BoJ, BoC and ECB open the year for central banks meetings, we will also have advanced Q4 GDP from the US as well as preliminary January PMI data from the Eurozone and the UK.
USD
Fed Governor Waller gave a speech in which he confirmed that economic data from the past few months is consistent with Fed cutting this year. He added that cuts need to be calibrated carefully and Fed will be able to cut if there is no rebound in inflation or inflation stays high. He emphasized that his view is consistent with three 25bp rate cuts suggested by Fed in December dot plot and added that timing and actual number of cuts will be dependent on the incoming data. According to him financial conditions remain restrictive and he is now more confident that inflation is on its to the 2% target. In the Q&A session he said that Fed is now in a peculiar position, they can cut rates without shocking the economy. He characterised 4% growth as a bit high, but not by much and commented that overnight repo facility does not need to have funds in it. Currently there are around $600bn in it and they could all be drained.
The old saying “never underestimate the strength of US consumer” proved true once again. Retail sales in December came in at 0.6% m/m vs 0.4% m/m as expected. Control group, used for GDP calculation, rose 0.8% m/m indicating a very healthy consumer and a strong Q4 GDP reading. The report shows that biggest gain in retail sales were from clothing, nonstore retailers and general merchandise stores. Declines were found in health and personal care stores as well as in furniture stores.
The yield on a 10y Treasury started the week at 3.94%, rose to 4.18% and finished the week at around 4.15%. The yield on 2y Treasury started the week at 4.15% and reached the high of 4.40%. Spread between 2y and 10y Treasuries started the week at -21bp then widened to -24bp as curve inverted further after a strong retail sales report. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at January meeting at 97% while probability of a 25bp rate cut is 3%. Probability of a March rate cut plunged from 70% at the start of the week to 55%.
This week we will get preliminary Q4 GDP, Atlanta Fed’s forecast is for 2.4% annualized, and Fed’s preferred inflation metric PCE.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
January German ZEW survey showed sentiment improve to 15.2 from 12.8 in December as majority of participants expect ECB to cut interest in the first half of this year. German statistical office released preliminary estimate and it shows that German economy shrank by 0.3% in 2023. Their estimates see Q4 GDP declining also by 0.3%.
ECB Chief Economist Lane stated that most complete wage data will be available only for the June meeting thus pushing back on market’s early rate cut bets. ECB hawks Holzmann and Nagel added that early wage data show high increases and that it is much too early to talk about rate cuts. They are also wary that once the story about rate cuts becomes proliferated markets will grab it and take it much further than policymakers intended thus potentially seriously damaging all that has been done so far. ECB policymaker Villeroy spoke in Davos and stated that it is too early to call victory on inflation adding that rate cut is coming this year, but did not want to specify when. ECB President Lagarde spoke in Davos and stated that “too optimistic markets are not helpful in fight against inflation”. She then added that it is likely that rates will be cut by the Summer. Hawks and doves in the ECB are not aligned when it comes to the path of future rate cuts.
This week we will have preliminary January PMI data as well as well as ECB meeting. No changes to the policy rate are expected. The focus will be on press conference for further clues regarding when can we expect first rate cut.
Important news for EUR:
Wednesday:
S&P Global Manufacturing PMI (Eurozone, Germany, France)
S&P Global Services PMI (Eurozone, Germany, France)
S&P Global Composite PMI (Eurozone, Germany, France)
Thursday:
ECB Interest Rate Decision
GBP
December payroll change saw a decline of 24k jobs. November reading was revised up so it shows 9k jobs added. November unemployment rate remained unchanged at 4.2%. Wages continued to decline as average weekly earnings came in at 6.5% 3m/y vs 7.2% 3m/y the previous month and earnings ex bonus printed 6.6% 3m/y vs 7.2% 3m/y in November. Wages remain elevated but their trend is clearly to the downside which should put downward pressure on prices.
Inflation data for December was unwelcome. Headline CPI printed an increase of 4% y/y, up from 3.9% y/y in November while markets expected a tick down to 3.8% y/y. Core CPI reading was unchanged at 5.1% y/y while markets expected a decline to 4.9% y/y. Services inflation was the biggest contributor as it rose by 0.7% m/m and 6.4% y/y vs 6.3% y/y in November showing that disinflationary path is not a straight line.
This week we will get preliminary January PMI data.
Important news for GBP:
Wednesday:
S&P Global Manufacturing PMI
S&P Global Services PMI
S&P Global Composite PMI
AUD
After two very strong job reports we got one abysmal report. December employment change came in at -65.1k vs 17.6k as expected. The unemployment remained unchanged at 3.9% due to big drop in the participation rate, 66.8% from 67.2% in November. The composition of jobs was dreadful as full-time employment saw a loss of 106.6k jobs! Part-time added 41.5k jobs. Labour market is easing and further inflation pressures will not come from wages.
Chinese Q4 GDP came in at 1% q/q as expected, but down from 1.5% q/q in Q3. Yearly figure printed a growth of 5.2% vs 5.3% as expected, but up from 4.9% in the previous quarter. December figures saw industrial production at 6.8% y/y vs 6.6% y/y as expected, but retail sales at 7.4% y/y vs 8% y/y as expected. Mixed activity data but GDP beat the 5% target. PBOC made no changes to their 1-year MLF rate and left it at 2.50%. Markets were looking for a rate cut to 2.40%. PBOC has added liquidity in the market by adding more loans instead of cutting rates.
NZD
Business confidence in Q4 showed a big improvement as it printed -2%, up from -52% in Q3. The report shows easing in labour market conditions and inflationary pressures. Concerns have now shifted to the demand side as week demand poses problems for businesses. Kiwi received a small boost after the news but remained under pressure from strong USD for the entire week.
This week we will get Q4 inflation data.
Important news for NZD:
Tuesday:
CPI
CAD
December CPI report printed 3.4% y/y as expected. It was 3.1% y/y in November. BoC core CPI reading declined to 2.6% y/y from 2.8% y/y the previous month. The main reason inflation increased was due to base effects coming out of the calculation. With core CPI coming in stronger than expected BoC will not be pressured to cut rates soon and markets are now pricing out January and March rate cuts.
This week we will have a BoC meeting. No changes to the policy are expected, however we may get a more dovish tone from the BoC indicating that rate cuts are soon to come.
Important news for CAD:
Wednesday:
BoC Interest Rate Decision
JPY
Core machinery orders, a good proxy for CAPEX six to nine months in the future, plunged in November 4.9% m/m and 5% y/y. Final industrial production for the same month saw declines of 0.9% m/m and 1.4% y/y. National inflation data for the month of December saw all three measures decline from their November readings. Headline CPI printed 2.6% y/y, down from 2.8% y/y, Ex fresh food printed 2.3% y/y, down from 2.5% y/y while ex fresh food energy, so called core-core, printed 3.7%, a tick down from 3.8% y/y the previous month. All three measures are above targeted 2% but the are slowly returning towards the target. BoJ members are not convinced that inflation has sustainably reached 2% target, therefore they are reluctant to make any changes to monetary policy. Tertiary industry index for the month of November came in at -0.7% m/m thus falling for the third straight month.
This week we will have BoJ meeting. No changes to rate or YCC are expected as recent wage and activity data came in weaker than expected.
Important news for JPY:
Tuesday:
BoJ Interest Rate Decision
CHF
SNB total sight deposits for the week ending January 12 came in at CHF476.3bn vs CHF468.8bn the previous week. A decent jump in the deposits but still within a well-established range that is been in play since November of 2023.
