RBA meeting, inflation data from China, employment data from New Zealand and Canada as well as PMI data from the US and China will highlight the week ahead of us.
USD
Fed has left rate unchanged in the range of 5.25-5.50% as widely expected. The accompanying statement was changed in several places. There was no mention of “additional policy tightening” and this part was added “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” With this expression Powell has effectively pushed back on expected rate cuts. There was no mention of QT taper, the discussion about it has been moved to March, giving this statement a hawkish bias.
During the press conference Powell clarified that expression “greater confidence” refers to desire of FOMC members to see more good data on inflation. He added that they give the most credence to 12 month inflation, y/y. Powell stated rate cuts will come this year but that it is unlikely that rate cut in March is not the base case. Additionally, he clarified the importance of jobs data and stated that if jobs data weakens rate cuts may come sooner. The Chairman did not want to call “soft landing” achieved.
ISM manufacturing PMI for the month of January came in at 49.1, up from 47.4 in December, Big jumps were recorded in new orders and in prices paid. Both came in above 52 and while former is very encouraging the latter is concerning. New orders were in contraction since May of 2022. ECI (Employment Cost Index) for Q4 came in weaker than expected indicating that inflation pressures from wages are subsiding. Q4 unit labour cost rose by 0.5% vs 1.1% as expected and it added to the notion of declining inflation pressures.
First NFP of 2024 smashed expectations by almost doubling them and came in at 353k vs 180k as expected. The unemployment rate was unchanged at 3.7% as well as participation rate at 62.5%. Wages jumped significantly with weekly earnings coming in at 0.6% m/m vs 0.3% m/m as expected and 4.5% y/y vs 4.1% y/y as expected. Some weak points are drop in hours worked and the fact that almost all of the jobs added are part-time jobs. The biggest job gains were in education and health, they added 112k. Leisure and hospitality added only 11k. We got a 74k increase in professional/business services, 64k in trade & transport and 45k added in retail. Scorching hot report gave boost to USD as rising wages warn that inflation may prove sticky. Chances of a March rate cut have dropped significantly and most likely March cut is off the table.
The yield on a 10y Treasury started the week at 4.14%, rose to 4.14%, dropped to 3.87% and finished the week strong post-NFP at around 4%. QRA announcement showed that Treasury will issue $760bn vs $811bn as expected. There has been a bid in bonds due to lower than expected supply and yield on 10y fell below 4%. The yield on 2y Treasury started the week at 4.34% and reached the high of 4.36%. Spread between 2y and 10y Treasuries started the week at -22bp then widened to -38bp post-NFP as curve inverted further in expectation that Fed will stay higher for longer. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at March meeting at 80% while probability of a 25bp rate cut is at 20%. Probability of a May rate cut is around 75%.
This week we will have ISM Services PMI.
Important news for USD:
Monday:
ISM Services PMI
EUR
ECB Vice President de Guindos stated that progress on inflation has been encouraging with recent good news on inflation front and added that they will start cutting interest rates when they are sure of meeting 2% inflation goal. He added that inflation risks are tilted to the downside. ECB Centeno stated that they are data dependent but that he is not in favor of wing for wage data before cutting rates. ECB Kazimir stated that rate cut is more likely in June than in April. These comments illustrate the divide in ECB while markets almost fully price in a 25bp rate cut in April.
Preliminary Q4 GDP reading from Eurozone showed a flat economy with a measly 0.1% y/y growth. French economy was also flat q/q but rose 0.7% y/y. German GDP came in at -0.3% q/q as expected and -0.2% y/y. Spain and Italy had their respective GDPs come in positive and beat expectations. Technical recession is avoided but growth is missing.
Preliminary Eurozone CPI for the month of January came in at 2.8% y/y vs 2.9% y/y in December with a 0.4% m/m drop. Energy prices were the biggest contributor to declines due to base effects, while services inflation was not changed at 4%. Core CPI ticked down to 3.3% y/y from 3.4% y/y the previous month. Spain CPI surprised to the upside while French and German readings continued to decline with German CPI printing 2.9% y/y, the lowest level since July of 2021.
GBP
BoE has left the bank rate unchanged at 5.2% as widely expected but the vote was interesting. It came in at 6-3 with two members, Haskel and Mann, voting for a 25bp rate hike while Dhingra, the most dovish member voted for a 25bp rate cut. GDP growth has been weak recently but it is expected to pick up. CPI has come in below November projections and inflation is expected to come to 2% in Q2 and then increase again in Q3 and Q4. CPI is seen at 2.75% by the year end, 2.3% in two years and 1.9% in three years. Risks surrounding domestic prices and wages are more evenly balanced while “risks around its modal CPI inflation projection are skewed to the upside over the first half of the forecast period, stemming from geopolitical factors”. The statement reveals that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term” as well as reiteration of data dependence. There was no mention of policy tightening indicating that despite the two members who voted for rate hike the bank is firmly in pause mode. Governor Bailey stated in the press conference that they are not yet at the place to lower rates. With BoE not sounding as dovish as expected markets are now moving rate cuts further into the future with June being almost fully priced in.
AUD
Q4 CPI data showed 0.6% q/q increase compared to 1.2% q/q increase in Q3 and 4.1% y/y vs 4.3% y/y as expected, down from 5.4% y/y in the previous quarter. Core measure, trimmed mean, came in at 0.8% q/q and 4.2% y/y, both down from 1.2% q/q and 5.2% y/y in Q3. These numbers are encouraging and will be well received by RBA, but markets should not get ahead of themselves and price in aggressive rate hike cycle. Next week’s meeting will deliver a pause.
Official PMI data from China for the month of January saw improvements across the sectors. Manufacturing came in at 49.2 as expected, up from 49 in December. Services came in at 50.7 vs 50.6 as expected and up from 50.4 the previous month. Composite was lifted to 50.9 from 50.3 in December. IMF wants more monetary policy easing from PBOC and said that RRR cut which will take effect from February 5 is a move in right direction. Caixin manufacturing PMI printed 50.8 in January, unchanged from December, but stronger than 50.6 as expected. The report shows that total new orders remain in expansion while new export orders increased for the first time in seven months indicating growing foreign demand. Business confidence improved to a nine-month high.
This week we will have RBA meeting. No change in monetary policy is expected and language should shift from tightening to easing in the future. We will also get Caixin PMIs as well as inflation data from China.
Important news for AUD:
Monday:
Caixin Services PMI (China)
Caixin Composite PMI (China)
Tuesday:
RBA Interest Rate Decision
Thursday:
CPI (China)
NZD
December trade balance deficit shrank substantially as it printed -NZD332m from -NZD1250m in November. Exports declined slightly while there was an almost NZD1bn drop in imports. January business confidence improved to 36.6 from 33.2 in December. Improvements were seen in commercial construction and ease of credit with pricing intentions and inflation expectations declining. On the other hand, there was a huge drop in residential construction.
This week we will get Q4 employment data.
Important news for NZD:
Tuesday:
Employment Change
Unemployment Rate
CAD
November GDP came in at 0.2% m/m vs 0.1% m/m as expected. Good producing industries grew by 0.6% m/m. December advanced reading sees GDP rising by 0.3% m/m which puts preliminary Q4 GDP reading at 0.3%.
This week we will get employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
The unemployment rate ticked down in December and it is now at 2.4%. Preliminary December industrial production data saw rebound compared to November but a smaller than expected improvements and January data is seen declining. Retail sales declined in December. BoJ Summary of Opinion showed that monetary policy should be maintained patiently and that positive wage-inflation spiral must be further strengthened.
CHF
SNB total sight deposits for the week ending January 26 came in at CHF472.2bn vs CHF473.4bn the previous week. Just a slight modification to the deposits as their multi-month range tightens further. SNB Chairman Jordan stated that inflation increased in January due to VAT and electricity prices but that is still below targeted 2%.
