Four major central banks, Fed, ECB, BoE and SNB all meet this week, coupled with inflation data from the US, preliminary PMI data from Eurozone and the UK and employment data from the uk and Australia makes this a massive week for the markets.
USD
ISM services for the month of November came in at 52.7 vs 52 as expected and up from 51.8 in October. The report shows new export orders and inventories jumping back into expansion with small improvement in employment category. New orders index was unchanged and still deep in expansion territory while there was a small drop in prices paid component. This report shows economy that is in a good shape.
November provided another stellar NFP report. Headline number was 199k vs 180k as expected. The unemployment rate dropped to 3.7% from 3.9% in October while participation rate ticked up to 62.8%. Hourly earnings rose 0.4% m/m vs 0.3% m/m as expected but 4% y/y vs 4.1% y/y as expected. There was a huge jump in manufacturing payrolls as auto strike ended and people returned to work.
The yield on a 10y Treasury started the week and year at around 4.2%, rose to 4.26%, then fell to 4.11% and finished the week at around 4.23%. The yield on 2y Treasury reached the high of 4.72%. Spread between 2y and 10y Treasuries started the week at -35bp then widened to -49bp as curve inverted further. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at December meeting at 98% while probability of a 25bp rate hike is 2%. Probability of March 2024 rate cut fell to 47% post NFP.
This week we will have inflation and consumption data as well as Fed meeting. There will be no change in rate but we will get new dot plot projections. Markets are currently pricing four rate cuts in 2024, although they are being pared back a bit after strong NFP report, and they will be eager to see how their estimates match with those of the Fed.
Important news for USD:
Tuesday:
CPI
Wednesday:
Fed Interest Rate Decision
Thursday:
Retail Sales
EUR
ECB Vice President de Guindos stated that falling inflation is a very welcoming sign and characterized it as a “positive surprise”. He cautioned that it is still too early to declare victory on inflation and reiterated that ECB remains in data-dependent mode. ECB Executive Board member Schnabel stated that further rate hikes are “rather unlikely” after last batch of inflation data which she called encouraging. She added that incoming data suggests that economy may be bottoming out but there are no signs of prolonged recession. Money markets are pricing in cuts more aggressively with cut in March being almost fully priced in.
Final November services PMI were revised higher on the back of almost a full point revision in German reading (49.6 vs 48.7) and printed 48.7 vs 48.2 as preliminary reported. This managed to lift composite to 47.6 from 47.1 as preliminary reported. The report mentions that services seem to be bottoming out but it states two concerning issues, one is that employment conditions fell for the first time in almost three years and two that high input prices persist making it difficult for companies to lower prices in the face of falling demand without making losses. Final Q3 GDP reading was unchanged at -0.1% q/q but yearly number was lowered and is now flat. Household consumption contributed with 0.2%, government expenditure added 0.1% and it was offset by drop in inventories of -0.3% and negative contribution from trade.
This week we will have ECB meeting and preliminary December PMI data. No change to rate is expected but change in tone to more dovish stance could come from ECB given falling inflation and weak economic data. Markets are pricing in rate cuts aggressively, with some pricing in 150bp of rate cuts, so if Lagarde pushes back there could be a rally in EUR.
Important news for EUR:
Thursday:
ECB Interest Rate Decision
Friday:
S&P Manufacturing PMI (Eurozone, Germany, France)
S&P Services PMI (Eurozone, Germany, France)
S&P Composite PMI (Eurozone, Germany, France)
GBP
Final services PMI reading for the month of November saw it revised up to 50.9 from 50.5 as preliminary reported. This is the first time that sector is in expansion since July. New work and employment categories managed to increase further while more concerning is that there is a noticeable drop in demand from clients combined with rising input costs. The main reason for rising input costs, fastest increase in four months, are wage increases. Composite was lifted into expansion, 50.7 from 50.1 as preliminary reported and 48.7 in October.
This week we will have employment data, preliminary December PMI data as well as BoE meeting. We will get no change to the policy but the tone of the statement will be scrutinized.
Important news for GBP:
Tuesday:
Payroll Change
Unemployment Rate
Thursday:
BoE Interest Rate Decision
Friday:
S&P Manufacturing PMI
S&P Services PMI
S&P Composite PMI
AUD
RBA has left cash rate unchanged at 4.35% as was widely expected. The statement shows that, according to monthly CPI, goods sector inflation is continuing to moderate, but there was no data on services inflation. Data on services inflation will be seen on January 31 with quarterly CPI numbers. The statement continues with saying that “overall, measures of inflation expectations remain consistent with the inflation target,” Ultimately, the statement concludes with “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.” This reaffirms their data-dependent stance.
Q3 GDP came in at 0.2% q/q vs 0.4% q/q as expected and in Q2. This marks the slowest growth in two years. GDP printed 2.1% y/y, same as in the previous quarter. Household saving to income ratio decreased to 1.1% from 2.8% in Q2, the lowest since December of 2007, as higher prices erode peoples’ purchasing power causing them to spend more and save less while terms of trade fell 2.6%. Government spending was the biggest contributor to GDP growth combined with investment from public corporations. Inventories also added to the reading as lower exports caused a build up. On the other hand, net trade deducted from the reading as exports fell and imports rose. Household spending was flat on the quarter.
Caixin PMI services for the month of November expanded further and printed 51.5 vs 50.8 as expected and up from 50.4 in October. The report states faster increases in business activity and new orders as well as in overall confidence. Additionally, inflation pressures are seen weakening. Composite was lifted up into expansion with 50.6 reading compared to 50 the previous month. Trade balance data for November showed bigger than expected widening of surplus to $68.39bn from $56.5bn in October. Exports rose 0.5% y/y, more than expected, while imports declined 0.6% y/y, missing expectations. Declining imports pose questions about China’s recovery as they indicate weak domestic demand.
This week we will get employment data from Australia as well as production and consumption data from China.
Important news for AUD:
Thursday:
Employment Change
Unemployment Rate
Industrial Production (China)
Retail Sales (China)
NZD
Q3 terms of trade saw deterioration of 0.6% q/q as export prices fell by more than import prices. First December GDT auction saw prices increase by 1.6% led by increase in Cheddar prices. This could help improve terms of trade in Q4 and bring positive impact to the economy.
This week we will have Q3 GDP data.
Important news for NZD:
Wednesday:
GDP
CAD
BoC left its cash rate unchanged at 5% as was widely expected. The main takeaways from the statement were that “higher interest rates are clearly restraining spending” and that disinflation is occurring at a faster pace. The statement concluded with “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed” indicating hawkish stance from BoC. We think that bar for raising rates is very high but with with strong labor market and their potential impact on inflation officials have to be careful.
JPY
Tokyo area CPI for the month of November came in at 2.6% y/y vs 3.3% y/y in October while expectations were for it to decline to 3% y/y. Ex fresh food category came in at 2.3% y/y vs 2.4% y/y as expected and down from 2.7% y/y the previous month. Ex fresh food, energy, so-called “core core”, came in at 3.6% y/y vs 3.7% y/y as expected and down from 3.8% y/y in October. All three measures are above targeted 2% but they all declined and by more than expected. BoJ is planing to wait for spring wage negotiations and raise rates after that.
Labor cash earnings for the month of October rose 1.5% y/y from 0.6% y/y in September but due to the high inflation real wages are still negative and came in at -2.3% y/y. Household spending came in at -2.5% y/y vs -3% y/y as expected. Final reading of Q3 GDP was revised down to -0.7% q/q from -0.5% q/q as preliminary reported. Q2 GDP also saw revisions down as it now printed 0.9% q/q and 3.6% annualized, down from 1.2% q/q and 4.5% annualized. Household consumption declined by 0.2% while capital expenditure declined by 0.4%. Net trade was also a drag on the reading while only positive was government spending. Despite the data JPY had a massive week as Governor Ueda’s comments have been interpreted to mean faster exit from negative interest rate policy. GBPJPY has declined 650 pips in a day and USDJPY was down 550 pips in a week at one moment.
CHF
November CPI declined further and printed 1.4% y/y vs 1.7% y/y as expected and in October. Core CPI also ticked down to 1.4% y/y from 1.5% y/y the previous month. Inflation is beyond their 2% target so SNB will have no need to act at next week’s meeting. SNB total sight deposits for the week ending December 1 came in at CHF474.1bn vs CHF473.7bn the previous week. Still in a very tight range.
Important news for CHF:
Thursday:
SNB Interest Rate Decision
