RBNZ meeting with another 50bp rate hike, preliminary February PMI from the Eurozone, the UK and Japan as well as inflation data from the US, Canada and Japan will mark the week ahead of us.
USD
January inflation report saw CPI drop by less than expected. December print was 6.5% y/y, January printed 6.4% y/y but it was expected for it to drop to 6.2% y/y. There were talks about inflation coming higher than expected, as we pointed in our previous week’s outlook, it caused a lot of volatility in the market with GBPUSD going almost 150 pips up only to give it all back. Core CPI also slipped but higher than expected (5.6% y/y vs 5.5% y/y). The report states “The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing”. Also the weight of shelter in the CPI basket has been increased from 32.9% to 34.4%, Powell told us repeatedly that services ex shelter inflation is most watched and it came at 7.2%.
January retail sales smashed even elevated expectations. Headline number came in at 3% m/m vs 1.8% m/m as expected and -1.1% m/m in December. Control group, the reading used for GDP reading, rose 1.7% m/m vs 0.8% m/m as expected indicating that consumer started the year strong and it will lead to some positive revisions to Q1 GDP forecast. Ex autos category also smashed expectations by coming in at 2.3% m/m vs 0.8% m/m as expected. Warmer than expected weather has certainly helped the reading. The biggest gains were seen in sales at department stores (17.5%) followed by eating and drinking out (7.2%).
Vice-President of the Fed Lael Brainard, the biggest dove in FOMC, will step down from her position and take a new one as economic advisor to the White House. First reports indicate that Chicago Fed President Austeen Goolsbee has the most chances to succeed her as new Vice-President. With Brainard gone we could see Fed turning more hawkish. Cleveland Fed President Mester confirmed her hawkish stance stating that Fed will need to go above 5% and stay there for a while adding that if inflation surprises to the upside they will have to take more aggressive stance.
The yield on a 10y Treasury started the week and year at around 3.75%, rose to 3.91% and finished the week at around 3.89%. The yield on 2y Treasury reached 4.72% and finished the week at around 4.67%. Spread between 2y and 10y Treasuries started the week at -81bp and widened to -90.8bp which is the lowest it has been since 1980 and then tightened back to -79bp on the back of higher yields in 10y Treasureies. FedWatchTool sees the probability of a 25bp rate hike in March at 79% while probability of a 50bp rate hike is at 21%.
This week we will get FOMC Minutes, second estimate of Q4 GDP and PCE inflation data.
Important news for USD:
Wednesday:
FOMC Minutes
Thursday:
GDP
Friday:
PCE
EUR
ECB policymaker Makhlouf, a well known hawk, stated that he could see rates going above 3.50%. He added that he is open to acting forcefully in order to bring down inflation toward their target level. According to him, trajectory of rates is up and then plateauing there without any considerations about rate cuts. ECB President Lagarde reiterated bank’s decision to raise by 50bp in March as inflation is running way too high. Executive Board member Isabel Schnabel echoed madame Lagarde’s words adding that a 50bp rate hike in March is very much needed.
This week we will get preliminary PMI data for the month of February.
Important news for EUR:
Tuesday:
S&P Manufacturing PMI (EU, Germany, France)
S&P Services PMI (EU, Germany, France)
S&P Composite PMI (EU, Germany, France)
GBP
The number of unemployment claims in January fell again as it came in at -12.9k vs -3.2k in December. The number of payrolled employees came in at 102k vs 47k the previous month. ILO unemployment rate for December was steady at 3.7% while average weekly wages (ex bonus) continued to rise and printed 6.7% 3m/y, up from 6.5% 3m/y the previous month. Although wages keep growing in nominal terms, inflation is keeping them depressed in real terms. Real wages for that period fell by 2.5% which indicates devastating effects of high inflation in producing cost-of-living crisis. The number of people whore not employed nor actively seeking a job has moved lower.
Inflation in January fell by more than expected 10.1% y/y vs 10.3% y/y. December print was 10.5% y/y. This a third consecutive monthly decline and it was led by a drop in transport category (petrol/diesel prices fell almost 4%) as well as restaurants and hotels. Slower increases were seen in food and non-alcoholic beverages and clothing and footwear while inflation accelerated for housing and utilities, recreation and culture and alcoholic beverages and tobacco. Core CPI also declined to 5.8% y/y from 6.3% y/y the previous month with core services also reporting a decline. BOE will be satisfied with these numbers and will cement their decision to raise by 25bp at the March meeting and increase the probability of a pause in May.
This week we will get preliminary PMI data for the month of February.
Important news for GBP:
Tuesday:
S&P Manufacturing PMI
S&P Services PMI
S&P Composite PMI
AUD
Employment report in January was a weak one. Employment change came in at -11.5k vs 20k as expected for a second consecutive month of job loses. The unemployment rate rose to 3.7% from 3.5% in December while participation rate inched lower to 66.5% from 66.6% the previous month. Entirety of job loses were full-time (-43.3k) which only adds to the bleakness of report. Part-time employment held with 31.8k jobs added. RBA will have to reevaluate its monetary policy stance as they are now in a tough position with employment falling and inflation rising. We still think that 25bp rate hike is coming in March, but after that there may come a pause.
RBA Governor Lowe stated in his first appearance in front of the Senate and reiterated that inflation is way too high and that they have not reached peak in rates, but that he is unsure how far they will be going with further rate increases. In his second appearance, which came after the employment report was published, he stated that if another weak job report came out they will need to reconsider tight labour market. He added that current assessment is that rates will need to go higher, which prompted some analysts to raise their peak rate forecast to 4.1%. If top in inflation occurs during 2023 then there is a possibility of rates coming down in 2024.
NZD
RBNZ published its 2yr inflation expectations and it was lower than previous (3.3% vs 3.6%). As inflation expectations slide down RBNZ will find itself in more comfortable position and not need to aggressively continue with rate hikes after the February meeting. Kiwi did not like the news and lost some ground.
This week we will get a Q4 consumption data and RBNZ meeting. A 50bp rate hike is fully priced in by markets, therefore if RBNZ does not send a strong hawkish message on future rate hikes and if they only hints at pausing we will get NZD weakness.
Important news for NZD:
Wednesday:
RBNZ Interest Rate Decision
Sunday:
Retail Sales
CAD
BOC Governor Macklem spoke in Parliament and stated that inflation is turning the corner. He said that economy is overheating and is clearly in excess demand and there are some evidence emerging that rate hikes are slowing down demand. He is forecasting inflation to fall to 3% in the middle of 2023 and fall back further to their target in 2024. On labour market he said that it is too tight and it needs to get balanced. Reminder that last employment report showed 150k jobs added while only 15k was expected.
This week we will get inflation data and see if it will confirm Macklem’s words.
Important news for CAD:
Tuesday:
CPI
JPY
Q4 GDP rebounded but much weaker than expected. It came in at 0.2% q/q vs 0.5% q/q as expected with Q3 reading being downwardly revised to -0.3% q/q. Private consumption was the driving force of growth with 0.5% Business investment fell -0.5% while net exports added 0.3pp to the GDP with exports growing 1.4% and imports falling -0.4%. January trade balance printed the biggest deficit in history -JPY3496.6bn. Exports were up 3.5% y/y but imports were at 17.8% y/y. This is the 18th consecutive month of trade deficits.
The government has confirmed nomination of Kazuo Ueda as new Governor of BOJ. Former head of FSA Himino will be a new Deputy Governor. With a weak Q4 reading it is questionable how fast or whether new Governor will be able to move BOJ from its ultra loose monetary policy.
CHF
SNB total sight deposits for the week ending February 10 came in at CHF525.6bn vs CHF528.1bn the previous week. Continuation of well established trend as SNB looks to adjust its monetary policy. January inflation came in hot with 3.3% y/y vs 2.9% y/y as expected and up from 2.8% y/y in December. Core inflation also rose printing 2.2% y/y vs 2% the previous month. SNB will have no option but to raise in March. Markets are pricing a 25bp rate hike but talks of a 50bp rate hike might creep in to give Swissy some push.
