After a massive week we are in for a quiet week where markets will have time to digest impacts of central bank’s policy decisions. The week ahead of us will bring us RBA meeting, preliminary Q4 GDP from the UK and employment data from Canada.
USD
Fed delivered a 25bp rate hike as expected, lifting the rate to 4.5-4.75%. Statement shows that “ongoing increases in the target range will be appropriate” indicating that they will continue raising interest rates at the future meetings. QT will continue as before, no changes. Statement also showed that for future rate hikes “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Powell stated at a press conference that there is more work to be done. He added “We’re talking about a COUPLE of more rate hikes to get to that level we think is appropriately restrictive.” He later added that if inflation starts coming down more quickly it will be incorporated in their policy setting. Powell mentioned that they are not seeing rate cuts in 2023, although markets are positioned for the first rate cuts to come in November. Powell was given opportunity to push back on the looser financial conditions and he did not take it so we had broad USD declines and rise in stock markets. He stated that terminal rate should be between 5-5.25%. According to him, disinflation period has started.
ISM manufacturing PMI continued to decline in January and came in at 47.4 from 48.4 in December. New orders plunged even deeper in contraction indicating weakening of demand. Prices paid index rose indicating that inflation pressures are not fully going away. Most probable reason for increase in prices is widespread rise in commodity prices on the back of China reopening. Employment index remained in expansion territory, although slowed down a bit.
ISM Non-Manufacturing for January smashed expectations by coming in at 55.2 vs 50.4 as expected and returned into expansion after shortly dipping in contraction in December with 49.2 reading. New orders index surged back into expansion with astonishing 60.4 reading with new export orders printing 59. Business activity also printed 60.4. Prices paid continued to decline and employment index ticked up to exactly 50. There are no signs of economy slowing down in the services sector which will allow Fed to continue with rate hikes.
January NFP report smashed expectations by coming in at 517k vs 185k as expected. The unemployment rate slipped to 3.4% while participation rate inched up to 62.4%. Average wages rose 0.3% m/m and 4.4% y/y, down from 0.4% m/m and 4.9% y/y in December. Most jobs were added in leisure and hospitality followed by professional and business services. Wages are easing, but labour market continues running red hot so Fed may feel comfortable continuing with rate hike increases.
The yield on a 10y Treasury started the week and year at around 3.5%, fell below 3.35% after the FOMC meeting and finished the week at around 3.54% thanks to the strong NFP number. The yield on 2y Treasury reached 4.25% during the week and fell below 4.18%, then rebounded and finished the week at around 4.22% post NFP. Spread between 2y and 10y Treasuries started the week at -69bp and tightened to -74bp. FedWatchTool sees the probability of a 25bp rate hike in March at 94.5% while probability of a no change is at 5.5%.
EUR
Preliminary Q4 GDP reading saw Eurozone escape contraction as it came in at 0.1% q/q vs -0.1% q/q as expected. Germany and Italy had negative readings while France and Spain had positive readings. Ireland surprised everyone with 3.5% q/q and it pushed Eurozone reading above zero. Domestic demand is stumbling with household consumption falling.
Although French and Spanish readings showed that inflation reaccelerated, preliminary Eurozone inflation for the month of January declined to 8.5% y/y from 9.2% y/y in December. There was a drop of 0.4% m/m. Falling energy prices have dragged inflation down with it, but core inflation remained stubbornly high at 5.2% y/y. Additionally, when we exclude energy inflation rose 7.3% y/y vs 7.2% y/y previous month on the back of rising food, alcohol and tobacco. One caveat to these numbers is that they do not include inflation numbers from Germany. German data has been postponed until next week. Eurozone inflation reading was calculated using model for German inflation data, so we may see a big revision to the number when final reading is published on February 23.
ECB raised by 50bp as widely expected lifting the interest rate to 3%. The statement showed intent for another 50bp rate hike at March meeting after which there will be evaluation of future path of rates. Future rate hikes will continue to be data-dependent and will be meeting-by-meeting decisions. QT will start from March 1 and last till the end of June and will average €15bn per month.
Risks for growth and inflation were described as more balanced. ECB President Lagarde clarified that today’s decision is not the March decision. She added that peak in rates is not reached and there is more work to be done. However, she did not provide clear direction on rates from March meeting so markets interpreted that as a sign that smaller rate hikes will come after March meeting or it will be outright pause. On Friday ECB policymakers came out with statements that March rate hike will not be the last.
GBP
BOE proceeded as expected and raised interest rate by 50bp to 4%. The vote was 7-2 with Tenreyro and Dhingra voting to keep rates unchanged. Inflation has likely peaked but if the price pressures continue mounting new rate hikes may be required. Inflation is now expected to drop to 3.92% by Q4 of 2023, which is a big downgrade from 5% as seen in December. BOE Governor Bailey reiterated that inflation is expected to fall sharply in second half of 2023 and added that inflation risks are still skewed to the upside. Lower inflation projections combined with higher projected growth should lead BOE toward the pause or if inflation remains stubbornly high to 25bp rate hikes. It could be a final 25bp rate hike of this cycle.
This week we will have a preliminary Q4 GDP reading.
Important news for GBP:
Friday:
GDP
AUD
Australian building permits exploded higher in January 18.5% m/m which pushed AUD higher since housing is a very big part of the economy. In combination with weak USD the data point propelled AUDUSD to a new seven- month high of 0.7158.
First full month after economy reopened saw Chinese PMI data return into expansion territory. Manufacturing came in at 50.1 from 47 in December while services made astonishing jump to 54.4 from 41.6 the previous month! This all led to composite coming in at healthy 52.9 from 42.6 in December. Caixin readings also saw improvements across the board with manufacturing coming in at 49.2, services at 52.9 and composite at 51.1.
This week we will have RBA meeting from Australia where another 25bp rate hike is expected. We will also get inflation data from China.
Important news for AUD:
Tuesday:
RBA Interest Rate Decision
Friday:
CPI (China)
NZD
The employment report for Q4 of 2022 showed employment change continue to rise but at a modest 0.2% q/q vs 1.3% q/q in Q3. The unemployment rate ticked up to 3.4% while participation rate remained at 71.7%. On the wages front private wages increased 4.3% y/y while public wages increased 3.6% y/y. RBNZ is seen raising 50bp later in the month after a strong inflation report published previous week, however this report may cause them to slow down with future rate hikes. Analysts are already dialling down their calls for terminal rate to 5%,
CAD
November GDP, a very late data point but still relevant for calculation of Q4 GDP, came in at 0.1% m/m as expected thanks to rise in services of 0.2% m/m. With advanced GDP for December at 0.1% m/m it is projected that Q4 GDP will be 0.4% q/q and 3.8% y/y.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
BOJ governor Kuroda reiterated that the bank will continue with easy monetary policy in order to reach its inflation target of 2%. Kuroda will finish its term as governor on April 8 so his remarks do not carry the same weight as before. BOJ has bought record amount of JGBs in January, JPY23.69tn ($182bn) in order to defend the yield curve control.
CHF
SNB total sight deposits for the week ending January 27 came in at CHF528bn vs CHF531.6bn the previous week. Total sight deposits continue trending to the downside as SNB continues selling USD and EUR.
