BOJ meeting with a small chance of widening YCC target or full removal of it will be the highlight of the week followed by China Q4 GDP, inflation from the UK and Canada, employment data from the UK and Australia and consumption data from the US. Monday is Martin Luther King day, banks will be closed in the US and liquidity will be lower.
USD
December inflation data came in line with expectations. Headline number at 6.5% y/y, down from 7.1% y/y in November and -0.1% m/m. Core number came in at 5.7% y/y, down from 6% y/y the previous number and 0.3% m/m. Energy prices saw biggest declines (fuel oil and gasoline especially), prices of used cars and new vehicles also declined. Food prices rose 0.3% m/m with index for eggs rising 11.1% m/m. Shelter increased 0.8% m/m. It is a lagging indicator and it will continue to stay elevated due to hot housing market in 2022. Core services, ex shelter are the main focus of Fed due to wage costs. The reading today has all but settled a 25bp rate hike at February meeting.
The yield on a 10y Treasury started the week and year at around 3.6%, fell after the CPI report below 3.43%, then rebounded and finished the week at around 3.5%. The yield on 2y Treasury reached 4.29% during the week and fell after the CPI report below 4.12%, then rebounded and finished the week at around 4.16%. Spread between 2y and 10y Treasuries started the week at -68bp and tightened slightly to -67bp. FedWatchTool sees the probability of a 25bp rate hike in February at 92.2% with a probability of a 50bp rate hike at 7.8%.
This week we will have consumption data.
Important news for USD:
Wednesday:
Retail Sales
EUR
ECB showed in its economic bulletin that wage growth should be very strong in the coming quarters as cost-of-living crisis intensifies and unions demand higher wages in the upcoming wage negotiations. In the future, however, expected economic slowdown will have negative impact on wages pushing them down. ECB policymaker Rehn commented that rates will need to go significantly higher with ECB policymaker De Cos echoing his statement. ECB policymaker Holzmann stated that their determination will not change until core inflation peaks. He added that the terminal rate could be reached by the summer and expressed caution regarding moving too quickly on quantitative tightening. Probability of a 50bp rate hike at February meeting is around 76%.
ECB’s economic bulleting for December sees headline inflation falling to 2% target in H2 of 2025. Inflation is seen at an averaging 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025. Core HICP inflation is seen staying above 2% over that time horizon. Inflation risks are seen as tilted to the upside.
GBP
BOE Chief Economist Huw Pill stated in a speech that rising food and energy prices, due to the war in Ukraine, have driven inflation higher and a shortage of workers in the economy has contributed to more inflation. He added that Monetary Policy Committee is acting to bring inflation back down in the months and years ahead. His strong commitment to bringing inflation down was interpreted as hawkish by markets who now see almost 70% probability of a 50bp rate hike at February meeting. BOE member Mann confirmed that more rate hikes are to come and added that there is no risk of over-tightening at the moment. She is a more hawkish member. November GDP came in at 0.1% m/m vs -0.2% m/m as expected which could help Q4 GDP come in flat or slightly positive. That will push back inflation into Q1 of 2023 and coming recession may prove milder than feared. That would explain hawkish stance by BOE members and continuation of rate hikes.
This week we will have employment and inflation data.
Important news for GBP:
Tuesday:
Claimant Count Change
Unemployment Rate
Wednesday:
CPI
AUD
Retail sales data for November improved 1.4% m/m from upwardly revised October reading of 0.4% m/m and 0.6% m/m as expected. Monthly CPI reading saw inflation rise to 7.3% y/y in November after a 6.9% y/y print the previous month. Motor fuels, holidays, recreation and fruits and vegetables were pushing inflation higher while alcohol and tobacco as well as clothing had negative m/m prints. Monthly CPI does not encompass full CPI basket, so the reading may be distorted, however it still shows inflation moving in unwanted direction which will prevent RBA from pausing at February meeting. Consensus is for a 25bp rate hike.
Inflation data for the month of December printed two up ticks. CPI came in at 1.8% y/y vs 1.6% y/y in November while PPI printed -0.7% y/y vs -1.3% y/y the previous month. With price pressures nowhere to be seen PBOC may freely engage on monetary loosening policy in order to stimulate economy after lockdowns. PPI showed third straight deflationary reading. December trade balance data saw surplus increase to $78bn. Exports fell 9.9% y/y, expectations were for a bigger decline of 11.1% y/y, while imports fell 7.5% y/y. In Yuan terms exports fell 0.5% y/y making it the first negative reading since beginning of 2020.
This week we will have employment data from Australia as well as Q4 GDP, industrial production and consumption data from China.
Important news for AUD:
Tuesday:
GDP (China)
Industrial Production (China)
Retail Sales (China)
Thursday:
Employment Change
Unemployment Rate
NZD
Kiwi had a quiet week as all eyes were on the USD. Better news coming from China kept it stable against EUR and GBP while it managed to make gains against weak USD and CHF during the week, but the weak bank earnings pushed the Kiwi down as a part of risk-off mood in the market. NZDJPY was the biggest mover to the downside of all NZD pairs.
CAD
Building permits for the month of November rose by 14.1% m/m after a plunge of 5.3% m/m in October. CAD has not benefited greatly from rising Oil prices. It stood its ground against the EUR and GBP while it gained against weak USD and CHF. CADJPY was the biggest mover to the downside of all CAD pairs.
This week we will have inflation data.
Important news for CAD:
Tuesday:
CPI
JPY
December inflation data for the Tokyo area saw headline number continue to rise and come in at 4% y/y vs 3.8% y/y in November. It is a new 40-year high. Ex fresh food component also printed 4% y/y, up from 3.6% y/y the previous month. Ex fresh food and energy, so called core-core, came in at 2.7% y/y, up from 2.5% y/y in November. Both core and core-core measures have been steadily rising since February of 2022 and trend is set to continue in the coming months. BOJ Governor Kuroda is to retire in April and newly appointed BOJ Governor may take a firmer stance on inflation and tighten monetary policy as a result. Household consumption in November fell 1.2% y/y for the first drop in 6 months. The drop was attributed to lower spending on food.
This week we will have a BOJ meeting. Majority of surveyed economists expect no change at the meeting, but considering last meeting’s sudden change in YCC (Yield Curve Control) there is a growing feeling that entire YCC could be abandoned at this meeting.
Important news for JPY:
Wednesday:
BOJ Interest Rate Decision
CHF
SNB total sight deposits continued their downward trajectory in the new year and for a week ending January 6 came in at CHF533.5bn vs CHF539.2bn the previous week. The bank is selling USD and EUR in order to strengthen CHF to fight inflation. Swiss labour market continues to tighten with seasonally adjusted unemployment rate in December ticking down to 1.9%.
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Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.
