BOC meeting, inflation data from the US, Australia and New Zealand, preliminary Q4 GDP from the US and preliminary January PMI data from Eurozone and the UK will highlight the week ahead of us.
USD
Retail sales disappointed in December and came in at -1.1% m/m vs downwardly revised -1% m/m in November. Control group, the measure that goes into GDP calculation, fell by 0.7% m/m. Ex autos and gas, as well as ex autos categories also fell by 0.7% m/m and 1.1 m/m respectively. Industrial production data for the month of December fell by 0.7% m/m after November’s data was revised down to -0.6% m/m. Negative prints on consumption and production raised fears that US could already be in a recession which lead to USD gains and stock market loses.
The yield on a 10y Treasury started the week and year at around 3.52%, fell below 3.33%, then rebounded and finished the week at around 3.47%. The yield on 2y Treasury reached 4.24% during the week and fell below 4.06%, then rebounded and finished the week at around 4.16%. Spread between 2y and 10y Treasuries started the week at -69bp and widened slightly to -70bp. FedWatchTool sees the probability of a 25bp rate hike after Fed Waller speech in February at 99.8%.
This week we will get preliminary Q4 GDP reading and PCE inflation data.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
Rumours started to circulate that ECB is considering to continue with 25bp rate hikes from March meeting. ECB president Lagarde stated in December that we are in for a series of 50bp rate hike so the rumours caused EUR to weaken in the first half of the week. We see this change as premature and we think that ECB will continue with 50bp rate hikes at March meeting. ECB policy maker Villeroy stated that it is still too early to consider what their actions will be in March. Lagarde came out later in the week with a statement that confirms bank’s resolution to continue with further tightening of monetary policy and advised market participants to “revise their positions”.She added that “Staying the course” is the new mantra.
ZEW data for January, first data point of new 2023, showed increasing optimism in both Germany and Eurozone. Current conditions improved slightly to -58.6 from -61.4 in December while sentiment for both Germany and Eurozone returned into positive territory for the first time since the beginning of Russia-Ukraine conflict in February of 2022. Optimism is growing that recession will not be as deep as feared.
This week we will get preliminary January PMI data.
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
BOE Governor Bailey appeared in front of the Parliament and stated 3 main risks for the UK economy: 1. China’s sudden lifting of Covid restrictions, 2. Continuing fallout of the war in Ukraine 3. Shrinking of Britain’s labor force. According to Bailey, China reopening will have negative consequences in the short run, but it is not clear how long will they last. Later in the week he stated that BOE is not targeting particular peak in rates and added that inflation will probably start to decline rapidly in late spring.
Claimant count change for December rose by 19.7k while ILO unemployment rate for November remained unchanged at 3.7%. Weekly earnings continued to rise and came in at 6.4% for both earnings including and excluding bonus. It is hard to see how will inflation fall fast with wages steadily rising. Additionally, since inflation is running above wages real wages are falling (2.6% y/y).
December CPI saw headline ease to 10.5% y/y as expected from 10.7% y/y in November. The largest drop was seen in motor fuels, followed by prices for clothing and footwear. Prices for restaurants and hotels continued to rise and there was a historic rise in food and non-alcoholic beverages (16.8%) which makes it the highest increase since 1977. Core rate has stayed the same at 6.3% y/y but core services, excludes components like airfares, package holidays and education, continued to increase. BOE is particularly sensitive to core services component. Rising wages and high inflation will push BOE into continuing with rate hikes and markets are leaning in favor of a 50bp rate hike.
AUD
December employment report started to show cracks appearing in the tight labor market. Employment change came in at -14.6k, down from 58.2k in November. The unemployment rate remained unchanged at 3.5% since previous month’s was revised up. Participation rate dropped to 66.6% from 66.8%. One positive is that full-time employment continued to increase adding 17.6k jobs. All of job loses for the month were in part-time employment. With inflation running hot RBA will be on a pace for another 25bp rate hike and inflation report next week will provide more clarity to the picture.
PBOC kept the 1Y MLF rate at 2.75% but increased the volume of the facility, thus injected liquidity into the system in order to support the economy. Chinese data all beat expectations. Q4 GDP data came in flat vs -0.8% q/q as expected and 2.9% y/y vs 1.8% y/y as expected. Industrial production in December came in at 1.3% y/y vs 0.5% y/y as expected while retail sales fell by 1.8% y/y and the expectations were for a drop of 7.8% y/y.
This week we will get Q4 inflation data.
Important news for AUD:
Wednesday:
CPI
NZD
NZIER Quarterly Survey of Business Opinion saw business confidence in Q4 deteriorate to -70% from -42% in Q3, with net 73% of businesses expecting deterioration in general economic conditions in the coming months, thus making this the weakest reading in survey’s history. The report shows that companies are becoming much more cautious and are looking to reduce staff numbers and tone down on investment plans. Companies are also reporting shortages of skilled workers, lower demand as well as increasing number of them transferring higher costs to the consumers through price increases which points to inflation staying high in 2023. Second GDT auction of the year saw prices continuing to decline, although by negligible -0.1%.
This week we will get Q4 inflation data.
Important news for NZD:
Tuesday:
CPI
CAD
December CPI data fell more than expected. Headline CPI came in at 6.3% y/y vs 6.4% y/y and down from 6.8% y/y in November and -0.6% m/m vs -0.5% m/m as expected. The main reason inflation fell is gasoline prices which dropped 13.1 m/m. Core measures saw median and trimmed remain unchanged at 5% and 5.3% y/y respectively, while common slipped to 6.6% y/y. Inflation coming down will nudge BOC into a 25bp rate hike next week.
This week we will have a BOC meeting. Although labor market continues to be tight, weaker than expected inflation reading will lead BOC to raise 25bp and move toward pausing rate hikes in order to protect falling economy and housing market.
Important news for CAD:
Wednesday:
BOC Interest Rate Decision
JPY
BOJ decided to stand pat at their meeting and caught markets on the wrong side. Change in Japan comes gradually and markets got ahead of themselves. The rate remained at -0.1% and targeted yield on 10y JGB remained within -0.5/0.5% range. BOJ has unveiled their new program for YCC thus showing their strong resolve to protect the targeted range. Needless to say, JPY has tanked over 200 pips on the news on across the markets. Core-core CPI, that is excluding fresh food and energy, is projected to be at 1.8% in FY (fiscal year) 2023. up from 1.6% as seen in October. For FY 2024 it remains at 1.6% as in October. Real GDP has been revised down and is now seen at 1.7% for FY 2023 and 1.1% for FY2024 from 1.9% and 1.5% projected in October.
BOJ Governor Kuroda reiterated that bank will not hesitate to ease monetary policy further if need arises. The goal is to get inflation sustainably at 2% level with rising wages. He sees no issues with recent increases in bond purchases and adds that flexible market operations will be carried by using the fund-supplying operations against pooled collateral, their newly unveiled policy for keeping yields in range. The BOJ has reportedly bought JPY 34tn of JGBs since its decision to raise the targeted yield range in December. Trade minister Nishimura stated that he will advise companies to hike wages in excess of 5%. That way it will lead to a moderate demand-pull inflation which BOJ strives to achieve. Trade deficit for the year 2022 rose to record JPY19.97tn! With energy prices coming down we can see trade balance data starting to improve.
CHF
SNB total sight deposits for the week ending January 13 came in at CHF536.2bn vs CHF533.5bn the previous week. This is a sudden change in the long lasting downward trend, but it may be just a small correction and downside is set to continue. SNB Chairman Jordan stated in Davos that when looking back monetary policy everywhere was too expansionary. He added that price stability and bringing down inflation are top priorities.
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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.
