We are in for a massive week that will see Fed and BoE meetings, preliminary Q4 GDP and January CPI from the Eurozone, NFP and Q4 CPI data from Australia. Additionally, we will get QRA from Treasury and earnings from big tech companies.
USD
Fed has announced that they will not be extending their Bank Term Funding Program (BTFP) which is scheduled to end on March 11. The program was introduced last year when regional bank crisis escalated led by the failure of Silicon Valley Bank. Starting immediately the rate charged to banks that use funding from this program will be raised by 50bp. So far banks have used BTFP as an arbitrage opportunity, borrowing at lower costs with BTFP and lending at higher to Fed thus recording a profit, but with rate hikes this will come to an end.
Preliminary Q4 GDP reading came in at 3.3% annualized vs 2% annualized as expected, Atlanta Fed predicted 2.4% annualized. The biggest highlight is GDP deflator, measure of inflation, which plummeted to 1.5% from 3.3% in Q3. Expectations was for it to drop to 2.3%. Consumer spending rose 2.8% q/q while government spending rose 3.3% q/q. Net trade contributed 0.43pp to the GDP print. GDP for 2023 is seen at 2.5%. Such a strong GDP reading increases probability of economy achieving a soft landing.
December PCE data showed headline number staying at 2.6% y/y as expected while core PCE dropped to 2.9% y/y from 3.2% y/y in November while a decline to 3% y/y was expected. Digging into details of the report we can see that services ex energy and housing component rose 0.3% m/m, higher than 0.1% m/m increase the previous month. On the other hand, 6-month annualized inflation fell to 1.9% and 3-month annualized to 1.5%. With them below the 2% target chances of a rate cut are increasing and USD is weakening. Personal spending ripped higher by 0.7% m/m vs 0.4% m/m as expected while personal income rose 0.3% m/m as expected.
The yield on a 10y Treasury started the week at 4.13%, rose to 4.20% and finished the week at around 4.15%. The yield on 2y Treasury started the week at 4.38% and reached the high of 4.42%. Spread between 2y and 10y Treasuries started the week at -27bp then tightened to -19bp as curve steepened further. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at January meeting at 97% while probability of a 25bp rate cut is 3%. Probability of a March rate cut is around 50%.
This week we will get Fed meeting, Quarterly Refinancing Announcement (QRA) from Treasury, ISM manufacturing PMI and NFP on Friday. Fed is expected to stay pat, acknowledge encouraging growth and inflation data and emphasize data dependence. Investors will be on the lookout for the talk about QT reduction. Headline NFP number is expected to print around 162k with the unemployment rate staying at 3.7%.
Important news for USD:
Wednesday:
QRA
Fed Interest Rate Decision
Thursday:
ISM Manufacturing PMI
Friday:
NFP
Unemployment Rate
EUR
ECB lending survey for Q4 showed that banks continue to tighten their credit standards as well as business demand for loans weakening. High interest rates are the main reason for lower demand for credit. The report shows that demand will continue to get weaker and credit lending standards will continue to tighten which is another signal that rate cuts will come in the first half of the year. Ifo has revised German 2024 GDP to 0.7% from 0.9% seen the previous month.
Preliminary January PMI data in the Eurozone showed a split in the economy, but this time manufacturing improved while services declined. Manufacturing came in at 46.6 vs 44.8 as expected and up from 44.4 in December. Both German and French readings improved as well with German reading improving for the sixth consecutive month. The report shows that output, new orders and employment are all improving. Services reading slipped to 48.4 from 48.8 the previous month with declines seen in German and French readings. The report states that companies are expanding their workforce in services sector which is a very encouraging sign. Composite PMI ticked up to 47.9 from 47.6 in December while Germany and France saw small declines in their respective readings.
ECB has left key interest rates unchanged as was widely expected, deposit rate is at 4%. Inflation is moving in the right direction of the medium-term inflation outlook. Tight financing conditions are helping to weaken demand and push down inflation. President Lagarde stated at the press conference that risks to economic data remain tilted to the downside and that economy likely stagnated in Q4. In the Q&A section she revealed that consensus when talking about rates was that it is premature to cut them. She reiterated that they are data dependent and the importance of wage growth data.
This week we will have preliminary Q4 GDP and January CPI data.
Important news for EUR:
Tuesday:
GDP
Thursday:
CPI
GBP
Activity data from the UK surprises to the upside. Preliminary January PMI saw manufacturing improve to 47.3 from 46.2 in December and higher than 46.7 as expected. Services continued to move higher into expansion and printed 53.8, up from 53.4 the previous month and thus lifted composite reading to 52.5 from 52.1 in December. The report shows that businesses are becoming more optimistic regarding future growth prospects. This reading shows that UK economy is on a path for a positive GDP reading in Q1. BoE may look at this data and decide that there is no need to rush with rate cuts.
This week we will have BoE meeting. Taking into account recent UK data we expect no change to monetary policy. We will get new projections an a press conference after the meeting so we may see inflation forecast revised down.
Important news for GBP:
Thursday:
BoE Interest Rate Decision
AUD
PBOC has decided to make no changes to LPR rates. The 1-year rate is left at 3.45% while 5-year rate stayed at 4.20%. LPR (Loan Prime Rate) is rate used as a benchmark for loans (1-year is used) and mortgages (5-year is used). Investors have hoped that bad economic data from China will push PBOC into cutting rates, but so far they are not obliging to market requests. PBOC has announced a 50bp RRR (Reserve Required Ratio) cut. The cut will apply from February 5. Rumors have started circulating in Chinese media that PBOC will cut MLF rate in Q1. MLF rate is a benchmark rate that commercial banks in China use to borrow funds from PBOC.
This week we will get Q4 CPI data from Australia which will be very important data input for the coming RBA meeting. We will also get official PMI data from China.
Important news for AUD:
Wednesday:
CPI
Manufacturing PMI (China)
Services PMI (China)
Composite PMI (China)
NZD
Inflation data for Q4 came in as expected at 0.5% q/q and 4.7% y/y. Inflation is down from 1.8% q/q and 5.6% y/y increases in Q3. Inflation in New Zealand is divided into “Tradable” which is primarily driven by international demand and “Non-tradable” which is mainly driven by domestic demand. “Non-tradable” inflation surged by 5.9% y/y and 1.1% q/q, coming in much higher than 0.8% q/q as expected and indicating that domestic price pressures are not subsiding. RBNZ sectoral factor model inflation declined to 4.5% y/y from 5.2% y/y in the previous quarter. Overall, inflation pressures are easing which will be well accepted by RBNZ, but caution remains as domestic demand is still strong and pushes prices higher.
CAD
BoC held the interest rate at 5% as was widely expected. The bank expects growth to remain close to zero in Q1 of 2024 and then to pick up around the middle of the year. GDP projection is for 0.8% growth in 2024 and 2.4% in 2025. Regarding inflation statement says “The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.” The statement concludes with “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.” There is no mention of rate hikes giving this statement a clearly dovish tone. At the press conference BoC Governor Macklem stated that they have not ruled out future rate hikes and that if inflation accelerates they are prepared to raise rates but markets are not buying it.
JPY
New year but same old BoJ as they decided to make no changes to their monetary policy. Interest rate stays at -0.1% and yield on 10y JGB will fluctuate around 0% with 1% being a flexible upper bound. New projections saw no changes to core-core inflation while core inflation was lowered for 2024. GDP projections see lower growth in 2024 than projected in October but higher in 2025 than projected in October. BoJ Governor Ueda put some hawkish comments at the press conference stating that likelihood of achieving 2% inflation target is increasing. He reiterated the importance of spring wage negotiations and added that more companies are mulling wage hikes. Higher wages are necessary to sustainably achieve 2% inflation target. Ueda remarked that loose policy will continue for as long as necessary and added that change in policy is possible even if there is no change to quarterly outlook.
Preliminary January PMI data saw improvements across the sectors. Manufacturing ticked up to 48 from 47.9 in December on the back of slight improvements in output and new orders. They are still in contraction territory though. Services posted much bigger improvement as they printed 52.7 vs 51.5 the previous month. There was a big jump in new business growth and improvement in foreign demand. Composite was thus lifted to 51.1 from 50 in December. Tokyo area CPI for the month of January saw headline and ex fresh food numbers drop to 1.6% y/y from 2.4% y/y and 2.1% y/y in December respectively. Only core-core, CPI ex fresh food, energy, came in above BoJ’s 2% inflation target and printed 3.1% y/y, still down from 3.6% y/y the previous month.
CHF
SNB total sight deposits for the week ending January 19 came in at CHF473.4bn vs CHF476.3bn the previous week. A small decline but still within well-established range.
