Inflation week is ahead of us as the US, China and Switzerland publish inflation reports.
USD
ISM Manufacturing for the month of December improved to 47.4 from 46.7 in November. Expectations were for it to improve to 47.1. Manufacturing has spent entire 2023 in contraction territory and has not been in expansion since October of 2022. Production was the only component that was in expansion with 50.3, up from 48.5 in November. New orders index declined to 47.1 making it sixteenth month in contraction. Employment improved to 48.1 from 45.8 the previous month while the biggest positive was a big drop in prices paid component which came in at 45.2 from 49.9 in November. With inflation pressures easing Fed will be more confident that they are on path to achieve much coveted “soft landing”.
Minutes from the December meeting revealed that participants see policy rates to likely be at its peak. “A number” of participants questioned for how long monetary policy should remain restrictive. All participants observed that clear progress on bringing inflation down to 2% has been made in 2023. However, progress on inflation has been uneven with core services component continuing to increase at elevated pace. There was also talk about preparing to reduce the size of balance sheet run off, QT, which will be a hot topic of discussion at the next press conference.
Headline December NFP number printed 216k vs 170k as expected. The unemployment rate was unchanged at 3.7% y/y vs 3.8% y/y as expected, however participation rate recorded a big drop to 62.5% from 62.8% in November. Wages increased 0.4% m/m and 4.1% y/y. These numbers refute market’s pricing of Fed rate cuts as jobs are stable and wages are increasing at a healthy pace. Digging into the details we can see that there was a downward revision of 71k jobs in the past two months. Additionally, government added 52k jobs with health care adding 38k jobs.
ISM services posted a big miss in December as they came in at 50.6 vs 52.6 as expected and down from 52.7 the previous month. The biggest drop was seen in the employment category which plunged to 43.3 from 50.7 the previous month. This number indicates that businesses are not hiring. Prices paid component also declined as did new orders, new export orders and inventories. The numbers from report are very dovish.
The yield on a 10y Treasury started the year at 3.88%, rose to 4.10% and finished the week at around 4.05%. The yield on 2y Treasury started the year at 4.25% and reached the high of 4.48%. Spread between 2y and 10y Treasuries started the year at -37bp then widened to -38bp as curve inverted further. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at January meeting at 94% while probability of a 25bp rate cut is 6%. Probability of a March rate cut is at 66%.
This week we will get December inflation data and it is expected to come in unchanged from previous month.
Important news for USD:
Thursday:
CPI
EUR
Final December manufacturing PMI was revised up to 44.4 from 44.2 as preliminary reported with positive revisions to German and French readings. Italy beat the expectations while Spain missed. Still, absolute measures show Spain to decline at the slowest pace while France declines fastest. Although number is very low it still marks a seven month high. The report shows that growing number of firms shows optimism regarding their output over the next 12 months. Final services for Eurozone improved to 48.8 on the back of improvements in German and French readings as well as Spain beating the expectations. New business opportunities continued to weaken while input prices continued to increase with companies successfully passing higher costs to consumers. Composite PMI came in at 47.6 unchanged from November.
Preliminary December inflation numbers saw headline CPI at 2.9% y/y vs 3% y/y as expected and up from 2.4% y/y in November. Both German and French preliminary CPI readings for December came in higher than previous month and printed 3.7% y/y. Declining energy base effects were the main culprits for increase in inflation. A very encouraging sign was seen in core CPI which declined to 3.4% y/y from 3.6% y/y in November while markets were expecting a decline to 3.5% y/y. These numbers give confidence to ECB that pause is the right way to go for now and that rate cuts in the second half of the year, or from June, are justified.
GBP
Unlike Eurozone manufacturing reading, final December UK manufacturing PMI was revised down to 46.2 from 46.4 as preliminary reported and down from 47.2 in November. New orders and output declined and there was a further decline in business optimism. The report sees a gloomy future for manufacturing sector stating drop in input prices due to weaker demand as one shining light. Final services reading was revised up to 53.4 from 52.7 as preliminary reported and up from 50.9 in November indicating a healthy and rising sector. New orders and business activity both increased in December. Input prices have been increasing but doe to cost-of-living crises companies are not capable of fully transferring costs to consumers. Composite improved to 52.1 from 50.7 the previous month.
AUD
Official PMI data from China for the month of December showed manufacturing continue to slip down into contraction printing 49 vs 49.5 as expected and down from 49.4 in November. New orders component is declining further indicating weak activity. Services PMI inched up to 50.4 from 50.2 the previous month but expectations were for a 50.5 reading. Composite dipped slightly to 50.3 from 50.4 in November. Caixin manufacturing PMI, measuring small and medium sized enterprises, fared better and ticked up to 50.8 from 50.7 the previous month while it was expected for it to dip to 50.4. The report shows that both output and new orders increased at faster pace. Caixin services beat expectations and rose further into expansion with 52.9 reading, up from 51.5 the previous month while composite printed 52.6, a seven month high.
This week we will get inflation data from China.
Important news for AUD:
Friday:
CPI (China)
NZD
NZD had a turbulent start of the year as rebalancing of portfolios took its toll on the risk on currencies. However, it seems that Kiwi has carved out a bottom post NFP and we could see some nice strength throughout the coming week.
CAD
December employment report was a mixed bag. Employment change was 0.1k, basically unchanged, vs 13.5k as expected. The unemployment rate remained at 5.8% while tick higher to 5.9% was expected. Wages surged 5.7% y/y vs 5% y/y in November. All of the jobs added were part-time jobs (23.6k) while full-time jobs saw a big decline (23.5k). There are signs of weakening job market but with wages running hot it is not what BoC wants to see.
JPY
Final December manufacturing PMI was revised up to 47.9 from 47.7 as preliminary reported, but still down from 48.3 in November. The report highlights weaker external demand but higher input prices. Firms, however, remain hesitant to continue passing higher costs to consumers. Final services were revised down to 51.5 from 52 as preliminary reported but up from 50.8 in November. The report shows that business volume improved led by domestic consumers. On the other hand, there was a big increase in prices from service sector that will keep inflation elevated.
CHF
Swissy was the best performing currency, out of majors, with its incredible surge in the last couple of trading days in 2023. However, 2024 has started slow and Swissy lost ground against all major pairs only to regain its strength as the week progressed.
This week we will get inflation data.
Important news for CHF:
Monday:
CPI
