January’s Growth Chronicle
- The spotlight today is on relative growth momentum with the release of the January PMI readings for the EU, UK, and US. Japan and Australia’s PMI improve.
- President Trump lifts financial market risk sentiment. USD down across the board while stocks keep rising.
- Bank of Japan delivered a hawkish hike. Markets continue to imply the BOJ policy rate to peak at 1.00% over the next two years. Monetary Authority of Singapore loosened policy.
USD is down across the board and global equity markets keep grinding higher. US President Donald Trump’s constructive tone on China and his demand for the Fed to lower interest rates buoyed financial market risk sentiment. Yesterday, Trump said that “with oil prices going down, I'll demand that interest rates drop immediately”. Asked later on if he believed Fed officials would listen to him, Trump responded, “Yeah.”
The fundamentals suggest the Fed has very little room to ease policy further which is USD supportive. The US economy is tracking well above long-run annual trend growth of 1.8% (the Atlanta Fed GDPNow model estimates Q4 growth at 3.0% SAAR) and progress on inflation is stalling above 2%.
Additionally, US economic outperformance continues to favor USD strength. The US January preliminary PMI is forecast to be indicative of an encouraging growth outlook (2:45pm London). The composite index is expected at 55.6 vs. 55.4 in December, the manufacturing PMI is anticipated at 49.8 vs. 49.4 in December, and the services PMI is projected at 56.5 vs. 56.8 in December.
In contrast, the Eurozone January preliminary PMI is expected to remain consistent with a soggy growth outlook (9:00am London). The composite PMI is forecast at 49.7 vs. 49.6 in December, the manufacturing PMI is expected at 45.4 vs. 45.1 in December, and the services PMI is projected at 51.5 vs. 51.6 in December. The PMIs for France and Germany are released earlier (8:15am and 8:30am London, respectively). ECB President Christine Lagarde participates in panel titled “The Global Economic Outlook” (10:00am London).
The UK January preliminary PMI is equally anticipated to print soft (9:30am London). The composite index is forecast at 50.1 vs. 50.4 in December, the manufacturing PMI is expected at 47.0 vs. 47.0 in December, and the services PMI is projected at 50.8 vs. 51.1 in December.
In the meantime, private sector activity in Japan and Australia improved in January. Japan’s composite PMI rose to a four-month high at 51.1 vs. 50.5 in December, while Australia’s ticked-up to a five-month high at 50.3 vs. 50.2 in December.
USD/JPY dropped as much as 1% briefly below key support at 155.00 after the Bank of Japan (BOJ) delivered a hawkish hike. In line with market pricing, the BOJ raised the policy rate 25bps to 0.50%. Only NAKAMURA Toyoaki dissented on raising rates, which is not surprising as he also voted against raising rates last July.
Importantly, the BOJ reiterated that “if the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” Still, BOJ Governor Ueda cautioned that the policy path will be guided by checking the impact of rate hikes already undertaken. This argues against an aggressive pace of tightening.
The BOJ made no changed to real GDP growth projections but lifted CPI inflation forecasts (see table) and continues to see risks to prices skewed to the upside for 2025. Specifically, the BOJ warned that the “virtuous cycle between wages and prices will continue to intensify” as firms' behavior has shifted more toward raising wages and prices.
Nonetheless, the money market continues to imply the BOJ policy rate to peak at 1.00% over the next two years. This seems about right as the BOJ expects inflation to stabilize around its 2% target in 2026. Bottom line: the BOJ shallow policy normalization cycle is an ongoing headwind for JPY. USD/JPY should find good technical support at its 200-day moving average (152.85), if 155.00 gives way.
The Monetary Authority of Singapore (MAS) loosened policy. It reduced “slightly” the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band whilst keeping the width and midpoint unchanged. This was the first time it has eased since 2020. MAS noted that Singapore’s growth momentum is expected to slow over this year while core Inflation will remain below 2% this year, reflecting the return to low and stable underlying price pressures in the economy.
USD/CNH fell to its lowest level since November on broad USD weakness. As was widely expected, the People’s Bank of China (PBOC) left its 1-year medium-term lending facility (MLF) rate steady at 2.0%. More easing is in the pipeline. However, China’s economic outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity (i.e. the huge debt overhang).