• The Fed delivered a hawkish hold; Chair Powell’s press conference was once again key; banking sector stress is back in the headlines; financial conditions continue to loosen; ADP reported its private sector jobs estimate yesterday; January ISM manufacturing PMI will be the data highlight
  
• Eurozone January CPI data ran slightly hot; final eurozone January manufacturing PMIs were reported; BOE meeting ends shortly with a decision; BOE reports its January DMP inflation survey; Riksbank delivered a dovish hold
  
• Japan unions continue to push for higher wages; Australia housing sector continues to weaken; New Zealand’s government announced it will raise the minimum wage 2% starting April 1; Caixin reported preliminary January manufacturing PMI

The dollar is firm in the wake of the Fed’s hawkish hold. DXY is trading higher near 103.681 and should eventually test the December high near 104.263. The euro is trading lower near $1.08 despite the slight upside miss to eurozone CPI, while sterling is trading lower near $1.2630 ahead of the BOE decision (see below). USD/JPY is trading lower near 147.75 on reports of higher union wage demands (see below). AUD is the worst performing major on soft housing data (see below). All indications are that the U.S. economy continues to grow above trend as Q1 gets under way. Recent data have mostly come in on the firm side and so we continue to believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold yesterday (see below). Perhaps the jobs data Friday will add to the adjustment process.

AMERICAS

The Fed delivered a hawkish hold. Of note, the statement removed the reference to “further policy firming” and confirms that the tightening bias is gone. On the other hand, the Fed stressed that "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." The section on balance sheet normalization was unchanged, suggesting discussions remain ongoing with no firm decisions made yet on slowing the pace and eventually halting QT. Updated macro forecasts and Dot Plots won’t come until the March meeting. So far, so good.

Chair Powell’s press conference was once again key. He echoed the statement that the Fed is looking for great confidence that inflation is moving down, implying it’s not there yet. He said the Fed can’t mechanically adjust policy as inflation falls, which is direct pushback against those saying the Fed has to cut nominal rates in order to keep real rates from rising too much. Powell acknowledged that the Fed is planning to start in-depth discussions on the balance sheet unwind at the March meeting, suggesting little urgency. Lastly and most importantly, Powell said point blank that he doesn’t think it’s likely that the Fed will cut in March.

Despite the pushback from Powell, the market believes a March cut is still in play. Yes, the odds have fallen but, at nearly 40%, remain significant. Of course, it’s all data dependent and we note that by the time the March 19-20 FOMC meeting rolls around, we will see two each of jobs, CPI, PPI, and retail sales reports. A lot can happen between now and March, which is why we think the Fed did the right thing by delivering a balanced hold yesterday. As things stand, we see absolutely no reason for the Fed to ease March 20. That said, May 1 and June 12 are possible but again, totally data dependent.

Banking sector stress is back in the headlines. Concerns picked up yesterday after the big earnings miss from New York Community Bancorp. This seems like a bit of a "wag the dog" story but the market is likely to remain jittery. Is the Fed concerned? Of course. Will it lead the Fed to cut? No. Recall that the Fed hiked two more times last year after the SVB debacle in March. If needed, the Fed can simply extend its emergency Bank Term Funding Program that it recently announced would expire as planned next month after one year.

Financial conditions continue to loosen. The Chicago Fed's measure loosened last week for the 15th straight week and are the loosest since November 2021. If UST yields continue to fall this week, conditions are likely to loosen even more. There is simply no policy restraint on the economy right now, which is a major reason why we think it would be foolish for the Fed to rush into an easing cycle.

ADP reported its private sector jobs estimate yesterday. It came in at 107k vs. 148k expected and a revised 158k (was 164k) in December. Bloomberg consensus for NFP stands at 185k vs. 216k in December, while its whisper number stands at 205k. We see upside risks and note that NFP has matched or outperformed ADP for four straight months.

January ISM manufacturing PMI will be the data highlight. Headline is expected at 47.2 vs. 47.4 in December. Keep an eye on employment and prices paid, which are expected at 47.0 and 46.9, respectively. ISM services will be reported Monday and is expected at 52.2 vs. 50.6 in December. Of note, S&P Global PMIs came in stronger than expected so we see upside risks to the ISM readings. Yesterday, Chicago PMI came in at 46.0 vs. 48.0 expected and 47.2 in December.

Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first estimate came in at 3.0% SAAR and the first update comes today after the data. Elsewhere, the New York Fed’s Nowcast model’s Q1 estimate rose to 2.8% SAAR vs. 2.4% previously and will be updated tomorrow. Its estimates for Q2 will begin about one month before the start of the quarter. Of note, actual Q4 growth came in at 3.3% SAAR and was the sixth straight quarter of above trend growth. If momentum carries over into Q1 as we expect, we are likely to see a seventh straight quarter.

Ahead of the jobs report tomorrow, we get some more labor market data today. January Challenger job cuts, Q4 unit labor costs and non-farm productivity, and weekly jobless claims will all be reported. December construction spending (0.5% m/m expected) and January vehicle sales (15.70 mln annual rate expected) will also be reported.

EUROPE/MIDDLE EAST/AFRICA

Eurozone January CPI data ran slightly hot. Headline eurozone inflation came in a tick higher than expected at 2.8% y/y vs. 2.9% in December, while core inflation came in a tick higher than expected at 3.3% y/y vs. 3.4% in November. Of note, Italy’s EU Harmonised inflation came in a tick higher than expected at 0.9% y/y vs. 0.5% in December.

Despite the upside miss to CPI, ECB easing expectations remain intact. Declining underlying inflation and the poor domestic growth outlook suggest the ECB may not have to wait until June to cut the policy rate. Markets have essentially priced in a 25 bp rate cut at the April 11 meeting. Chief Economist Lane speaks on “Monetary Policy and Inflation.” Yesterday, Lane stressed that tight policy will be maintained “until we are more confident that we are on our way back to 2%.”

Final eurozone January manufacturing PMIs were reported. Headline remained steady from the preliminary at 46.6. Looking at the country breakdown, Germany rose a tick from the preliminary to 45.5 while France fell a tick to 43.1. Italy and Spain reported for the first time and came in at 48.5 and 49.2, respectively. Both rose three full points from December.

Bank of England meeting ends shortly with a decision. The bank is widely expected to leave the policy rate at 5.25%. The risk is that the BOE does not push back against money pricing for rate cuts this year that see nearly 125 bp of rate cuts over the course of 2024 starting in Q2. Specifically, look-out for a capitulation within the MPC hawks. At both the November 2 and December 14 meetings, Greene, Mann, and Haskel all dissented in favor of a 25 bp hike. That number is likely to drop. Also, there are risks that the reference to “further tightening in monetary policy would be required” is omitted. Updated macro forecasts will be released and Governor Andrew Bailey holds his press conference shortly after the decision.

BOE reports its January Decision Maker Panel inflation survey later today. 1-year inflation expectations are expected to fall two ticks to 3.8%. If so, it would be the lowest on record but still well above the 2% target.

Riksbank delivered a dovish hold. It kept rates steady at 4.0%, as expected, but warned that “the policy rate probably can be cut sooner than was indicated in the November forecast.” Recall that the November projections implied no rate cuts before end-2025 but now, according to the Riksbank, the possibility of the policy rate being cut during the first half of 2024 cannot be ruled out. The Riksbank noted that indicators point to inflationary pressures continuing to decline going forward and that the slowdown in Swedish economic activity (driven by household consumption and housing investment) is continuing roughly in line with the November forecast. Finally, as previously flagged, the Riksbank decided to expand the sales of government bonds as part of the ongoing normalization process. The pace will be increased from SEK5 bln to SEK6.5 bln per month.

Riksbank easing expectations have picked up. Markets see nearly 60%probability of a 25 bp rate cut in March. Over the next 12 months, the OIS curve is pricing in a total of 150 bp of easing. This seems too aggressive considering the potential for domestic demand in Sweden to pick up gradually in 2024. Indeed, consumer confidence has recovered from its October 2022 low and the decline in inflation will lead to an increase in real disposable household income and underpin higher consumption. The next Monetary Policy Report containing updated forecasts will be published at the March 27 meeting.

ASIA

Japan unions continue to push for higher wages. UA Zensen, one of the largest and mostly representing workers at small- and medium-sized firms, is asking for a 6% increase in total wages this year, up from “around 6%” last year. Union official Matsuura said “The yen’s depreciation has gone too far, and I would like to see the BOJ take some policy steps to correct the situation. I think we have to raise wages enough for the BOJ to be able to make a decision on that.” If other unions follow suit and win such increases this spring, we believe BOJ liftoff will likely come at the June meeting. Of note, December cash earnings will be reported next Tuesday and are expected to pick up from November.

Australia housing sector continues to weaken. The number of dwellings approved plunged -9.5% m/m in December 2023 vs. 0.5% expected and a revised 0.3% (was 1.6%) in November. The y/y also plunged to -28.1%, the worst since February. The downtrend in building approvals will further constrain the supply of new dwellings and push house prices higher. On the other hand, the terms of trade (export/import prices) improved in Q4 on stronger export prices (namely, base metals and energy). The higher terms of trade will generate a positive net wealth effect to the Australian economy and raises the fundamental value of AUD.

New Zealand’s government announced it will raise the minimum wage 2% starting April 1. It is uncertain how businesses will respond to this increase. The lift in the minimum wage may spill over to worker demands in higher wage brackets and delay a return of inflation to the mid-point of the RBNZ’s 1-3% target range. If so, the risk is that New Zealand’s OIS curve pushes out the timing of the first RBNZ rate cut that is roughly 55% priced for May.

Caixin reported preliminary January manufacturing PMI. It came in steady as expected at 50.8. Caixin reports its services and composite PMIs this Monday, and services is expected to rise a tick to 53.0. While recent PMI readings suggest the economy is stabilizing, we do not expect a robust recovery in 2024. Of note, the PBOC provided CNY150 bln of funding to commercial banks for housing and infrastructure projects in December via its Pledged Supplemental Funding (PSL) program.