- Chicago Fed financial conditions for last week will be reported; S&P Global reports its preliminary January PMIs; BOC meeting ends shortly with a decision
- The two-day ECB meeting began today; eurozone reported mixed preliminary January PMIs; U.K reported firm preliminary January PMIs; South Africa reported December CPI
- Reports suggest Japan unions will push for significant wage increases this spring; Japan reported solid December trade data; Japan and Australia reported firm preliminary January PMIs; New Zealand reported Q4 CPI data; PBOC announced it will cut its RRR for banks; Malaysia kept rates steady at 3.0%
The dollar is trading lower as PMIs point to unexpected resilience in some economies. DXY is trading lower near 103.166 after trading at a new high for this move near 103.817 yesterday. We still believe DXY is on track to test the December 8 high near 104.263. The yen is the biggest winner so far today, with USD/JPY trading lower near 147.50 after reports of higher wage demands and firm PMIs (see below). Sterling surged to trade near $1.2775 following the encouraging U.K. January PMIs (see below), while euro is lagging a bit due to soft PMIs but still trading higher near $1.90. The U.S. PMIs are up next (see below), and all indications are that the U.S. economy remains robust as Q1 gets under way. Over the past few weeks, the 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.
AMERICAS
After a quiet start to the week, the action picks up today. Preliminary January PMIs have started to roll out and have already contained some surprises. Key central bank meetings have begun and here too, we suspect there may be some surprises coming our way. Key U.S. data will be reported through the end of this week and should help confirm that the economy remains robust.
Chicago Fed financial conditions for last week will be reported. For the previous week ended January 12, conditions loosened for the 13th straight week and were the loosest since mid-January 2022, about two months before the Fed started hiking rates. We may get a 14th straight week. Absent some sort of exogenous shock, there is nothing that's really slowing down the U.S. economy right now and so we expect Q1 GDP growth to remain north of 2% SAAR.
S&P Global reports its preliminary January PMIs. Manufacturing is expected at 47.6 vs. 47.9 in December, services is expected at 51.5 vs. 51.4 in December, and the composite is expected at 51.0 vs. 50.9 in December. As background, the U.S. services PMI signaled a quicker expansion in activity in December with the index rising 6 ticks to 51.4. Meanwhile, the manufacturing sector slipped further into contraction at the end of 2023. ISM PMIs won’t be reported until next week.
The Bank of Canada meeting ends shortly with a decision. The bank is widely expected to leave the overnight rate at 5.0%. Importantly, the BOC is likely to emphasize again that it “is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed” which is CAD supportive. Indeed, underlying inflation in Canada remains too high and sticky between 3.5-4.0% since May 2023. Updated macro forecasts will be released and Governor Macklem will hold a press conference.
Mexico reports mid-January CPI and November GDP proxy. Headline inflation is expected at 4.78% y/y vs. 4.86% previously, while core inflation is expected at 4.78% y/y vs. 4.98% previously. If so, it would be the first deceleration in headline since October but still well above the 2-4% target range. Next Banco de Mexico meeting is February 8, and no change is expected then. After that, the March 21 meeting is in play if disinflation continues. Elsewhere, GDP growth is expected at 2.90% y/y vs. 4.24% in October. If so, it would be the slowest since April and would likely put pressure on the central bank to start the easing cycle sooner rather than later.
EUROPE/MIDDLE EAST/AFRICA
The two-day European Central Bank meeting began today and ends tomorrow with a decision. The bank is widely expected to leave the policy rate steady at 4.0% and reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. President Lagarde’s press conference will be key. Lagarde will likely further lean against money market bets on policy loosening. Indeed, the ECB’s Account of the December 2023 policy meeting noted that “it was widely regarded as important not to accommodate market expectations in the post-meeting communication” as it could derail the disinflationary process.
Eurozone reported mixed preliminary January PMIs. Headline manufacturing came in at 46.6 vs. 44.7 expected and 44.4 in December, services came in at 48.4 vs. 49.0 expected and 48.8 in December, and the composite came in at 47.9 vs. 48.0 expected and 47.6 in December. Services activity has not only declined for the sixth consecutive month in January but has also accelerated in its downturn. Manufacturing remains in recessionary territory for the 19th straight month, but the downturn has softened. Overall, the Eurozone economy started the year on a sluggish note which will continue to weigh on the Eurozone OIS curve and EUR. Looking at the country breakdown, the German composite came in at 47.1 vs. 47.8 expected and 47.4 in December while the French composite came in at 44.2 vs. 45.1 expected and 44.8 in December. Italy and Spain won’t report until final PMI readings are reported in early February.
U.K reported firm preliminary January PMIs. Manufacturing came in at 47.3 vs. 46.7 expected and 46.2 in December, services came in at 53.8 vs. 53.2 expected and 53.4 in December, and the composite came in at 52.5 vs. 52.1 expected and actual in December. The composite is the highest since June. Overall, the improved UK economic growth outlook and high underlying inflation suggest the Bank of England may not have to slash the policy rate as much as is currently priced (100 bp in 2024).
U.K. CBI reported its January industrial trends survey. Total orders came in at -30 vs. -23 expected and actual in December, while selling prices came in at 9 vs. 5 expected and 7 in December. Its distributive trades survey will be reported tomorrow and retailing reported sales are expected at -20 vs. -32 in December. January GfK consumer confidence will also be reported tomorrow and is expected to improve a point to -21.
South Africa reported December CPI. Headline inflation eased to 5.1% y/y vs. 5.2% expected and 5.5% in November, while core remained steady as expected at 4.5% y/y. Overall, inflation in South Africa is on a downward trajectory and within the 3-6% target band. The South African Reserve Bank meets tomorrow and is widely expected to leave the policy rate steady at 8.25% whilst setting the table for the start of the easing cycle. The swaps market is pricing in 50 bp of easing over the next three months, which suggests a cut at the March 27 meeting. Of note, the SARB projects a lower policy rate near 7.55% by end-2024, which is roughly in line with 1-year swaps pricing. Bottom line: credible monetary policy should offer ZAR some support.
ASIA
Reports suggest Japan unions will push for significant wage increases this spring. Nikkei reports that NTT’s labor union will seek a 5% wage increase this spring, up from 2% last year. As if on cue, the leader of the Japanese Trade Union Confederation (Rengo) warned that “This year’s wage talks will be a critical moment in the transition to an economy with steadily rising wages and prices, and the biggest challenge is to share awareness throughout society.” Of note, Rengo first estimated the average wage increase last spring at 3.8% based largely on pay deals with large firms. This average fell to 3.6% when pay deals with small- and medium-sized firms were incorporated. BOJ officials have stressed that higher wages are a key factor in removing accommodation. If the wage negotiations signal a pickup from 2023, BOJ liftoff could be seen around mid-year. Of note, December earnings data will be reported February 6.
Japan reported solid December trade data. Exports came in at 9.8% y/y vs. 9.2% expected and -0.2% in November, while imports came in at -6.8% y/y vs. -5.4% expected and -11.9% in November. Export growth was the strongest since December 2022 and coincides with improving trade data from the rest of the region. Of note, exports of cars rose 35.9% y/y vs. 16.3% in November.
Japan reported firm preliminary January PMIs. Manufacturing came in at 48.0 vs. 47.9 in December, services came in at 52.7 vs. 51.5 in December, and the composite came in at 51.1 vs. 50.0 in December. The composite PMI had been gyrating around the key 50 level the past three months but rose to the highest since September. Firm data and prospects for higher wages have moved expected BOJ liftoff to June from July at the start of this week and has also raised the odds of April liftoff to nearly 65% vs. 45% at the start of this week.
Australia reported firm preliminary January PMIs. Manufacturing came in at 50.3 vs. 47.6 in December, services came in at 47.9 vs. 47.1 in December, and the composite came in at 48.1 vs. 46.9 in December. The composite PMI is the highest since September but has been below 50 for four straight months and is unlikely to move above that level anytime soon as we believe the spike higher in manufacturing PMI cannot be sustained.
New Zealand reported Q4 CPI data. Headline CPI came in as expected at 0.5% q/q vs. 1.8% in Q3, while the y/y rate came in as expected at 4.7% y/y vs. 5.6% in Q3. Headline is the lowest since Q2 2021, but the RBNZ will not be in a rush to loosen policy because underlying inflation remains too high. Annual non-tradables inflation slowed more slowly than the RBNZ anticipated to 5.9% in Q4 vs. 5.7% expected and 6.3% in Q3. The RBNZ’s sectoral factor model (core) also slowed to a more than a two-year low to 4.5% y/y in Q4 but remains elevated. This suggests it will take some time for inflation to return to the mid-point of the RBNZ’s 1-3% target range. The OIS curve is now pricing in 75 bp of rate cuts this year, down from 100 bp last week. In our view, there is scope for further repricing of rate cut expectations in favor of NZD. Indeed, New Zealand’s December ANZ Business Outlook survey points to a rebound in activity, and firmer whole milk powder prices (its biggest commodity exports) will have a positive net wealth effect to the real economy.
The PBOC announced it will cut its reserve requirement ratio (RRR) for banks. The 50 bp cut will take effect February 5 and is meant to encourage more lending. The bank cut the RRR twice in 2023, with the last reduction taking place in September. RRR cuts can briefly shore up domestic economic sentiment. However, it does not deal with the root cause of China’s structural economic headwind: its inability to rebalance the economy away from unproductive debt-fueled, investment-led growth and towards consumption. Household consumption still accounts for less than 40% of China’s GDP versus a global average in other countries of roughly 60%.
Bank Negara kept rates steady at 3.0%, as expected. The bank warned that risks remain, noting that the government review of price controls and subsidies this year adds uncertainty to the inflation outlook. OF note, December headline CPI came in steady at 1.5% y/y earlier this week. While the bank does not have an explicit inflation target, low prices should allow it to keep rates on hold for now with an eye on easing later this year. The swaps market is pricing in steady rates over the next 6 months, with some risks of a 25 bp cut over the subsequent 6 months.
