• The two-day FOMC meetings ends this afternoon with a decision; Chair Powell’s press conference will be key; ADP private sector jobs estimate will be the data highlight; Q4 employment cost index will be of interest; January Chicago PMI will be reported; Canada reports November GDP; Brazil, Chile, and Colombia are all expected to cut rates
  
• Eurozone January CPI data continue to roll out; some eurozone retail sales data were reported; U.K. housing prices are stabilizing
  
• BOJ released its summary of opinions for the January meeting; Japan reported soft December retail sales, IP, and housing starts data; Australia reported soft CPI data; New Zealand January ANZ Business Outlook survey was mixed

The dollar is still treading water ahead of the FOMC decision. DXY is trading slightly higher near 103.494 but remains rangebound. The euro is trading lower near $1.0840 as French CPI surprised to the downside (see below), while sterling is trading lower near $1.2685 ahead of tomorrow’s BOE decision. USD/JPY is trading higher near 147.75 after BOJ summary of opinions showed little urgency to tighten (see below). AUD is the worst performing major on soft CPI 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. Perhaps today’s FOMC decision will provide a catalyst. If not, there’s also the jobs data Friday to consider.

AMERICAS

The two-day FOMC meetings ends this afternoon with a decision. No change in policy is expected. We expect the Fed to acknowledge ongoing resilience in the economy and labor market. The discussions about slowing and eventually ending Quantitative Tightening are likely to continue but we believe it is too early to announce any changes at this meeting as bank reserves remain plentiful. That said, the Fed may give some hints about what changes are being discussed. Updated macro forecasts and Dot Plots won’t come until the March meeting. The market still sees nearly 50% odds of a cut in March and fully priced in for May.

Chair Powell’s press conference will be key. Recall that at the December meeting, the FOMC statement was fairly balanced but was then totally overshadowed by Chair Powell’s ultra-dovish press conference. Recall also that in the days following that meeting, many Fed officials pushed back against the market reaction to Powell and they continued to do so right up to the current quiet period. We believe Powell will take a much more balanced stance at this meeting, especially given how robust the economy remains.

ADP private sector jobs estimate will be the data highlight. It is expected at 150k vs. 164k in December. Bloomberg consensus for NFP this Friday stands at 185k vs. 216k in December, while its whisper number stands at 200k. We see upside risks and note that NFP has matched or outperformed ADP for four straight months. Unemployment is expected to rise a tick to 3.8%, while average hourly earnings are expected to remain steady at 4.1% y/y.

December JOLTS data suggest the labor market remains firm. Openings came in at 9.026 mln vs. 8.750 mln expected and a revised 8.925 mln (was 8.790 mln) in November. Despite the strong headline, the details were mixed as both hires and layoffs rose while quits fell. That said, underlying strength in the labor market is undeniable. The ongoing moderation in labor demand has not been enough to lead to a higher unemployment rate. The vacancy rate remained at 5.4% for a second consecutive month and down from a high of 7.4% in March 2022. According to research by Fed Governor Christopher Waller the vacancy rate would need to fall below 4.5% to see a significant increase in the unemployment rate.

Q4 employment cost index will be of interest. It is expected at 1.0% q/q vs. 1.1% in Q3. With wage growth remaining relatively high, a strong ECI reading would suggest the Fed needs to be cautious about wages feeding into higher inflation.

January Chicago PMI will be reported. Headline is expected at 48.0 vs. 47.2 in December. ISM manufacturing will be reported tomorrow, and headline is expected at 47.2 vs. 47.4 in December. Keep an eye on employment and prices paid. ISM services PMI will be reported next Monday, and headline is expected at 52.4 vs. 50.6 in December. Of note, S&P Global PMIs came in stronger than expected so we see upside risks to the Chicago and ISM readings.

Consumer confidence continues to climb. January Conference Board consumer confidence came in firm, with headline rising as expected to 114.8 vs. 110.7 in December. This was the third straight improvement to the highest since December 2021, as both expectations and current situation rose. Final January University of Michigan consumer sentiment will be reported Friday. Its preliminary reading of 78.8 was the highest since July 2021. With jobs still being created and confidence still rising, we expect consumption and the economy to remain strong in early 2024.

Canada reports November GDP. The preliminary GDP estimate points to growth of 0.1% m/m after three consecutive months of no growth, while the y/y rate is expected to remain steady at 0.9%. The Bank of Canada projects the economy to stall in Q4 as inventory drawdown offsets tailwinds from exports. Last week, the Bank of Canada delivered the widely expected hold but no longer has a cautious tightening bias. The OIS curve suggests that the probability of a 25 bp rate cut in April stands around 60% and becomes nearly priced in for June.

Brazil COPOM is expected to cut rates 50 bp to 11.25%. Mid-January IPCA inflation fell to 4.47% y/y, the lowest since mid-August and further within the 1.75-4.75% target range. The swaps market is pricing in 225 bp of total easing over the next 12 months that would take the policy rate down to 9.5%.

Chile central bank is expected to cut rates 100 bp to 7.25%. However, a handful of analysts look for a smaller 75 bp cut. The swaps market is pricing in 425 bp of total easing over the next 12 months that would take the policy rate down to 4.0%. Ahead of the decision, Chile reports December IP and retail sales. Manufacturing production is expected at 1.7% y/y vs. 4.5% in November, while sales are expected at -1.8% y/y vs. -2.4% in November.

Colombia central bank is expected to cut rates 50 bp to 12.5%. However, the market is split as nearly half of the analysts polled by Bloomberg look for a smaller 25 bp hike and one looking for a 75 bp cut. At the last meeting December 19, the bank started the easing cycle with a 25 bp cut to 13.0%. The vote was 5-2, with the dissents in favor of steady rates. Given those cautious dissents, we lean towards a 25 bp hike today. The swaps market is pricing in 475 bp of total easing over the next 12 months followed by another 125 bp over the subsequent 12 months that would take the policy rate down to 7.0%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone January CPI data continue to roll out. France reported its EU Harmonised rate at 3.4% y/y vs. 3.6% expected and 4.1% in December and was the lowest since January 2022. Germany reports later today and is expected at 3.2% y/y vs. 3.8% in December. However, German state CPI data already reported today point to some downside risks to the national reading. Italy and eurozone report tomorrow. Italy’s EU Harmonised inflation is expected at 0.8% y/y vs. 0.5% in December, while headline eurozone inflation is expected at 2.7% y/y vs. 2.9% in December and core inflation is expected at 3.2% y/y vs. 3.4% in November. Declining inflation and a poor growth outlook suggest the ECB may not have to wait until June to cut the policy rate. WIRP suggests 20% and 90% probabilities of a cut in March or April, respectively.

Some eurozone retail sales data were reported. Spain and Germany both reported sales. Germany came in at -1.6% m/m vs. 0.6% expected and a revised -0.8% (was -2.5%) in November, while the y/y rate remained steady at-1.7%. Elsewhere, Spain reported sales at 3.1% y/y vs. a revised 5.0% (was 5.2%) in November. Recall that Spain and Italy propped up eurozone growth in Q4 and offset weakness in Germany and France. Italy and eurozone retail sales will be reported next week. Germany also reported January unemployment at -2k vs. 11k expected and a revised 2k (was 5k) in December, which kept the unemployment rate steady at 5.8% vs. 5.9% expected.

U.K. housing prices are stabilizing. January Nationwide house prices rose 0.7% m/m vs. 0.1% expected and 0.0% in December. As a result, the y/y rate improved to -0.2% vs. -1.8% in December. Nationwide Building Society said, “While a rapid rebound in activity or house prices in 2024 appears unlikely, the outlook is looking a little more positive.” It added that “There have been some encouraging signs for potential buyers recently with mortgage rates continuing to trend down. This follows a shift in view amongst investors around the future path of Bank Rate, with investors becoming more optimistic that the Bank of England will lower rates in the years ahead.” Tomorrow, the Bank of England is widely expected to leave the policy rate at 5.25%. The risk is the bank lays the groundwork for a less restrictive stance partly because of the improving UK inflation backdrop.

ASIA

Bank of Japan released its summary of opinions for the January meeting. At that meeting, the bank left all policy settings unchanged. One board member saw the need to continue patiently with easing, while another member said conditions are increasing for the end of negative rates. One said policy is likely to remain accommodative even if negative rates end, while another saw a need to start discussions for a policy exit. While it’s clear that the BOJ is moving closer to removing accommodation, there seems to be little sense of urgency. The market sees liftoff at the June meeting, which seems about right. However, odds of April liftoff have risen and are significant at around 75%.

Japan reported soft December retail sales, IP, and housing starts data. Sales came in at 2.1% y/y vs. 5.1% expected and 5.4% in November, IP came in at -0.7% y/y vs. 0.2% expected and -1.4% in November, and housing starts came in at -4.0% y/y vs. -6.6% expected and -8.5% in November. The economy contracted -2.9% SAAR in Q3. Bloomberg consensus sees Q4 growth at 1.1% SAAR, but we see some downside risks as the recovery has been spotty.

Australia reported soft CPI data. December headline came in at 3.4% y/y vs. 3.7% expected and 4.3% in November. This was the lowest since November 2021 and nearing the 2-3% target range. For Q4, headline came in two ticks lower than expected at 4.1% y/y vs. 5.1% in Q3 and was the lowest since Q4 2021. Elsewhere, trimmed mean inflation came in a tick lower than expected at 4.3% y/y vs. a revised 5.1% (was 5.2%) in Q3. This was also the lowest since Q4 2021. Markets are pricing in 70% odds of a cut in August and 95% in June vs. roughly 50% on Tuesday.

New Zealand January ANZ Business Outlook survey was mixed. Business confidence rose over 3 points to 36.6, the highest since July 2014. However, the forward-looking activity outlook dipped nearly 4 points to 25.6 in January but still looks solid. Overall, the survey suggests the RBNZ can be patient before shifting away from restrictive policy settings. The OIS curve implies low odds of any change in either February or April followed by a 50% probability of a rate cut in May and nearly priced in for July.

China reported mixed official January PMIs. Manufacturing came in a tick lower than expected at 49.2 vs. 49.0 in December, while non-manufacturing came in a tick higher than expected at 50.7 vs. 50.4 in December. As a result, the composite rose to 50.9 vs 50.3 in December and was the highest since September. Caixin reports preliminary January manufacturing PMI tomorrow and is expected to remain steady at 50.8. Caixin then reports its services and composite PMIs next Monday. While recent PMI readings suggest the economy is stabilizing, we do not expect a robust recovery in 2024.