- U.S. financial conditions continue to loosen; Q4 GDP data will be reported; December CFNAI will also be reported; S&P Global reported firm U.S. preliminary January PMIs; BOC delivered the widely expected hold
- ECB meeting ends shortly with a decision; Lagarde’s press conference will be key; Germany reported a soft IFO survey for January; U.K. CBI reported a weak January distributive trades survey; Norges Bank delivered a hold and Turkey hiked rates 250 bp to 45.0%, both as expected; SARB is expected to keep rates steady at 8.25%
- Australia plans to scale back tax relief for the wealthy in favor of low- and middle-income earners; Korea reported Q4 GDP
The dollar is treading water ahead of key data. DXY is trading flat near 103.245 after trading at a new high for this move near 103.817 Tuesday. We still believe DXY is on track to test the December 8 high near 104.263. The euro is trading flat near $1.0890 ahead of the ECB decision but remains vulnerable as eurozone data remain very weak (see below). Sterling is also trading flat near $1.2730 despite weak CBI distributive trades survey (see below). USD/JPY is trading flat near 147.50. Q4 GDP will be the U.S. data highlight and all indications are that the U.S. economy remains robust even 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
Chicago Fed financial conditions loosened last week for the 14th straight week. They are now the loosest since mid-November 2021 and if this week’s market trends continue, conditions will loosen for a 15th straight week. There is simply nothing holding back the US economy right now.
New York Fed's FCI-G measure of financial conditions for December also loosened. It shows monetary policy was accommodative in December for the second straight month after November revisions. Policy was also the most accommodative since January 2022 and if current trends continue, they are likely to become even more accommodative in January.
The market is doing all the heavy lifting for the Fed in terms of easing. At some time, the Fed will have to validate this with a rate cut but the way things are going, why rush? WIRP suggests 45% odds of a cut in March, down from nearly 85% at the start of last week. Even 45% seems too high in light of ongoing strong growth. 125 bp of total easing is still priced in for 2024, which also seems unlikely.
Q4 GDP data will be reported. Growth is expected at 2.0% SAAR vs. 4.9% in Q3, with personal consumption expected at 2.5% SAAR vs. 3.1% in Q3. The risks are clearly skewed to the upside as both the Atlanta Fed GDPNow and New York Fed Nowcast models forecast Q4 growth at 2.4% SAAR. The Atlanta Fed will begin estimating Q1 growth tomorrow, while the New York Fed currently estimates Q1 growth at 2.4% SAAR and will be updated tomorrow as well.
December Chicago Fed National Activity Index will also be reported. Consensus sees 0.06 vs. 0.03 in November. If so, the 3-month moving average would rise to -0.19 vs. -0.20 in November and would move further away from the -0.7 threshold that signals imminent recession. The odds of a soft landing have risen in recent months.
Regional Fed surveys for January continue rolling out. Kansas City manufacturing index is expected at -3 vs. -1 in December. This will be followed by Kansas City Fed services index tomorrow. Earlier this week, Philly Fed non-manufacturing came in at -3.7 vs. 6.3 in December, while Richmond manufacturing and non-manufacturing indices came in at -15 and -3, respectively. Both worsened from December.
S&P Global reported firm U.S. preliminary January PMIs. Manufacturing came in at 50.3 vs. 47.6 expected and 47.9 in December, services came in at 52.9 vs. 51.5 expected and 51.4 in December, and the composite came in at 52.3 vs. 51.0 expected and 50.9 in December. This was the highest composite reading for this series since June. Its manufacturing PMI moved above 50 for the first time since April and is the highest since October 2022. Consider us a bit skeptical in light of ongoing weakness in the hard data coming from not only the U.S. manufacturing sector, but in most DM countries too. Let's look to ISM manufacturing PMI due out February 1 for confirmation. This measure stood at 47.4 in December and is expected to fall a tick to 47.3 in January. While the S&P Global reading points to upside risks, a move above 50 seems a bit of a stretch.
Weekly jobless claims will be closely watched. That’s because continuing claims will be for the BLS survey week containing the 12th of the month. These are expected at 1.823 mln vs. 1.806 mln last week, the lowest since mid-October. Initial claims are expected at 200k vs. 187k last week, the lowest since September 2022. Bloomberg consensus for January NFP stands at 168k vs. 216k in December, while its whisper number stands at 169k.
Housing data will remain in focus. December new home sales are expected at 10.0% m/m vs. -12.2% in November. Pending home sales will be reported tomorrow and are expected at 2.0% m/m vs. 0.0% m/m in November. With 30-year mortgage rates hovering around 7% vs. the peak above 8% back in October, it appears the Fed will have to follow through on its rate cuts before these rates fall further and give the housing sector some more relief.
Other minor data will be reported. December advance goods trade, retail and wholesale inventories, and durable goods orders will all be reported. Orders are expected at 1.5% m/m vs. 5.4% in November, order ex-transportation are expected at 0.2% m/ vs. 0.4% in November, and capital goods orders non-defense ex-aircraft are expected at 0.1% m/m vs. 0.8% in November.
The Bank of Canada delivered the widely expected hold. Most importantly, the BOC no longer has a cautious tightening bias. Previously, it warned that it “is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.” The new policy statement simply says that “the Governing Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” Governor Macklem pushed back against aggressive rate cut bets in his press conference. He said hat the risk of another hike is “not zero.” Macklem stressed that it’s premature to discuss rate cuts and that the bank needs to see further progress before beginning that discussion. Despite the pushback, the OIS curve is pricing in the same probability of a 25 bp rate cut in April of 55% that was seen at the start of this week. Updated macro forecasts were released with very minor tweaks.
EUROPE/MIDDLE EAST/AFRICA
The two-day European Central Bank meeting ends shortly with a decision. The bank is widely expected to leave the policy rate at 4% 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. After the decision, Panetta, Kazaks, and Vujcic speak tomorrow.
President Lagarde’s press conference will be key. Lagarde will likely further lean against money market bets on policy loosening. Indeed, the account of the December 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. If all goes as expected with the ECB, the euro will likely take its cue from the eurozone data this week, which have come in uniformly softer than expected. As such, the euro should come under renewed downside pressure against most major currencies.
Germany reported a soft IFO survey for January. Headline came in at 85.2 vs. 86.6 expected and a revised 86.3 (was 86.4) in December. This was the lowest reading since May 2020 and driven by a drop both current assessment and expectations to 87.0 and 83.5, respectively. Both were much weaker than expected. German February GfK consumer confidence will be reported tomorrow and is expected to rise five ticks to -24.7 but there are clear downside risks as sentiment in Germany remains soft overall.
U.K. CBI reported a weak January distributive trades survey. Retailing reported sales came in at -50 vs. -20 expected and -32 in December, while total reported sales came in at -33 vs. -16 expected and -15 in December. The retailing number was the worst since January 2021 and suggests retail sales are likely to remain under pressure after the much weaker than expected -3.2% m/m reading in December. Earlier this week, its industrial trends survey also came in weaker than expected. January GfK consumer confidence will be reported later today and is expected to improve a point to -21. However, there are clear downside risks to the reading.
Norges Bank delivered a hold, as expected. The decision was unanimous, and the bank reiterated that “the policy rate will likely be kept at that level for some time ahead” as the economy is cooling down but inflation is markedly above target. Macro forecasts won’t be updated until the March 21 meeting, but the December forecasts indicated that the policy rate will stay at 4.5% until Q3 2024 before gradually moving down. Norway’s OIS curve has adjusted a little higher since the start of the year and currently implies around 75 bp of rate cuts over the next 12 months. Bottom line: there were no dovish or hawkish surprises from the Norges Bank, and NOK is outperforming largely because of firmer Brent crude oil prices.
Turkey central bank hiked rates 250 bp to 45.0%, as expected. As per last month’s guidance, the bank suggested the tightening cycle was now complete as “the Committee assesses that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed…until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range.” Turkey’s OIS curve implies roughly 8 percentage points of policy rate cuts over the next 12 months, which will be hard to do with punishingly high (and rising) inflation. This would mean real rates will remain deeply negative and be a huge drag on TRY.
South African Reserve Bank meets. It 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 next meeting March 27. 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. South Africa reported December CPI yesterday. 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. If disinflation continues, a March cut seems likely.
ASIA
The Australian government confirmed plans to scale back tax relief for the nation’s wealthy in favor of low- and middle-income earners. Originally, the 32.5% and 37% income tax brackets were to be eliminated and a 30% rate would be applied to incomes between AUD45,000-200,000. The top 45% bracket would apply to incomes above AUD200,000 vs. AUD180,000 currently. Under the new plan, the 37% rate would remain in place for those earning AUD135,000-190,000 and the top 45% rate would apply to incomes above A$190,000. At the other end of the spectrum, the bottom tax rate of 19% would be cut to 16% for incomes of up to AUD45,000, with the 30% rate applying to incomes between AUD45,000-135,000. According to the government, the income tax rejig won't add to inflation. Indeed, fiscal policy is projected to be a small drag on the economy over 2024 (based on the cyclically adjusted primary budget surplus). This removes pressure on the RBA to keep monetary policy restrictive for too long. Cash Rate futures are pricing in less than 50 bp of rate cuts this year, with the first cut seen in September.
Korea reported Q4 GDP. Growth remained steady as expected at 0.6% q/q, while the y/y rate came in a tick higher than expected at 2.2% vs. 1.4% in Q3. This was the highest y/y rate since Q3 2022. For the year, growth was 1.4% vs. 2.6% in 2022. Bloomberg consensus sees 2.1% growth in 2024, which may be a tad optimistic given that the same consensus sees global growth slowing to 2.6% vs. 3.0% in 2023.
