- U.S. Treasury reduced its estimate for Q1 borrowing; the two-day FOMC meetings begins today and ends tomorrow with a decision; December JOLTS data and January Conference Board consumer confidence will be reported
- Eurozone January CPI data started rolling out; eurozone reported mixed Q4 GDP data; U.K. January BRC shop prices cooled; U.K. December consumer credit readings were weak; Hungary is expected to cut rates 100 bp to 9.75%
- Japan reported mixed December labor market data; Australia reported weak December retail sales; RBNZ Chief Economist Conway leaned hawkish
The dollar is treading water as the FOMC meeting begins. DXY is trading lower near 103.446 but remains on track to test the December 8 high near 104.263. The euro is trading higher near $1.0845 on better-than-expected GDP data (see below), while sterling is trading lower near $1.2680 on soft data (see below). USD/JPY is trading heavy near 147.35 despite mixed labor market 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 tomorrow’s FOMC decision will provide a catalyst. If not, there’s also the jobs data Friday to consider.
AMERICAS
The U.S. Treasury reduced its estimate for Q1 borrowing. Treasury now sees $760 bln of net borrowing this quarter, down from its previous estimate of $816 bln from late October. For Q2, Treasury estimates net borrowing at $202 bln. These updated estimates come ahead of the quarterly refunding announcement tomorrow. The reduced supply helped USTs rally yesterday and that has carried over into today’s trading as yields continue to fall.
The two-day FOMC meetings begins today and ends tomorrow with a decision. No change in policy is expected. 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. Bank reserves remain high and so there seems to be little urgency to slow QT now. Updated macro forecasts and Dot Plots won’t come until the March meeting, which may offer a better opportunity to announce changes to QT.
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 more balanced stance at this meeting, especially given how robust the economy remains.
Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first estimate came in at 3.0% SAAR and will be updated Thursday. Elsewhere, the New York Fed’s Nowcast model’s estimate rose to 2.8% SAAR vs. 2.4% previously and will be updated Friday. 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.
December JOLTS data will be reported. Openings are expected at 8.750 mln vs. 8.790 mln in November but keep an eye on layoffs and hires. Layoffs were the lowest since December 2022 while hires were the lowest since April 2020, sending conflicting signals about the state of the labor market. That said, the ongoing moderation in labor demand has not been enough to lead to a significantly higher unemployment rate. The job vacancy rate fell from a high of 7.4% in March 2022 to 5.3% in November. According to research by Fed Governor Waller, the vacancy rate would need to fall below 4.5% in order to lead to a significant increase in the unemployment rate. Bottom line: the labor market remains firm. Consensus for NFP is 185k vs. 216k in December but we see upside risks.
January Conference Board consumer confidence will also be reported. Headline is expected at 114.5 vs. 110.7 in December. If so, it would be the third straight month of improvement to the highest since December 2021. Final January University of Michigan consumer sentiment will be reported Friday. Its preliminary reading of 78.8 was the highest since July 2021. Both indicators suggest consumption is likely to remain strong in early 2024.
Housing data will remain in focus. November FHFA and S&P CoreLogic house price indices will be reported and are expected at 0.3% m/m and 0.5%, respectively. The national average for a 30-year mortgage fell from over 8% in late October to just below 7% in late December but has since move sideways around 7%. This drop has helped the housing sector to stabilize but we believe that mortgage rates need to move even lower if this sector is to fully recover. That will likely require the Fed to follow through with its intended rate cuts.
EUROPE/MIDDLE EAST/AFRICA
Eurozone January CPI data started rolling out. Spain reported its EU Harmonised inflation at 3.5% y/y vs. 3.0% expected and 3.3% in December. Spain is one of the few eurozone countries to report core inflation, which came in at 3.6% y/y vs. 3.3% expected and 3.8% in December. France and Germany report tomorrow, and their EU Harmonised rates are expected at 3.6% y/y and 3.2% y/y, respectively. Both would be down significantly from December. Italy and eurozone report Thursday. Italy’s EU Harmonised inflation is expected at 0.8% y/y vs. 0.5% in December. Headline eurozone inflation is expected at 2.7% y/y vs. 2.9% in December, while core inflation is expected at 3.2% y/y vs. 3.4% in November.
Eurozone reported mixed Q4 GDP data. Headline growth came in a tick higher than expected at 0.0% q/q vs. -0.1% in Q3. The eurozone has avoided recession so far and Bloomberg consensus sees Q1 growth at 0.1% q/q and Q2 at 0.2% q/q. Looking at the country breakdown, Germany came in as expected at -0.3% q/q vs. a revised 0.0% (was -0.1%) in Q3, France came in as expected at 0.0% q/q vs. a revised 0.0% (was -0.1%) in Q3, Italy came in at 0.2% q/q vs. 0.0% expected and 0.1% in Q3, and Spain came in at 0.6% q/q vs. 0.2% expected and a revised 0.4% (was 0.3%) in Q3.
ECB easing expectations remains elevated after the dovish hold last week. Despite some pushback from ECB policymakers, the market believes that declining inflation and the subdued growth outlook mean that the ECB may not have to wait until June to cut rates. The OIS curve implies over 20% odds of a cut March 7 and rises to nearly 95% April 11.
U.K. January BRC shop prices cooled. Shop prices rose 2.9% y/y vs. 4.3% y/y in both November and December. This was the lowest since May 2022 and due to heavy discounting by retailers. The drop was driven in large part by food prices, which rose 6.1% y/y, the lowest since June 2022. The BRC readings bode well for the January CPI data, which will be key in determining whether further disinflation will be seen and how soon the BOE can start to think about cutting rates. Stay tuned.
U.K. December consumer credit readings were weak. Demand for credit remained weak in December 2023. Lending growth to individuals slowed to a multi-year low of 1% y/y on subdued mortgage lending. Indeed, net mortgage lending was flat y/y for the first time since the series began in March 1994. Meanwhile, the contraction in non-financial business loans deepened to -1.4% y/y vs. -1.1% in November. Bottom line: the risk is the BOE lays the groundwork for a less restrictive stance on Thursday.
National Bank of Hungary is expected to cut rates 100 bp to 9.75%. If so, the pace would pick up from 75 bp cuts the past three meetings. The bank has room to ease in order to support the modest recovery in domestic economic activity. Inflation in Hungary continues to decelerate broadly, falling to 5.5% y/y in December from a high of over 25% y/y last January. The bank forecasts strong disinflation to continue in early 2024. As such real rates will likely remain positive and in favor of a firm HUF.
There is added uncertainty, however. The bank may not slash rates as much as anticipated because of the conflict (now resolved) between the central bank and the government. Last week, the government proposed switching the main reference rate used by commercial banks for loans to T-bill yields from the Bubor interbank rate currently. Given the rate differential, this would lead to de facto easing. Yesterday, the government effectively dropped its bid to replace the reference rate after commercial banks agreed to reduce their margins over the interbank reference rate temporarily.
ASIA
Japan reported mixed December labor market data. The unemployment rate fell a tick to 2.4% vs. 2.5% expected and actual in November, while the job-to-applicant ratio fell a tick to 1.27 vs. 1.28 expected and actual in November. Overall, the labor market remains tight and yet wage pressures have yet to be felt. Early signs are that the spring wage negotiations will show a pickup in wages, but the BOJ is likely to want confirmation before removing accommodation. Market sees June as likely liftoff.
Australia reported weak December retail sales. Sales came in at -2.7% m/m vs. -1.7% expected and a revised 1.6% (was 2.0%) in November, while the y/y rate slowed to 0.8% vs. 2.2% in November. This was the slowest y/y gain since August 2021. According to the ABS, the large drop in retail sales was caused by a fall in discretionary spending. Cash rate futures continue to imply around a 10% probability of a 25 bp rate cut at the February 6 policy meeting.
RBNZ Chief Economist Conway leaned hawkish. He said “Monetary policy is working, with the economy slowing and inflation falling. But we still have a way to go to get inflation back to the target midpoint.” Indeed, non-tradables inflation slowed less than the RBNZ anticipated to 5.9% y/y vs. 5.7% expected and 6.3% in Q3. This suggests it will take some time for headline inflation to return to the mid-point of the RBNZ’s 1-3% target range. In its November forecasts, the bank signaled that the policy rate would remain at current levels through 2024, with some risks of another hike. While the RBNZ is widely expected to keep rates steady at the February 28 meeting, its updated macro forecasts will be very important. Conway’s hawkish tone suggests no pivot then, with its expected rate path unlikely to shift significantly. Of note, the OIS curve implies low odds of any change in either February or April followed by a 60% probability of a rate cut in May and fully priced in for July.
