Drivers for the Week of February 5, 2023

February 05, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar was stronger across the board against the majors last week. CHF, CAD, and EUR outperformed while NOK, GBP, and NZD underperformed. Market sentiment has been hurt by the repricing of Fed tightening risks after U.S. data came in very strong last week. Heightened US-China tensions over the spy balloon probably won’t help sentiment either. There are many Fed speakers this week and they are likely to highlight the “higher for longer” theme. Taken in conjunction with dovish hikes last week from the ECB and BOE, we believe the dollar rebound will continue this week


Markets are still digesting the shock jobs report. The headline and details were all very strong and point to a robust labor market as we move into 2023. Average hourly earnings fell to 4.4% y/y from a revised 4.8% but given how tight the labor market remains, we expect little relief ahead in terms of wage pressures. For good measure, ISM reported a stellar service PMI reading for January, with headline posting the biggest gain since June 2020 to 55.2 vs. 49.2 in December. Of note, the prices paid component remained high at 67.8 vs. 68.1 in December.

The Friday data had serious implications for Fed policy. Simply put, it confirms our long-standing belief that the Fed will have to go higher for longer than what optimistic market scenarios had priced in. WIRP suggests a 25 bp hike March 22 is nearly priced in, while another 25 bp hike May 3 is 60% priced in and rising to nearly 80% June 14. If we do get that second hike, which seems very likely, that would take the Fed Funds target range up to 5.0-5.25%, which is where the December Dot Plots put it by year-end. Yet markets are still pricing in Fed easing in H2. Let that sink in. We still have a ways to go to get to peak Fed Funds rate, and yet folks are still looking for H2 rate cuts in what would be an extremely quick turnaround.

Fed speakers are plentiful. Chair Powell speaks Tuesday and it will be interesting to see if he tries to do any damage control. His press conference last week left a lot to be desired. Indeed, the biggest surprise to us was that Powell did not push back against recent loosening of financial conditions. Will he course-correct or will he simply let the data do the talking for him? Barr also speaks Tuesday. Williams, Cook, Barr, Bostic, Kashkari, and Waller all speak Wednesday. Waller and Harker speak Friday.

This is a very light week in terms of U.S. data. The highlight may be CPI revisions Friday. From the BLS website: “Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years.” Of note, January CPI data won’t be released until February 14. To makes things even tricker, the BLS announced last month that “Beginning with the January 2023 index, scheduled for publication on February 14, 2023, BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years. Spending weights indicate what share of total expenditures each item represents. This change will improve the relevance of CPI spending weights by using the most recent consumer spending information. By improving the relevance of spending weights, BLS can improve the accuracy of the CPI.” The BLS went from revising these weights every ten years to every two years back in 2002 and so the move to annual revisions is another step in the process.

February University of Michigan consumer sentiment Friday may be a minor highlight. Headline is expected to rise a tick to 65.0, with current conditions seen falling 4 ticks to 68.0 and expectations rising three ticks to 63.0. Given recent labor market readings, we see upside risks to the sentiment readings. Of note, 1-year inflation expectations are seen up a tick to 4.0% while 5- to 10-year expectations are seen steady at 2.9%.

Other minor data will be reported. December trade (-$68.5 bln expected) and consumer credit ($25.0 bln expected) will be reported Tuesday. Wholesale trade sales and inventories will be reported Wednesday. Weekly jobless claims will be reported Thursday. Initial claims are expected at 190k vs. 183k last week, while continuing claims are expected at 1.66 mln vs. 1.655 mln last week. Of note, last week’s initial claims were the lowest since April and brought the 4-week moving average down to 192k, the lowest since early May. January budget statement will be released Friday and is expected at -$42.0 bln vs. -$85 bln in December.

Canada highlight will be January jobs report Friday. Consensus sees 15.0k jobs added vs. a revised 69.2k (was 104.0k) in December, with the unemployment rate seen rising a tick to 5.1%. Ahead of that, January Ivey PMI will be reported Monday, followed by December trade data Tuesday. Bank of Canada tightening expectations have collapsed after it announced a pause at its January 25 meeting, with the swaps market pricing in very low odds of another hike from the current 4.5%. Like the Fed, the market is pricing in an easing cycle from the BOC in H2.


Markets are still digesting the ECB decision. WIRP suggests a 50 bp hike March 16 is fully priced in but then that may be it for the super-sized hikes. Looking further ahead, a 25 bp hike May 4 is priced in followed by another one either June 15 or July 27 that would take the deposit rate up to 3.5%. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear last week. ECB speakers are plentiful this week. Holzmann speaks Monday. Villeroy and Schnabel speak Tuesday. Knot speaks Wednesday. De Cos and Guindos speak Thursday. Schnabel and de Cos speak Friday. Visco speaks Saturday. Given President Lagarde’s rather equivocal press conference, we expect the hawks to try and assert their dominance this week.

Eurozone reports a fair amount of data this week. December retail sales will be reported Monday and are expected at -2.5% m/m vs. 0.8% in November. The y/y rate is expected to improve a tick from November to -2.7%. Italy reports retail sales Wednesday and are expected at -0.8% m/m vs. 0.8% in November. While there has been some marginal improvement in the recent data, we simply cannot get too excited about the eurozone outlook.

Germany reports key data as well. December factory orders will be reported Monday and are expected at 2.0% m/m vs. -5.3% in November. IP will be reported Tuesday and is expected at -0.8% m/m vs. 0.2% in November. January CPI will be reported Thursday and its EU Harmonised measure is expected at 10.0% y/y vs. 9.6% in December. Elsewhere, Spain reports IP Tuesday and is expected at 0.2% m/m vs. -0.7% in November. Italy reports IP Friday and is expected at 0.2% m/m vs. -0.3% in November. Eurozone IP won’t be reported until February 15.

Markets are still digesting the BOE decision. Tightening expectations have fallen sharply, as WIRP suggests odds of a 25 bp hike March 23 are only around 75%. After that, the odds of a final 25 bp hike top out near 30% for May 11 and so the expected terminal rate is now close to 4.25%, down from 4.5% at the start of last week and 6.25% after the disastrous mini-budget back in September. Higher U.K. rates were really the only thing supporting sterling and now that is evaporating; sterling certainly wasn’t being supported by the weak growth outlook, ongoing strikes, and political paralysis. BOE speakers are plentiful this week. Mann and Pill speak Monday. Ramsden, Pill, and Cunliffe speak Tuesday. Governor Bailey testifies before Parliament Thursday. Pill speaks again Friday.

The monthly U.K. data dump begins. December GDP, IP, services, index, construction output, and trade will all be reported Friday. GDP is expected at -0.3% m/m vs. 0.1% in November, IP growth is expected to remain steady at -0.2% m/m, services index is expected at -0.4% m/m vs. 0.2% in November, and construction is expected at -0.1% m/m vs. flat in November. The trade deficit is expected at -GBP2.8 bln vs. -GBP1.8 bln in November. Q4 GDP data will also be reported Friday. GDP is expected flat q/q vs. -0.3% in Q3,while the y/y rate is expected at 0.4% vs. 1.9% in Q3. Private consumption is expected at -0.1% q/q vs. -1.1% in Q3, government spending is expected at 0.4% q/q vs. 0.5% in Q3, and GFCF is expected at 0.7% q/q vs. 1.1% in Q3. Given the headwinds facing the U.K. economy, we see downside risks to all these readings.

Riksbank meets Thursday and is expected to hike rates 50 bp to 3.0%. December CPI ran hot as headline came in at 12.3% y/y vs. 12.0% expected and 11.5% in November, while CPIF came in at 10.2% y/y vs. 9.8% expected and 9.5% in November. Both are new cycle highs and CPIF moves further above the 2% target. At the last policy meeting November 24, the Riksbank hiked rates 75 bp to 2.5% and noted that “The forecast shows that the policy rate will probably be raised further at the beginning of next year and then be just below 3%.” Minutes from the meeting showed Governor Ingves and Deputy Governor Ohlsson had doubts as to whether planned rate hikes would be enough to tame inflation. That seems to be coming true. WIRP suggests another 50 bp hike to 3.0% is fully priced in with nearly 50% odds of another 25 bp hike at the April 26 meeting. We believe the Riksbank’s forward guidance will move closer to market expectations at this meeting.

Norway reports January CPI data Friday. Headline is expected at 6.3% y/y vs. 5.9% in December, while underlying is expected at 6.0% y/y vs. 5.8% in December. If so, headline would see the first acceleration since October while underlying would be at a new cycle high. Both support our view that inflation has not been so easily vanquished in many countries. Norges Bank next meets March 23 and a 25 bp hike to 3.0% is expected. At the last meeting January 19, the bank kept rates steady at 2.75% and noted that “The policy rate will need to be increased somewhat further” and Governor Bache later said rates “will most likely be raised in March.” The expected rate path from December saw the policy rate peaking near 3.0%, with gradual easing expected in H2 2024. Updated macro forecasts and expected rate path will come at the March meeting. Of note, the swaps market is now pricing in a peak policy rate between 2.75-3.0% vs. 3.25% right after the December meeting. This needs to adjust higher if inflation continues to run hot.


Japan highlight will be December cash earnings and household spending data Tuesday. Nominal earnings are expected at 2.5% y/y vs. 1.9% in November, while real earnings are expected at -1.5% y/y vs. -2.5% in November. Household spending is expected at -0.4% y/y vs. -1.2% in November. The BOJ has stressed the need to see significant wage gains before it feels comfortable tightening. December leading and coincident indices will also be reported Tuesday. January machine tool orders will be reported Thursday. January PPI will be reported Friday and is expected at 9.7% y/y vs. 10.2% in December.

Reports suggest BOJ Deputy Governor Amamiya has been approached about the post of Governor. Reports suggest the government is in the final stages of its nominations for replacing the outgoing Governor Kuroda. Amamiya has been instrumental in helping Kuroda formulate and implement the BOJ’s massive monetary stimulus program. Former Deputy Governor Nakaso has emerged as the other frontrunner and is viewed as slightly more hawkish than Amamiya. That said, we believe the next Governor will have no choice but to begin removing accommodation this year. Of note, Kuroda’s term ends April 8 and Prime Minister Kishida has said that the replacement will be named in February.

December current account data Wednesday will be of interest. An adjusted surplus of JPY1.2 trln is expected vs. JPY1.9 trln in November. However, the investment flows will be of most interest. November data showed that Japan investors were net sellers of U.S. bonds for the third straight month (-JPY227 bln) and in twelve of the past thirteen. Japan investors remained net sellers (-JPY280 bln) of Australian bonds for the fifth straight month and Canadian bonds (-JPY193 bln) for the tenth straight month, but remained net buyers of Italian bonds (JPY356 bln) for the second straight month. Japan investors were total net sellers of foreign bonds in November of -JPY1.4 trln. If the BOJ does hike rates this year and JGB yields continue rising, we see scope for further selling of foreign bonds (and for a stronger yen) as Japan investors bring more money home.

Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 3.35%. However, a handful of analysts polled by Bloomberg see no move. WIRP suggests over 80% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.75%, down from 3.90% at the start of last week. Given that inflation is still rising despite the 300 bp of tightening seen so far, we believe there are upside risks to the expected terminal rate. Updated macro forecasts will come at this week’s meeting. The bank then releases its Statement on Monetary Policy Friday. This report will contain updated forecasts.

Australia also reports some key data. Q4 real retail sales will be reported Monday and are expected at -0.5% q/q vs. 0.2% in Q3. December trade data will be reported Tuesday. Both exports and imports have been slowing lately and any boost from China reopening won’t be felt until the January data and beyond.

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