Drivers for the Week of January 16, 2022

January 16, 2022
Here's a look at the main drivers in Developed Markets this week.
  • Most observers are still trying to make sense of last week’s market moves, particularly in rates; there are no Fed speakers this week due to the media blackout for the January FOMC meeting; regional Fed manufacturing surveys for January will start rolling out; Canada has a busy week; BOC tightening expectations remain heightened
  • U.K. reports some key data; BOE tightening expectations remain elevated; Norges Bank meets Thursday and is expected to keep rates steady at 0.5%
  • Two-day BOJ meeting ends with a decision Tuesday; Japan also reports some key data this week; Australia reports December jobs data Thursday; RBA tightening expectations are picking up


Most observers are still trying to make sense of last week’s market moves, particularly in rates. After accelerating CPI and PPI inflation data were reported, U.S. yields and USD sank. After much weaker than expected retail sales data, these moves reversed higher on Friday. The 2-year yield ended the week at a new cycle high of 0.97%, while the 10-year rose to 1.78% and just shy of the cycle high near 1.81% from earlier last week. With the 10-year breakeven inflation rates stuck below 2.50%, the real 10-year yield rose to -0.69%, the highest since April 2021. What to make of all this noise?

Given what we know about the Fed, inflation, and the labor market, we continue to believe that last week's drop in rates and USD was unwarranted. That's not to say these moves lower can't resume over the short-term, but they just don't make sense fundamentally. Much of the reasoning behind renewed weak dollar calls simply aren't valid. One that’s often mentioned is that investors won’t want to hold dollars because the Fed is behind the curve. If that were true, then yields wouldn't be going lower. Bottom line: we still think the U.S. economy outperforms the rest of the world this year and find it hard to come up with any reasons to hold EUR or JPY over USD. Indeed, the 2-year differentials with Germany and Japan rose to 155 bp and 104 bp, respectively, both new cycle highs. This argues for further dollar gains.

There are no Fed speakers this week due to the media blackout for the January FOMC meeting. However, officials took every possible opportunity last week to emphasize the hawkish tilt under way. For those keeping score at home, last week brought an avalanche of hawkish comments. Mester, Harker, and Bostic favored March liftoff, while George favored reducing the balance sheet sooner rather than later. Waller saw three hikes this year but saw a case for four or five if inflation remains high. In their confirmation hearings, Chair Powell and Vice Chair nominee Brainard both promised to bring inflation down to target but refrained from making any explicit statements about timing or magnitude. It’s clear from this converted group effort that the January 25-26 FOMC meeting will likely set the table for a hike at the March 15-16 meeting.

Regional Fed manufacturing surveys for January will start rolling out. Empire survey comes out Tuesday and is expected at 25.0 vs. 31.9 in December. Philly Fed reports Thursday and is expected at 19.8 vs. 15.4 in December. These readings, while down from December, would still be relatively high and suggests ongoing strength in the manufacturing sector.

Weekly jobless claims will be of interest. Initial claims will be for the BLS survey week containing the 12th of the month and are expected at 220k vs. 230k the previous week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the survey week. This week, they are expected at 1.521 mln vs. 1.559 mln the previous week. There are no forecasts out yet for January jobs data. However, as we’ve noted before, the U.S. is very close to full employment and so it wouldn’t take more than a couple of decent jobs reports to get unemployment down to pre-pandemic levels. This is why the Fed is so keen to tighten policy sooner rather than later.

Other minor data round out the week. November TIC data will be reported Tuesday. December building permits (-1.0% m/m expected) and housing starts (-1.7% m/m expected) will be reported Wednesday. Existing home sales (-0.8% m/m expected) will be reported Thursday, followed by the leading index (0.8% m/m expected) Friday. Despite last week’s retail sales shocker, the U.S. economy remains robust. The Atlanta Fed’s GDPNow model is tracking 5.0% SAAR growth in Q4, down from 6.8% before the retail sales data.

Canada has a busy week. December CPI will be reported Wednesday. Headline inflation is expected to rise a tick to 4.8% y/y, while common core is expected to rise a tick to 2.1% y/y. November retail sales will be reported Friday. Headline is expected at 1.2% m/m vs. 1.6% in October, while sales ex-autos are expected at 1.2% m/m vs. 1.3% in October. Other minor data round out the week, with November manufacturing sales (3.0% m/m expected) and December existing home sales Monday, December housing starts Tuesday, and November wholesale trade sales (2.7% m/m expected) Wednesday.

Bank of Canada tightening expectations remain heightened. Current BOC forward guidance suggests liftoff in Q2 but recent firmness in the data has moved the expected timing forward. WIRP suggests nearly 55% odds of liftoff at the next policy meeting January 26 and fully price in for the March 2 meeting. Swaps market sees 150 bp of tightening this year that would take the policy rate to 1.75%, with 50 bp more is priced in for 2023.


U.K. reports some key data. Labor market data will be reported Tuesday. Unemployment for the three months ending in November is expected to remain steady, with employment expected at 128k vs. 149k previously. Average weekly earnings are expected to slow to 4.2% y/y from 4.9% previously. December CPI will be reported Wednesday. Headline inflation is expected to pick up a tick to 5.2% y/y, while CPIH inflation is expected to pick up a tick to 4.7% y/y and core inflation is expected to fall a tick to 3.9% y/y. Retail sales will be reported Friday. Headline sales are expected at -0.6% m/m vs. 1.4% in November, while sales ex-auto fuel are expected at -0.8% m/m vs. 1.1% in November. Last week’s data dump for November came in stronger than expected, but there are clearly risks that the December data soften a bit.

Bank of England tightening expectations remain elevated. WIRP suggests nearly 90% odds of another hike February 3, followed by hikes at very other meeting that would take the policy rate to 1.25% by year-end. Furthermore, the market is starting to price in the possibility of a fifth hike this year to 1.50%. We think this pricing overstates the BOE’s need to tighten, as headwinds abound from Brexit, higher energy costs, and fiscal tightening. Along the way, Quantitative Tightening will also kick in as the policy rate moves higher.

Norges Bank meets Thursday and is expected to keep rates steady at 0.5%. At the last policy meeting December 16, it hiked rates 25 bp to 0.50%, as expected. Governor Olsen said then that “There is considerable uncertainty about the evolution of the pandemic. But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March.” New macro forecasts and an updated rate path were released. While the growth and inflation forecasts were raised substantially, the expected rate path was surprisingly little changed. Swaps market is pricing in a terminal rate of 1.5% for the policy rate by end-2023, which is slightly below the bank’s projection for a rate of 1.75% by end-2024.


Two-day Bank of Japan ends with a decision Tuesday. While no change is policy is expected, leaks suggest there will be some modest upgrades to the bank’s inflation outlook in its new Outlook Report forecasts. Other reports suggest the BOJ is debating how to prepare markets for eventual liftoff, but we find it extremely hard to believe that the bank is really serious about tightening. Officials are playing with fire here as this will add to strong yen impulses. We suspect there will be some damage control at this week’s meeting, with Kuroda working to get these unnamed BOJ officials back on the same song sheet. Kuroda himself was just talking about adding stimulus if needed so we assume he's not happy with these unnamed sources.

Japan also reports some key data this week. Ahead of the BOJ, November core machine orders were reported Monday up 3.4% m/m vs. 1.2% expected. December trade data will be reported Thursday, with exports expected at 16.0% y/y vs. 20.5% in November and imports expected at 42.9% y/y vs. 43.8% in November. National CPI for December will be reported Friday. Headline inflation is expected at 0.9% y/y vs. 0.6% in November, while targeted core (ex-fresh food) inflation is expected at 0.6% y/y vs. 0.5% in November. Core would be the highest since February 2020 but still well below the 2% target.

Australia reports December jobs data Thursday. A 60.0k gain is expected vs. 366.1k in November, while the unemployment rate is expected to fall a tick to 4.5%. The RBA expects wage pressures to rise when unemployment approaches the low 4s. While we are not quite there yet, the movement is undeniable and the bank will likely have to update its forward guidance soon to acknowledge an earlier than expected liftoff. The yield on the 2-year government bond is trading near 0.77%, just shy of the late October high near 0.78% right before Yield Curve Control was abandoned at the RBA’s November 2 meeting.

Indeed, Reserve Bank of Australia tightening expectations are picking up. WIRP suggests nearly 75% odds of liftoff June 7, while July 5 is fully priced in. The next policy meeting is February 3 and the RBA will be reviewing its QE policy whilst updating its macro forecasts in its Monetary Policy Report. If the data remain firm, we think it is likely that the RBA ends its QE rather than extend it for another three months. While this could be AUD-positive, we believe Fed hawkishness trumps RBA hawkishness. As a result, AUD is likely to remain on its back foot. As it is, it has retraced over a third of the December-January rally. Key levels ahead are .7155 and .7115, break of which would set up a test of the December 3 low just below .70.

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