- Markets are still digesting the Fed’s unexpectedly hawkish minutes and the jobs data; U.S. rates market continues to adjust to the new Fed messaging; Fed Beige Book report Wednesday will be closely watched; Senate Banking Committee holds its hearing Tuesday on Fed Chair Powell’s nomination for a second term; U.S. inflation data will be the major focus this week; December retail sales data Friday will also be important
- Eurozone has a quiet week; the ECB hawks are likely to remain on high alert; monthly U.K. data dump occurs Friday; market sees full speed ahead for the BOE
- Japan has a fairly quiet week; November current account data Wednesday will hold some interest; Australia reports some key data this week
Markets are still digesting the Fed’s unexpectedly hawkish minutes and the jobs data. The two are very closely related. Using the household survey (which is used to calculate unemployment), we believe the US is pretty close to full employment. We are -2.760 mln jobs from peak employment in December 2019. At the same time, the labor force has shrunk -2.285 mln as people have retired (voluntarily and involuntarily). Some of those worker might come back but a lot of anecdotal evidence suggests many won't, at least at current wages. It really won't take more than a couple months of even unspectacular job gains to move the unemployment rate back down to the 3.5% that prevailed pre-pandemic, which most consider to be full employment. This is why the Fed is in such a hurry to remove accommodation this year and so the CPI and PPI data may not be as important as we thought for the Fed.
The U.S. rates market continues to adjust to the new Fed messaging. The U.S. 2-year yield traded Friday at a new cycle high near 0.90%, which in turn pushed the differentials with Germany and Japan higher to 146 bp and 95 bp, respectively. The U.S. 10-year yield traded Friday at a new cycle high near 1.80% and the real 10-year yield continues to climb; at -76 bp, it is the highest since mid-June. All of these moves are likely to continue and should underpin our strong dollar call for 2022. Lastly, the US curve steepening continues in force, with the 3-month to 10-year curve at a new cycle high of 167 bp, just short of the May 2021 high near 169 bp and the March 2021 high near 173 bp. This steepening is welcome and may help allay fears that the Fed tightening cycle will lead to a flat or even inverted yield curve.
The Fed Beige Book report Wednesday will be closely watched. Given the Fed’s rather quickly executed hawkish tilt, we expect the Beige Book to highlight a tightening labor market and rising price pressures. The previous Beige Book for the December 14-15 meeting noted that nearly all Fed districts reported “robust” wage growth. That report also noted that increases in input cost were widespread across all industries, and that prices are rising at a moderate to robust pace. With the economy moving closer and closer to full employment, we expect this Beige Book to continue focusing on the labor market and wages. Mester, George, and Bullard speak Tuesday. Kashkari speaks Wednesday. Barkin and Evans speak Thursday, followed by Williams Friday. At midnight Friday, the media blackout goes into effect and we will get no more Fed speakers until Chair Powell’s post-decision press conference January 26.
The Senate Banking Committee holds its hearing Tuesday on Fed Chair Powell’s nomination for a second term. It will do so again Thursday for Lael Brainard’s nomination for Vice Chair. If approved by the Committee, both would go before the full Senate for final confirmation. Elsewhere, we can add Lisa Cook to the list of likely nominees for the three empty seats on the Board of Governors. Cook has a Ph.D. in economics from Berkeley and currently teaches at Michigan State University. She was on the Council of Economic Advisers during the Obama administration. Philip Jefferson and Sarah Bloom Raskin are the other two names that have been floated so far, with the latter tipped for Vice Chair for Supervision. Once their nominations become official, a timetable for confirmation should quickly emerge.
U.S. inflation data will be the major focus this week. December CPI will be reported Wednesday. Headline is expected at 7.0% y/y vs. 6.8% in November, while core (ex-food and energy) is expected at 5.4% y/y vs. 4.9% in November. Both would be new cycle highs. PPI will then be reported Thursday. Headline is expected at 9.8% y/y vs. 9.6% in November, while core (ex-food and energy) is expected at 8.0% y/y vs. 7.7% in November. Here too, both would be cycle highs and should keep the Fed concerned enough to maintain its accelerated pace of removing accommodation.
December retail sales data Friday will also be important. Headline sales are expected at -0.1% m/m vs. 0.3% in November, while sales ex-autos are expected at 0.2% m/m vs. 0.3% in November. The so-called control group used for GDP calculations is expected at 0.1% vs. -0.1% in November. Of note, retail sales data surprised to the upside for a few months before the November downside miss. As things stand, the Atlanta Fed’s GDPNow model is tracking 6.7% SAAR growth in Q4, down from 7.4% previously but up from 2.3% in Q3. Bloomberg consensus sees 6.0% SAAR in Q4, slowing to 4.0% in Q1 and 3.6% in Q2.
Other minor data will round out the week. November wholesale trade sales and inventories will be reported Monday, followed by the December budget statement (-$2.5 bln expected) Wednesday. Weekly jobless claims will be reported Thursday, with initial claims expected at 200k and continuing claims at 1.76 mln. December import/export prices, IP (0.2% m/m expected), November business inventories (1.2% m/m expected), and preliminary January University of Michigan consumer sentiment (70.0 expected) will be reported Friday.
Eurozone has a quiet week. Spain reports November IP (0.4% m/m expected) Tuesday, followed by the eurozone reading (0.2% m/m expected) Wednesday and Italy (0.4% m/m expected) Thursday. Eurozone trade data will be reported Friday. Eurozone real sector data have been weakening recently, with Germany tipping into possible recession.
Yet the ECB hawks are likely to remain on high alert. Last week, eurozone December inflation came in higher than expected at a new record high 5.0% y/y even as November PPI came in at 23.7% y/y. Of note, the Bundesbank will hold a ceremony Tuesday to hand over the presidency from Weidmann to Nagel. ECB President Lagarde will be attending. Kazaks speaks Tuesday, while Lagarde speaks Friday. Some of the hawks are already talking about the possibility of liftoff in early 2023, and this has helped push peripheral yields higher in recent weeks. The 10-year differential between Italy and Germany is at a cycle high 137 bp and is likely to move higher.
Monthly U.K. data dump occurs Friday. November GDP, IP, construction output, services, and trade will all be reported. GDP is expected at 0.4% m/m vs. 0.1% in October, IP is expected at 0.2% m/m vs. -0.6% in October, construction is expected at 0.6% m/m vs. -1.8% in October, and services index is expected at 0.5% m/m vs. 0.4% in October. The trade deficit is expected at -GBP2.5 bln vs -GBP2.03 bln in October. The real sector have been disappointing of late, and there are certainly risks that the data remain weak due to omicron.
Yet the market sees full speed ahead for the BOE. WIPR suggests nearly 85% 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. However, swaps market is starting to price in the possibility of a fifth hike 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. Stay tuned.
Japan has a fairly quiet week. November leading and coincident indices will be reported Tuesday. December machine tool orders will be reported Thursday, followed by December PPI data Friday. So far, the real sector data for Q4 have been disappointing, while the CPI readings are creeping higher. This should keep the BOJ in ultra-dovish mode in 2022, and underpins our weak yen call for this year. The yield on the 10-year JGB continues to creep higher to the highest level since March 2020. At 0.14%, however, it still falls short of the 0.20% level that the BOJ has committed to defend under YCC.
November current account data Wednesday will hold some interest. An adjusted surplus of JPY1.05 trln is expected vs. JPY1.03 trln in October. However, the investment flows will be of most interest. October data showed that Japan investors were net buyers of U.S. bonds for the second straight month at JPY282 bln vs. JPY3.77 trln in September, which was the biggest monthly number since March 2020. Japan investors were also net buyers (JPY106 bln) of Australian bonds for the first time after five straight months of being net sellers. Japan investors were small net buyers of Canadian bonds (JPY7 bln) for the second straight month but were big net sellers of Italian bonds (-JPY370 bln), the biggest monthly drop since November 2011.
Australia reports some key data this week. November trade and retail sales data will be reported Tuesday. Sales are expected at 3.8% m/m vs. 4.9% in October. Recent data have been coming in strong as much of the nation emerged from lockdown. Of note, jobs rose 366.1k in November and pushed the unemployment rate down to 4.6%. The RBA next meets February 1. While no change in rates is expected, the bank will review its QE program. Of note , December jobs data will be reported January 20, while Q4 CPI and PPI data will be reported January 25 and 28, respectively. If the data come in strong, we think it is likely that the RBA ends its QE rather than extend it for another three months. WIRP suggests nearly 65% odds of liftoff June 7, while July 5 is fully priced in.