- The Riksbank decision has implications for global markets; Fed officials are falling in line with Powell; financial conditions continue to loosen; weekly jobless claims will be the only data highlight; the summary of deliberations show that the BOC debated either holding rates or hiking them at the January meeting; Mexico is expected to hike rates 25 bp to 10.75%; Peru is expected to hike rates 25 bp to 8.0%
- Germany reported January CPI; BOE officials are sounding very dovish; Riksbank hiked rates 50 bp to 3.0%, as expected.
- Reports suggest some in the ruling LDP would oppose former BOJ Deputy Governor Yamaguchi’s nomination to the top post; Japan reported weak January machine tool orders
The Swedish krona is leading the foreign currencies higher after the Riksbank decision. DXY is down for the third straight day and trading just below 103. After this current period of profit-taking and consolidation, the dollar should get some traction as the hawkish Fed narrative reasserts itself. The recent break above 103.793 sets up an eventual test of the January high near 105.631. The euro is trading near $1.0760 while sterling is trading higher near $1.2150 despite dovish BOE comments (see below). Despite the risk on environment today, USD/JPY is trading heavy just below 131. We are not sure why risk on sentiment is taking hold, as the hawkish Riksbank decision confirms our belief that rates are going higher for longer globally and not just in the U.S. This means global liquidity will be tighter for longer and that’s not good for equities and other risk assets (see below).
Believe it or not, the Riksbank decision has implications for global markets. It’s clear that the Riksbank is going to move rates “higher for longer.” However, that is exactly what the Fed is doing. So too is the ECB, as well as the RBA and the RBNZ. To us, the Riksbank move today simply validates our long-standing view that markets have gotten too complacent about the inflation fight. It’s just not going to be as easy as what is being priced in. Inflation remain stubbornly high in most countries and any notions of a pivot to easing this year remain misguided. The BOC stands out as the exception but it’s not yet clear whether it’s decision to pause was the right one. Bottom line: global liquidity is going to get much tighter for much longer than previously expected and that is a huge negative for global growth and risk assets.
Fed officials are falling in line with Powell. Williams said a peak rate of 5.0-5.25% is still a reasonable view. He added that 25 bp hikes seem like the right size but can move faster if the situation changes. Williams stressed that if financial conditions loosen, even higher rates may be needed. With regards to rate hikes, Waller said “We are seeing that effort begin to pay off, but we have farther to go. And, it might be a long fight, with interest rates higher for longer than some are currently expecting.” He added “Some believe that inflation will come down quite quickly this year. But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.” Kashkari said “There’s not yet much evidence, in my judgment, that the rate hikes that we’ve done so far are having much effect on the labor market. We need to bring the labor market into balance so that tells me we need to do more.” Kashkari added that the Fed will likely need to hike rates to the 5.25-5.5% range in order to bring inflation down to its 2% goal. Lastly, Cook said “We are not done yet with raising interest rates, and we will need to keep interest rates sufficiently restrictive,” adding that hiking in smaller steps “will give us time to evaluate the effects of our fast actions on the economy.”
Financial conditions continue to loosen. Through last Friday, the Chicago Fed’s measure of U.S. financial conditions was the loosest since late March. On an adjusted basis, it was the loosest since mid-February. This despite 450 bp of tightening by the Fed this past year. While Powell did not push back against this looseness, he and others at the Fed cannot be happy with this development when the labor market remains so tight. Williams is amongst the first to push back in his comments yesterday, and others could follow. In the end, however, it may be the data that do the talking.
Weekly jobless claims will be the only data highlight. 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. 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. If claims remain low, markets will brace for another solid but perhaps not spectacular jobs reports for February. The Atlanta Fed’s GDPNow model is now tracking 2.2% SAAR growth in Q1, up from 2.1% previously. The next model update will come next Wednesday. While the estimate is likely to change as more Q1 data is collected, it’s clear that Q3 and Q4 momentum in the economy has carried over into Q1.
The summary of deliberations show that the Bank of Canada debated either holding rates or hiking them at the January meeting. In the end, they hiked 25 bp but “Members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold.” The summary added very little to what we already know since Governor Macklem was all over the tapes basically telling us what was discussed. Yesterday, he noted that Canadians “are more indebted today than they’ve ever been,” adding that whatever cash buffer was built up during the pandemic, “extra savings are probably not going to last as long as the higher debt.” No wonder the bank turned more cautious. BOC 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 and that is highly unlikely.
Banco de Mexico is expected to hike rates 25 bp to 10.75%. Ahead of the decision, January CPI will be reported Thursday. Headline is expected at 7.90% y/y vs. 7.82% in December, while core is expected at 8.44% y/y vs. 8.35% in December. If so, headline would accelerate for the second straight month and move further above the 2-4% target range. The swaps market is pricing in a peak policy rate near 11.0% over the next six months, followed by the start of an easing cycle in the subsequent six months, which seems unlikely.
Peru central bank is expected to hike rates 25 bp to 8.0%. CPI accelerated for the third straight month in January to 8.66% y/y, the highest since July and further above the 1-3% target range. However, at the last meeting January 12, the bank said “The forecast is for annual inflation to start to slow from March, and to return to the target range in the fourth quarter of this year.” This suggests the bank is nearing the end of the tightening cycle.
Germany reported January CPI. It was delayed from last week. Its EU Harmonised measure came in at 9.2% y/y vs. 10.0% expected and 9.6% in December. Eurostat reportedly assumed a rate for Germany that was more than half a percentage point lower for its flash eurozone estimate last week, which suggests the final reading will be revised up a tick or two from the 8.5% preliminary reading. Of note, the drop in inflation was due in large part to energy subsidies and so underlying trend is murky. Of note, ECB’s Villeroy sees French inflation peaking in H1 and then falling mid-year. WIRP suggests a 50 bp hike March 16 is nearly 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. De Cos and Guindos speak today.
Bank of England officials are sounding very dovish. In testifying to Parliament, Governor Bailey warned of the inflationary impact of large pay hikes. However, he acknowledged that how pay hikes are financed are important and that borrowing to fund them would be inflationary. That said, Bailey said inflation has peaked earlier than expected. Elsewhere, MPC member Tenreyro also testified and said she thinks the base rate at 4.0% is too high and estimated that only about a fifth of the impact of its tightening to date has been felt. Similarly, Chief Economist Pill warned that “We need to guard against doing too much with policy because there is a danger of over-steering if there are lags in transmission.” Tightening expectations have fallen sharply since last week’s meeting, as WIRP suggests odds of a 25 bp hike March 23 are only around 80%. After that, the odds of a final 25 bp hike top out near 50% in Q2 and so the expected terminal rate is now between 4.25-4.5%, down from 4.5% at the start of last week and 6.25% after the disastrous mini-budget back in September.
Riksbank hiked rates 50 bp to 3.0%, as expected. However, the bank also delivered several other hawkish measures and noted “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” Starting in April, the Riksbank will accelerate its Quantitative Tightening and sell SEK3.5 bln ($340 mln) per month in government bonds. Furthermore, the bank is putting more emphasis on the exchange rate after a period of benign neglect, noting “If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target. A stronger krona would be desirable.” Lastly, forward guidance shifted more hawkish, as the policy rate is now seen peaking at 3.33% in Q4 2024 and staying there through Q1 2026. Governor Thedeen made quite a statement in his first meeting, as former Governor Ingves stepped down in December. WIRP suggests another 50 bp hike to 3.5% is fully priced in for the next meeting April 26 and is expected to remain there through 2023 and into early 2024. Some easing is priced in during the course of 2024 and this is inconsistent with the Riksbank’s new rate path.
The krona responded as one would expect. After trading at the highest since 2009 on Monday near 11.4434, EUR/SEK has fallen sharply to trade near 11.1712 currently. SEK had been the second worst performer in the majors YTD (ahead of only NOK) but today’s Riksbank decision has moved it up the league table. The renewed focus on the krona should help it outperform going forward.
Reports suggest some in the ruling LDP would oppose former BOJ Deputy Governor Yamaguchi’s nomination to the top post. To be honest, we never considered him to be a contender and instead saw a two-way race between current Deputy Governor Amamiya and former Deputy Governor Nakaso, with recent reports suggesting Amamiya was inching ahead. Several in the LDP said they would oppose Yamaguchi, who served under former Governor Shirakawa. Both Yamaguchi and Shirakawa are viewed as being more hawkish than current Governor Kuroda, whose term ends in April. Prime Minister Kishida will reportedly announce his choice for Kuroda’s replacement next week.
Japan reported weak January machine tool orders. Orders came in at -9.7% y/y vs. 0.9% in December and was the weakest since September 2020. Orders have now fallen y/y in three of the four past months. The January reading is disappointing given the expected positive impact of China reopening. However, like other recent data from Korea, Taiwan, and Australia suggest, China is unlikely to provide the spark that reignites regional growth and activity.