- Markets remain jittery as the new week begins; looking through the noise, we believe the underlying signals this week will remain dollar supportive; U.S. growth remains strong in Q1
- ECB comments highlight the policy debate within the GC; U.K reports January BRC shop price index later today
- RBNZ Chief Economist Conway speaks; China Evergrande Group was given an order to liquidate from a Hong Kong court; Singapore kept policy steady, as expected
The dollar is firm as an eventful week begins. DXY is trading higher near 103.595 and is on track to test the December 8 high near 104.263. The euro is trading lower near $1.0815 and is on track to test its December low near $1.0725. Sterling is trading flat near $1.27 while USD/JPY is trading lower near 147.85 after a brief move above 148 proved hard to sustain. 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 this week’s FOMC meeting will provide a catalyst.
AMERICAS
Markets remain jittery as the new week begins. Over the weekend, the U.S. said Iranian-backed militants killed 3 and wounded 25 in a drone attack on a U.S. miliary base in Jordan near the Syrian border. President Biden vowed retaliation. However, Iran tried to distance itself and said, “Resistance groups in the region do not take orders from the Islamic Republic of Iran in their decisions or actions.” Crude oil prices have been volatile, rising to multi-week highs earlier before trading flat on the day currently.
Looking through the noise, we believe the underlying signals this week will remain dollar supportive. The Fed is expected to keep policy on hold this Wednesday, but Chair Powell should walk back some of his ultra-dovish comments from the December meeting. U.S. data remain strong and jobs data this Friday should see another NFP reading near 200k.
Indeed, U.S. growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first estimate came in at 3.0% SAAR. Elsewhere, the New York Fed’s Nowcast model’s estimate rose to 2.8% SAAR vs. 2.4% previously. Its estimates for Q2 will begin around the beginning of March. 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.
We get some more January readings. Regional Fed surveys wrap up with Dallas Fed manufacturing index today and it is expected at -11.8 vs. -9.3 in December. Dallas Fed then reports its services index tomorrow, which stood at -8.7 in December. Chicago PMI will be reported Wednesday and is expected at 48.0 vs. 47.2 in December, while ISM manufacturing will be reported Thursday and is expected at 47.0 vs. 47.4 in December. Of note, S&P Global preliminary January PMIs came in stronger than expected so we see upside risks to the ISM readings.
EUROPE/MIDDLE EAST/AFRICA
ECB comments highlight the policy debate within the Governing Council. Knot (a hawk) emphasized “The only piece of the puzzle we are missing is the absolute conviction that wage growth will adapt to slower inflation. When that piece of the puzzle falls into place, we will be able to lower the interest rate a bit.” In contrast, Villeroy (a dove) said “We will cut our rates this year. Regarding the exact date, not one is excluded, and everything will be open at our next meetings.” Lastly, Centeno (another dove) sad “We don’t need to wait for May wage data to get an idea about the inflation trajectory,” adding that he sees “a lot of evidence that inflation is falling in a sustained way.” An April cut remains fully priced in.
U.K reports January BRC shop price index later today. Shop prices rose 4.3% y/y in both November and December, the lowest since June 2022 but showing signs of leveling off, same as CPI inflation. The January data 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.
ASIA
RBNZ Chief Economist Conway speaks. He is expected to make brief comments on domestic data developments since the November Monetary Policy Statement. His comments will offer a preview of what to expect at the next RBNZ policy meeting February 28, when macro forecasts will be updated and 2027 added to the forecast horizon. The RBNZ is expected to stay on hold then, while the OIS curve implies a 66% probability of a policy rate cut in May.
China Evergrande Group was given an order to liquidate from a Hong Kong court. Two key issues have been raised: first, does Hong Kong have the jurisdiction to compel such action on the mainland, where most of Evergrande’s assets are? If so, can liquidation be done in a sector that remains under stress? Make no mistake, this is the correct market-based solution, but it will be a true test case for whether China has the stomach to see it carried out fully. Stay tuned.
The Monetary Authority of Singapore kept policy steady, as expected. It wrote that “Core inflation is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by” Q4. It added that “Lower imported costs and a slower pace of domestic cost increases should underpin the moderating trend in inflation.” December CPI was reported last week, and headline came in two ticks higher than expected at 3.7% y/y vs. 3.6% in November, while core came in three ticks higher than expected at 3.3% y/y vs. 3.2% in November. While the MAS does not have an explicit inflation target, sticky inflation kept it on hold today. Whether it can ease at the April meeting will depend on how the data evolve.
