Markets to Watch This Week: Doves Could Dominate, BoC to Hike 25bp

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves Over the Past Week

Over the past week, the Bank of Japan (BoJ) failed to widen the yield curve control (YCC), contrary to our expectations. Instead, they added a new operation to help support the existing band (+/- 50bps). Japan yields retraced while JPY weakened (Charts 1 to 3). We think the BoJ will likely have to abandon YCC this year – it is just a matter of timing. If 10-year yields trade back above 0.5%, then the March BoJ meeting could come back into play. Otherwise, it will be left to the new BoJ governor in April.

And in the US, we changed our expectations for the Federal Reserve’s (Fed) next meeting. We now expect a 25bp hike from the Fed at the 1 February meeting and the December SEP to remain unchanged (i.e., 5.1% terminal Fed funds rate and no cut in 2023).Our change came as Vice Chair Lael Brainard’s (voter, dove) and New York Fed President John Williams’ (voter, dove) speeches implied the FOMC median vote lies at 25bps. Fed Board Member Christopher Waller (voter, hawk) backed 25bps, too.

In short, Dominique thinks the doves and hawks’ reading of the economy and inflation trends are moving apart, partly because of the discrepancy between strong employment and demand data (ignoring January seasonality) and slowing inflation. She expects this backdrop will persist in Q1.

Turning to politics, on 19 January the US Treasury reached the statutory debt limit and began to employ extraordinary measures to avoid default. Secretary Yellen warned of a potential crisis if the Treasury is unable to prioritise payments. House Speaker McCarthy accepted an invitation from President Biden to find a solution. However,  Biden previously stated that he will not make any concessions. The situation will likely be resolved closer to the Treasury’s projected end of resources in early June.

Meanwhile, in the UK, surprise negativity crept into the UK GfK consumer survey, with the drop suggesting that the worst is not over yet. UK retail sales were similarly negative. In contrast, Eurozone data has been consistently strong, with positive data surprises dominating releases. The difference in performance feeds into Henry’s view of central bank policy. He sees continued reasons for European Central Bank (ECB) hawkishness, while the arguments for a February Bank of England pivot remain strong.

Staying in Europe, Norges Bank kept their policy rate at 2.75% and noted it would be raised further in March, as we had expected. Looking forward, we expect Norges Bank to deliver their expected 25bp hike but note they are yet to shut the door on further work.

Elsewhere, in the $-Bloc, the latest labour force data did little to deter us from expecting a 25bp Reserve Bank of Australia hike on 7 February. Neither did the Business and Consumer Outlook Surveys in Canada. We continue to expect a 25bp hike from the Bank of Canada (Wednesday). Meanwhile, those arguing for a 50bp February hike from the Reserve Bank of New Zealand (instead of 75bp) got some data to back their case. Retail sales fell (2.5% MoM; SA) for the first time in nine months, while the outlook weakened in the NZIER survey.

What to Watch

This week, the Fed will fixate on data due near the end of the week. PCE (Friday), personal income and spending (Friday), and the first estimate of Q4 GDP (Thursday) are set to release. Dominique expects Q4 GDP to prove the only surprise – she expects 3.0% QoQ saar while the market expects 2.6%.

And in US equities, John points toward Comast, owner of NBC and just one of roughly 125 companies reporting this week, as a key read. Is advertising spending picking up after a slowdown hit the communications sector hard in H2 2022?

Next door, the BoC (Wednesday) is the only central bank set to adjust policy rates this week. Ben expects a 25bp hike given the labour force has remained resilient, core inflation momentum has failed to retreat, and the BoC survey continued to show elevated inflation expectations. However, a pause likely follows.

And in Europe, there will be opportunities to hear from the ECB doves with the likes of Italy’s Visco and Panetta (doves) speaking Monday. Importantly, Henry is looking to see whether they can justify dovish sentiment, given that the most powerful dovish voice so far has been anonymous. Even if they manage it, Henry believes they will be in the minority with Greece’s Stournaras and Portugal’s Centeno conceding to more hikes.

President Lagarde (neutral, Monday and Tuesday) has already had some good opportunities to dispel dovish sentiment, and we have already heard a decent amount from the hawks (Holzmann speaks on Monday, Knot speaks on Tuesday). For now, Henry’s central case remains for 50bp in February and March, followed by more (potentially smaller) hikes thereafter.

Elsewhere, Q4 CPI will prove key for the RBNZ. Markets expect headline to fall to +7.1% YoY from +7.2% YoY. Meanwhile, our model, which agreed with the dip in Q3, is now suggesting a higher reading in Q4.

Watch Andrew and Dominique discuss their thoughts on whether the Fed is talking too much, what the energy price rebound and China re-opening mean, whether we are in a new regime, and much, much more!

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.