US – Europe – $-Bloc and Scandies – China/Japan

US

Summary

• A full bipartisan budget is likely to be voted by 23 December. 
• Personal income and spending data to show continued strength.

Fed

The Federal Open Market Committee (FOMC) meeting produced a dovish Summary of Economic Projections (SEP) and a hawkish presser, possibly because US Federal Reserve Chair Powell has more control over the latter than the former. The bottom line is that the Fed is more likely to react to an inflation recovery than to pre-empt it (Fed Review – On Balance, Hawkish). 

There are also no Fed speakers scheduled over the next two weeks. 

Data

The Atlanta Federal Reserve’s GDP ‘nowcast’ fell to 2.8% Q-o-Q Seasonally Adjusted Annual Rate (SAAR) from 3.1% a week ago. The slower than market Consumer Price Index (CPI) I expect may well reflect lower energy prices (November 2022 CPI: Inflation Trends Remain Strong). 

The most important data over the next two weeks are Personal Consumption Expenditures (PCE) inflation, personal income and savings (Friday 23 December). I agree with the consensus that is consistent with a household savings rate below 2.5%, a key driver of my bullish macro view.    

Other key data include:                                                                                                                     

• Supply indicators: Chicago Fed National Activity Index and KC Fed manufacturing index  (Thursday), Richmond and Dallas Fed Manufacturing indices (Tuesday), MNI Chicago PMI (Friday). 
• Housing markets indicators: housing starts (Tuesday), existing home sales (Wednesday), new home sales (Friday), FHFA and CoreLogic house price indices (Tuesday). 
• Demand side indicators: Conf Board consumer confidence (Wednesday), durable goods orders (Friday). 
• Other: Current account balance (Wednesday), goods trade balance (Tuesday), wholesale and retail inventories (Tuesday), jobless claims (Thursdays 22 and 29 December). 

Events/Political Developments

A Continuing Resolution (CR) has been passed to extend government funding by one week through Friday 23 December. There is a more than 50% chance that a full budget, which would fund the government until end-September 2023, will be passed by 23 December. The more populist House Republicans are opposed to it because they want the next Congress to pass it, but they probably won’t find the votes to block it. 

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS 

Europe: ECB Speakers Support Hawkishness

Key Points

• A quiet end to the year with little by way of data. Instead, after last week’s hawkish ECB meeting, policy makers will be important to watch. We expect them to affirm the need for further significant hikes.

ECB Speakers to Affirm Hawkishness 

It’s setting up to be a quiet week in Europe next week, with little by way of first-tier data. After last week’s hawkish ECB meeting, the draw may be ECB speakers. On that front, on Monday we hear from Vice-President Luis de Guindos (neutral), and Lithuania’s Gediminas Šimkus (neutral), and on Tuesday from Slovakia’s Peter Kažimír (hawk) and Estonia’s Müller (hawk). Of these, de Guindos’ voice will be the most important to hear. In his most recent comments, he stated he sees inflation stable for the next three-four months, suggesting there is good room for the kind of substantial tightening that ECB President Christine Lagarde telegraphed at the presser. He also commented that his vote at the December meeting would be contingent on data, so it will be interesting to understand what he saw as appropriate at that meeting.  

Amongst the other voices, Šimkus has previously stated that hikes can continue after March if needed. It will be interesting to hear whether the conviction behind this has increased given the hawkish forecasts. Amongst the hawks, Kažimír has been fervent that interest rates will need to get into strongly contractionary territory, we expect this will remain his view. Finally, Müller will likely repeat his comments from a blog post on Friday that rates will go further than markets are pricing. This aligns with our own conviction. 

$-Bloc and Scandies

Central Bank Watch

Reserve Bank of Australia

Markets are getting ahead of themselves for the February RBA meeting. They are leaning toward a 15bp hike, but we believe there is still ample opportunity for a 25bp hike. The latest data for our indices shows that we are yet to reach a peak in wage pressures, while the road down from peak inflation may not be fast (Charts 2 and 3). 

Focusing on the labour force, official data shows it is yet to weaken. Through November, unemployment remained at 3.4% despite the 64k surge in employment, over three times higher than consensus expected (19k). Participation returned to all-time highs. Some of the increase in participation and employment can be explained by sample variability (incoming participation = 67.8% vs outgoing participation = 65.3%). There were also substantial revisions to employment growth as the ABS incorporated 2021 consensus estimates (which happens every five years). In particular, since April 2022, average employment growth is now 40k a month. This reflects greater net migration over the period. Note, the historical revision did not affect headline ratios. 

Overall, the labour market remains extremely tight. And while secondary indicators have come off their highs, they remain at a level that leaves the labour market in a spot of bother. Firms continue to have difficulty employing new staff and suitably filling positions. Our unemployment indicator is yet to point to any forthcoming uptick in the unemployment rate. 

Looking toward the upcoming festivities, the RBA minutes (Tuesday, 00:00 GMT) are the only release of real note. Here, we are looking for the size hikes discussed. If 50bp was considered, it would likely suggest a pause is unlikely at the upcoming meeting. Meanwhile, if a pause was considered, it would be hard to not accept a potential upcoming pause as far more likely. Additionally, we will see if there was much discussion about the ‘range of potential scenarios’ that could happen if the economy is not kept on an ‘even keel’. 

Bank of Canada

As expected, the recent speeches were used to set out pointers for the BoC January meeting. They noted that they have become ‘more data-dependent’. And that, if they are surprised on the upside, they are still prepared to be forceful. For now, they are monitoring: 

• How the economy is responding to higher interest rates – we previously discussed their research. 
• An expanded range of labour market indicators – recall 30 of 41 of these have ‘recovered’. 
• Whether supply chain issues are resolving and to what extent are businesses passing on changes in costs. 
• If three-month rates of core inflation will come down even further and be sustained – these have trended lower and are to be updated on 21 December. 
• Inflation expectations to remain anchored – updated on 16 January. 

Over the Christmas weeks, we will be watching for further moderation of core inflation momentum (Wednesday, 13:30 GMT). 

Reserve Bank of New Zealand

We continue to expect a 75bp RBNZ hike on 22 February. Concentrating on the upcoming week, focus will be pointed towards the ANZ business survey (Tuesday, 00:00 GMT). 

Norges Bank

Norges Bank hiked the policy rate by 25bp to 2.75%, as expected. The new forecasted rate path is more hawkish than expected and little changed from September. The peak remained at ~3.1% (i.e., stuck between 3.00% and 3.25%). If inflation and unemployment eases quicker than expected (the latter updated next week (Thursday, 09:00 GMT)), the policy rate will likely end at 3%. Meanwhile, particular attention will be paid towards how wages develop. 

Riksbank

The Riksbank is pushing the labour market to one side. The employment rate might have increased to a new all-time high (69.5%), 0.3pp above forecast. Meanwhile, the unemployment rate may have returned to forecast (7.2%). But, wage expectations remained broadly stable in the Prospera tendency survey. This is encouraging for the Riksbank, that place faith in the Swedish wage formulation model. Moreover, the Prospera tendency survey pointed to (marginally) easing consumer inflation expectations over a one- and two-year horizon. They also ticked up to 2.3% on a five-year horizon. The survey contributes to our CPIF index agrees with the forecasted trend for inflation over the next six months, but disagrees with the second spike (Chart 4).  

We continue to expect the Riksbank to deliver a 25bp hike in February but note the risk of a potential 50bp. 

China/Japan

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Ben Ford is 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.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)