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US
Summary
- Retail sales could surprise on the upside.
- CPI to remain at 0.3% core MoM.
Market Implications
- I continue to think a March cut is unlikely – against markets pricing a 20% risk.
- The Fed expects disinflation to slow this year and will likely take a wait-and-see response to any rise in MoM inflation prints.
Fed
All 10 Fed speakers this week stressed the Fed could be patient and would cut only once it felt confident inflation remained on a sustainable path to 2%. Some raised the possibility that R* could have increased (Mester, Collins). Governor Kugler, a labour economist, gave her inaugural speech and was the more hawkish of the speakers.
The SLOOS (loan officers survey) showed that the number of banks reporting tighter credit standards and weaker demand for lending is continuing to fall, though on balance more banks are tightening than loosening standards.
Speakers this week include Barkin, Kashkari, Goolsbee, Barr, and Daly.
Data
The Atlanta fed Q1 GDP estimate slowed to 3.4% from 3.5% a week ago. The Citi economic surprise index rose to 44 from 39.5 a week ago. WTIC spot rose to $76.2 /barrel from $72.3/barrel a week ago.
Key data by order of importance includes:
Jan. CPI (Tuesday): consensus seems reasonable. I am looking for a slowdown in OER and for supercore to remain around 40bp.
Jan. Retail sales (Thursday): there is scope for a small positive surprise since the consensus on control group growth implies a contraction in real terms, which seems too pessimistic in view of labour markets and income trends, even with last month’s large increase.
Feb. U Mich Consumer confidence (Friday): following January’s large positive surprise, consensus expects an unchanged number. I agree.
Jan. Import prices (Wednesday): I expect a 10bp contraction alongside consensus. So far, we have seen little impact from the Red Sea quagmire on import prices, which aligns with my expectations.
Jan. PPI (Friday): I expect a 10bp increase. So does consensus. In recent months, though, consumer goods prices have decoupled from the PPI and remained closer to import prices.
NFIB small business optimism (Tuesday): I will be looking for an improvement in the hard part of the survey.
Housing market data: NAHB index (Thursday), building permits and housing starts (Friday): I see starts moving sideways and a small increase in permits.
Manufacturing: US-wide index (Thursday), NY Fed Empire survey and Philly Fed business outlook (both Wednesday): I agree with the consensus, though the surveys are much more negative than the manufacturing production index.
LT TIC flows (Friday): I agree with the consensus.
Jobless claims (Thursday): I expect continued low claims.
Events/Political Developments
As expected, President Biden and former President Trump won the NV primaries and caucuses. The next primaries are on 24 February.
The SC heard arguments on whether Trump could remain on the Colorado ballot and is expected to rule in his favour.
Europe
Summary
- December UK unemployment could see downside risks on the back of changes in ONS methodology.
- The more important factor will be private regular wage growth, which I expect to rise slightly on base effects.
- Reweighting factors will likely support January UK inflation. There is considerable uncertainty in the aggregates from this. I will look at the details. I expect core inflation to undershoot BoE estimates.
Market Implications
- We have less conviction the BoE will be able to cut in May. If this week’s data is stronger than we expect, a May cut becomes very unlikely. Accordingly, we would reassess our 2Y EUR/GBP swap spread trade.
December UK Unemployment & Wage Growth (Tuesday)
Unemployment dropped rapidly at the correction of LFS data last week. While the ONS heavily caveats the data, it is still the most official data the BoE has until at least July. Given the three-month-rolling nature of the LFS data and that face-to-face interviewing only returned in October, the near-term trend could continue downwards.
I would not read too much into the release, but another decline in the rate could drive a strong market reaction – even if we see dovish data elsewhere.
On the wage growth side, I estimate a slight rise in the YoY rate of private regular wages to +6.1% (+6.0% prior) in December. This is more on base effects than anything else and is likely to fall away in the February numbers (Chart 1). February’s numbers will be the last ones the BoE sees before their May meeting, so greater misses would be important. However, I expect the undershoot to grow more from April.
Meanwhile, data from Indeed suggests an interesting disparity in job postings in January, which did not see the usual tick higher, while job searches did. While not a long-term trend, this would support labour market loosening.
Downside Risks to UK Core Inflation (Wednesday) – Big Uncertainty Around Reweighting
Considerable uncertainty exists around the January number due to the reweightings. They are expected to lift the YoY, but by how much is unknown. 0.2ppt or more is possible. My baseline expectation excluding this effect would be a slight beat in headline vs the BoE forecast of +4.1% and an undershoot (about +5.1%) for core vs the BoE’s +5.5%.
The detail will be important given the reweighting effect on the aggregates – in particular the like-for-like inflation rate within sectors. Within this, I expect accommodation inflation to see the discounting it missed in December. I have pencilled in a modest decline. But if the assumption on the seasonal shift is correct, we could see a much stronger miss. However, if this fails to materialise, it will weigh strongly against my expectation for a May BoE cut.
ECB Comments
This week brings no shortage of ECB speakers. I thought Lane’s comments last week were telling, namely that inflation could undershoot near term (my expectation) but that this might not affect the medium-term forecasts (due in March). This conclusion fits with my expectation that the ECB wants to wait until they have enough data to be sure before easing. That suggests a June cut.
Lane speaks again on Monday, with Cipollone (likely dove) and de Cos (dove/neutral) on the same day. Later in the week, Vujcic (neutral/hawk), de Guindos (neutral) and Schnabel (hawk) speak. I expect the main messaging to be similar to Lane’s conclusion last week – that inflation may miss near term, but medium-term risks abound.
BoE Comments
This week we hear from Governor Bailey and External Member Greene (hawk). I would put little weight on Greene’s voice normally. However, given she switched from backing a hike to backing a pause, she may say something interesting. Overall, I will listen for whether the tone around the labour market has changed at all since the LFS revision.
UK GDP
The BoE is looking for 0.0% growth in Q4, with consumption and business investment down, but government expenditure offsetting the move. That headline growth outlook seems reasonable.
$-Bloc and Rest of G10 Europe
Key Points
- Australia: Details in NAB survey remain key, while the labour market is on loose footing.
- New Zealand: Governor Orr should guide us into the February decision.
- Norway: Bache’s annual address is unlikely to provide anything new.
- Sweden: Riksbank communication is likely to remain the same, while unemployment could increase above forecast.
Market Implications
- We were stopped out of our long AUD/NZD trade at 1.0650. However, the rationale continues to make sense. Our conviction could increase this week if Orr plays down the possibility of further tightening.
Australia – Labour Market on Loose Footing
RBA’s Head of Economic Analysis Kohler is due to speak at the Australian Business Economists Annual Forecasting Conference again (Monday). Last year she delved into the why, how and what of forecasting at the Bank. It gave us insights into how the RBA were looking at their forecasts and the risks they were looking at. She is unlikely to comment on policy decisions.
Everyone will turn their eyes to the NAB Business Survey (Tuesday), as well as the Labour Force Survey and consumer inflation expectations (both Thursday).
While the initial headline scores for the NAB Business Survey are useful, we will again be paying attention to the details. Through December it showed a sharp decrease in retail prices alongside further progress in purchases costs (Chart 4). Meanwhile, demand remained weak (Chart 5).
Thereafter, the LFS – the main data point of the week – is due. The RBA’s models suggest we are tighter than NAIRU (Chart 6). So, further loosening would do little to scare the RBA at this stage. However, we continue to point out that much of the strength in labour market has come from part-time hires, not full-time (Chart 7). That means gains are on loose footing.
When the release comes out, it will be important to consider progress versus their newly released indicator suite (we will create and update on release – Chart 8).
New Zealand – Will He Orr Wont He Confirm a February Hike?
A busy week ahead across the ditch. Our take on each:
- Governor Orr (Monday and Thursday) will be the man to watch next week. ANZ now expect a February and April hike, and Governor Orr would be the man to walk us into one if they were going to tighten policy later this month. We continue to think they will not tighten this month and that, despite being stopped out at 1.0650, long AUD/NZD will make sense as RBNZ hawkishness is unlikely to outlast RBA hawkishness.
- Inflation expectations (Tuesday) are out first; you will want to watch the mean expectation (Chart 9).
- On food prices (Tuesday), we expect to see disinflation continue the progress made through Q4, which we discussed two weeks ago (Chart 10).
- Card spending (Tuesday) should continue to show weak spending details with all core categories running below average, except hospitality (Chart 11).
Norway – Bache Unlikely to Provide Anything New
Governor Bache’s annual address is the big-ticket item of the week. However, we do not expect a lot to come of it. That is because while core inflation missed the forecast, it did so by only 0.1pp. Moreover, core inflation momentum increased. That means upside surprises remain possible.
Sweden – Awaiting January Inflation
Three board members are talking this week. There is unlikely to be anything in them that differs from the minutes (our review). We think a change in language would come once inflation details are known – we think inflation could prove stronger than expected, a downside risk to NOK/SEK.
Labour market data is due at the end of the week. With the unemployment rate already at 8.2%, we are very close to the Q1 forecast of 8.3%. The once stubborn full-time employment growth is passing (Chart 12). It is yet to be seen how much further this can go with the Riksbank’s indicator now tracking sideways (Chart 13).
Emerging Markets
Key Points
- Extended holidays in Asia due to Lunar New Year, Carnival in Brazil.
- Indonesia election day is 14 February.
- BSP (Philippines) to hold rates.
- NBH minutes to reveal cracks in the MPC.
- Czechia YoY inflation to drop by a huge 4pp on base effects.
- Poland’s disinflation more modest, and temporary.
- Israel disinflation to continue on war-related demand weakness.
Lunar New Year and Carnival Holidays
China will be out the entire week, Taiwan Monday-Wed, HK Monday-Tuesday, Singapore and Korea on Monday. Brazil will be on holiday Monday-Tuesday for Carnival.
Indonesia Elections
Indonesia’s mega elections are on 14 February. The polls will determine the next president, VP, and legislature (upper and lower house). Prabowo/Gibran have strengthened their lead in the president/VP race. The latest polls indicate the pair could win by a slim majority. If no ticket wins a majority vote, a run-off will be held on 26 June. See here for more details.
BSP to Hold Rates at 6.5%
BSP is likely to hold its overnight borrowing rate at 6.5% on Thursday. The Finance Secretary often comments on monetary policy, and has indicated that the BSP will cut once the Fed starts cutting.
Inflation has continued to moderate. The headline gauge slipped to 2.8% year on year in January – below the midpoint of the central bank’s 2-4% target. Core inflation is also back in the desired range. Even so, the BSP remains wary of upside risks to prices and warned of a temporary breach of the target in 2Q24.
If the BSP are implicitly pursuing a ‘follow the Fed’ reaction function; the expanding real rates could support the PHP going forward.
NBH Minutes to Reveal Dissenting Voter(s)
Deputy Governor Virag said that the January decision to cut by 75bps, rather than 100bps, was a broad majority. This is the first time in many years the NBH decision has not been unanimous, leaving the voting split of particular interest this month.
Czechia’s Disinflation Cliff
A 6.0%MoM print from January 2023 leaves a huge base effect for YoY comparisons. Versus the 6.9% in December, CPI is projected to drop to 3.0%, implying a MoM of around 2.1%. CNB policymakers have said they expect no surprises in the data from January repricing, and we think the risks are to the downside. A reading significantly below 3% could mean a further acceleration in rate cuts at the next policy meeting on 20 March.
Poland to See Further Gradual Disinflation
Base effects are reasonably favourable in Poland this month, but not on the same scale as for Czechia. Nevertheless, disinflation is expected to continue for another few months with January likely to drop around 2pp from December’s 6.2%. The January CPI print will be the baseline for the new NBP forecasts. And with the NBP governor repeatedly stressing next month’s forecasts as key for the policy outlook, a material downside surprise could bring back discussion on further rate cuts.
Israel CPI to Drop Below 3%
The demand shock from the war with Gaza has meant inflation is slowing faster in Israel than previously expected. While the BoI will proceed cautiously with rate cuts given the need to balance economic and financial market stability, CPI below 3% will strengthen the case for further easing.
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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.
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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.
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Ben Ford is a Researcher at Macro Hive. Benjamin 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.
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Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
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Mirza Baig is a Senior Macro Strategist at Macro Hive, specializing in EM research. He has been researching and trading global FX & rates products for over 19 years, boasting affiliations with Morgan Stanley, BNP Paribas, Deutsche Bank, and Point 72.
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