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US
Summary
- CPI to show continued disinflation.
- Small business survey to show resilient growth trends.
Fed
The Fed December FOMC marked a deep change in policy bias, and I have changed my Fed view accordingly. The Fed now seeks to ease to support growth and asset prices, and reduce the risk of the US economy sliding back into the pre-pandemic low inflation regime.
Based on core PCE remaining around 20bp a month in the lead up to the March FOMC, I see a 50bp cut as, on balance, more likely than a 25bp cut and more as a hedge against lowflation than against recession. I will develop these themes in my research this week.
As of this writing, only 4 speakers are scheduled: Bostic, Barr, Williams, and Kashkari.
Data
This week’s data continued to indicate strong growth. NFPs were higher than expected. The Atlanta Fed nowcast of Q4 GDP rose to 2.5% from 1.9% a week ago. The Citi economic surprise index fell to 6.4 from 8.2 a week ago. WTIC spot rose to 73.8/barrel from $71.6/barrel a week ago.
Key data by order of importance includes:
December CPI (Thursday): the consensus on MoM core is 0.2%, and I agree based on energy prices driving core inflation and on the decline in energy prices in December.
December PPI (Friday): I agree with the consensus that sees core PPI accelerate to 0.2% from 0% in November.
December NFIB Small Business Optimism (Tuesday): I will be looking for a recovery in the hard data of the survey.
November Consumer Credit (Monday): I agree with the consensus that forecasts a small increase in credit. Households have absorbed the increased inflation and the decline in real wages by borrowing more and saving less.
November Trade Balance (Tuesday): I agree with the consensus that sees virtually no change relative to October.
Jobless Claims (Thursday): I agree with the consensus that sees continued low claims.
Events/Political Developments
Negotiations between House Republicans and Democrats are ongoing on a tightening of border control in exchange for funding for Ukraine and/or government funding. The CRs currently in effect expire on 19 January and 2 February. I continue to expect no significant government shutdowns as historically these have proven detrimental to GOP electoral outcomes.
Europe
Key Points
- Watch ECB comments for signs they continue to favour pausing and waiting for more data on the labour market and inflation.
- We watch for good entry points to fade March/April cuts.
Data and Central Bank Speakers
The main releases for next week will be Eurozone industrial production data (throughout the week), final December CPI data in France and Spain (Friday), and UK monthly GDP (Friday). ECB and BoE speakers will also be important.
ECB speakers this week include Villeroy, de Guindos, Vujcic and Lane. In line with our and market expectation, December core inflation came out at +3.4% YoY. The modest uptick in headline inflation was widely anticipated, too. The ECB had pencilled in an unreasonably hawkish near-term inflation trajectory, and this will be the first time we hear from policymakers after inflation has been confirmed below their expectations.
Lane will be particularly important to hear from on this front. I expect they can wait until the June meeting to make their first cut, given they will lack a good view of the inflation and wage picture before then. I will watch for indications that this is the case, and that cuts priced for March and April can be faded.
The main BoE speaker this week is Bailey. Market pricing has become more dovish lately and is now pricing our base case of a May cut. Inflation recently surprised to the downside, and official wage growth numbers have (finally) dropped. This should provide some room for dovishness, but I also expect he will want to caveat that some of the November disinflation was likely due to sample timing changes. As such, we could see a tick up in the December inflation number.
Eurozone industrial production is expected to have seen a modest rise in November after repeat misses. The near-term picture in goods demand remains relatively subdued, although declining goods prices and loosened financial conditions could provide support.
Final French and Spanish inflation is not expected to show a change from the preliminary release. The important part will be services inflation, which saw some strength in the aggregate number. We expect accommodation deflation faded in December, in line with the seasonals of the last few years.
UK November monthly GDP is expected to see a modest rebound after the miss in October (which may have been exacerbated by weather effects). The broader picture remains that the UK consumer remains under heavy pressure from prices and rates, and the economy is widely expected to stagnate in the near term.
Emerging Markets
Key Points
- Bank of Korea will stay on hold at 3.5% on 10 January.
- Chinese data on TSF, CPI, and trade.
- India headline CPI to remain noisy, core disinflation to extend.
- Poland to keep rates firmly on hold at 5.75% despite recent downside surprise on CPI.
- Core and adjusted inflation will continue to matter more for the CNB than the headline print.
- Favourable base effects will mean a sharp drop in Hungary YoY CPI.
- Mexico CPI will be watched for clues
BoK on Hold
The Bank of Korea is likely to maintain its current stance, refraining from rate cuts before the Fed as it is cautious about the private sector’s substantial borrowing, which poses a potential risk to financial stability. Nevertheless, we will be paying close attention to the commentary and statement, as cuts are highly likely this year, but the question is on timing.
China TSF, Trade, and CPI
TSF data is no longer market moving, as the market has understood that authorities do not intend ‘floodgate’ easing. Government bond issuance will likely support the headline figures, but December is a seasonally weak period for corporate loans.
China’s price data for December will likely show consumer and producer prices falling in tandem for a third straight month.
India CPI to Remain Noisy
India’s headline inflation may increase on 12 January on volatile food prices and base effects. However, we expect lower core goods and transport costs to push core inflation further down to 3.9% from 4.1% in November. The minutes from the last MPC statement noted that the majority of the committee, including Governor Das, are patient about cutting rates. However, this should change once headline CPI falls below 5%, and geopolitical concerns about oil ease. We expect a shallow rate cut cycle to begin cutting around mid-year.
NBP on Hold
The downside surprise on December CPI (6.1% YoY versus 6.5% consensus) will not trigger a rate cut, or even dovish-sounding commentary, from the NBP on Wednesday. Only once new forecasts are released in March will the NBP think about cutting rates again. And with the teachers’ wage hike, the new family 800+ payments in effect, and various other spending measures, we expect the NBP will continue to highlight the inflationary risks and uncertainties from fiscal policy. Rates are set to remain on hold at 5.75% with no new guidance on the outlook for 2025.
Most Disinflation in Czechia
The CNB will continue to focus on core and adjusted inflation rather than the headline print. Last month’s 7.3% YoY reading was above their 7.1% forecast but did not impede a late December rate cut. Mild YoY disinflation and continued softness in inflation momentum this month should keep the door open for another modest rate cut at the next policy meeting on 8 February. This will be the last significantly above-target CPI print with the bumper base effect in January causing a very sharp drop in YoY comparisons.
Sharp Disinflation in Hungary
Last year’s scrapping of the fuel price cap in late December leaves a helpful base for Friday’s CPI reading. The NBH forecast is for 5.7% (0.2pp below consensus), from 7.9% in November, and for inflation to drop to 4.6% in Q1. Any downside surprise could see the NBH accelerate rate cuts from the current 75bps. But with oil higher in recent days and the forint not benefitting from the good news on EU funds, our base case is that they stick with the 75bps cuts for now.
Mexico CPI
Mexican CPI, due on 9 January, is likely to edge higher from the previous 4.32%, though it would remain consistent with the central bank’s forecast of an average inflation rate of 4.4% in Q4. Furthermore, core inflation is likely to persist in its downward trend.
Any material surprises could be market moving. Banxico has pushed back on market expectations of an imminent start to a rate cut cycle. February is probably off the table now, but March is an even-offs bet. An upside surprise, especially in core, could further reduce odds of a March cut.
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.
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.
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.