Key Events: Market Starting to Move Our Way on Another Non-Consensus Call

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US

Summary

• Retail sales could surprise on the upside.
• Import prices could start showing the impact of higher shipping costs.

Market Implications

• Still expect a 50bp cut at the March FOMC meeting.

Fed

The CPI lowered my odds of a 50bp cut in March but not of a cut, largely because the data remained consistent with my framework – energy prices are falling and driving core inflation.  Fed speakers this past week were generally non-committal on a March rate cut, ‘we will cut when we are confident that inflation is on a sustainable path to 2%’ (Williams, dove, voter Bowman, hawk, voter), ‘I don’t want to prejudge the March meeting’ (Barkin, hawkish, voter) or downright opposed (Mester, hawk, voter).

The Fed will release the Beige book next week and as usual I am not expecting much new or important information.

As of writing, this coming week’s speakers are Waller (dove, voter), Williams (dove, voter), Bostic (dove, voter), and Daly (dove, voter). I eagerly await Waller’s speech, the first since his late November comment that cuts could start if inflation continued to cool ‘for several months.’

Data

This week’s CPI was stronger than I expected but in line with Sam’s model. The Atlanta Fed nowcast Q4 GDP rose to 2.2% from 2.0% a week ago. The Citi economic surprise index rose to 8.1 from 6.1 a week ago. WTIC spot rose to $74.4/barrel from $73.8/barrel a week ago.

Key data by order of importance includes:

December retail sales (Tuesday): if anything, I see a risk of a positive surprise to the control group (used to estimate consumption in the GDP data) forecast of 0.3%, since the CPI implies that real retail sales growth would be zero. This would be inconsistent with strong employment and a low savings rate.

December import price ex-oil (Wednesday): the increase in shipping costs suggests import price inflation acceleration (e.g., 0.3% compared with 0.2% in November).

Residential real estate market indicators: January NAHB index (Wednesday), December building permits and housing starts (Thursday), December existing home sales (Friday): the consensus is generally somewhat lower numbers. Over the next few months we should see an impact from the 1.4ppt decline in mortgage rates since October on existing home sales.

Manufacturing: January NY Fed Empire survey (Tuesday), December Fed manufacturing production, January Philly Fed survey: the data is going to once more demonstrate the decoupling of manufacturing surveys from the hard data.

January U Mich consumer confidence (Friday): I agree with the consensus for a small decline, still consistent with the upward trend since mid-2022.

November long-term TIC flows (Friday): I agree with the consensus.

Jobless claims (Thursday): I agree with the consensus that sees continued low claims.

Events/Political Developments

Government funding is being negotiated between the House of Representatives and White House, with House Speaker Johnson trying to accommodate GOP hardliners. I continue to expect no significant shutdown although the usual brinkmanship and a last-minute deal before the expiry of the current Continuing Resolution on Friday are possible.

Europe

Summary 

• The UK labour market data will include corrected labour force survey numbers. I expect this to show MPR forecasts for labour market loosening are too hawkish. 
• AWE could tick up again after October’s surprise fall. Even so, there is a good chance that YoY Median Private Wage drops to 6%. 
• UK inflation could see a near-term MoM uptick in core goods if sample timing affects November’s release (as I suspect). I would not take that as hawkish unless wage-intensive services inflation also overshoots.  
• Expect that ECB speakers will continue to push back on need for near-term cuts, but there could be some dovish comments after the last inflation print. 

Market Implications 

• We like to fade ECB cuts priced for April via paying April ECB-dated ESTR. 
• A UK inflation beat could provide good entry to be long the UK front-end. 

Corrected UK Labour Market Data to Show MPR Too Hawkish 

The ONS will publish its November wage and unemployment data on Tuesday. The release will be a key one given that it will also include a correction of labour force survey data (including employment and unemployment) that has been missing since last October. Thus it will provide a critical piece of the puzzle for the BoE – how fast the labour market is loosening. 

On the unemployment side, the rate of change rather than the level of rate quoted will be most important. The updated release may show previous releases exaggerated the rate of unemployment’s rise last summer. However, the increased sampling of younger people and disadvantaged areas could offset this. I expect together it paints a picture in which unemployment continued to rise in H2 2023, overshooting the slow loosening that the BoE is assuming (Chart 1). 

Granular employment data will be important in showing whether the shift from full-time to part-time employment has persisted. If this proves to have been the case, then that would add to dovish market pricing. 

Average weekly earnings data (AWE) for October showed a surprise decline in wages, even while the employment composition provided continued support. A similar outturn in November would be extremely dovish. Instead, I expect we will see a tick back up in the level of wages, but given base effects that still leaves a good chance that private median wage growth YoY drops to 6%. That would confirm that the November MPR assumptions were far too hawkish as we had warned. 

UK CPI – Risk of Near-Term Uptick 

UK November CPI fell significantly. However, some of this move appears to have been down to the timing of sampling (a week later than in 2022), which likely oversampled Black Friday sales.  

As such, I expect to see some temporary uptick in MoM core goods (clothing and furniture in particular saw surprising declines). Depending on the size of this effect, we could see headline inflation remain stable and even a rise in YoY core inflation. 

Our longstanding expectation is that the BoE can cut in May. The market is now close to pricing this possibility (21bp by then).  A surprise uptick in goods prices could provide a nice opportunity to fade any knee-jerk hawkishness priced into the front end. The most important detail will be the underlying trend in wage-intensive services inflation. If momentum there ticked up again in December, it could suggest the BoE can be more patient (Chart 4). 

EZ Final Inflation and ECB Speakers 

Eurozone December inflation came out roughly in line with our and the market’s expectations last week. The final reading (Wednesday) will provide more information on the sectoral drivers. 

Perhaps more important will be the slew of ECB speakers we will get this week from the WEF conference in Davos. Recent comments from the likes of Vujcic, Schnabel and de Guindos all align with our thesis that the ECB can wait until June before cutting. We will be listening for any indications this is not the case.  

The risk at this stage is that the ECB stuck to infeasibly high near-term CPI forecasts at their last meeting, which have (as expected) proven overly hawkish. I expect this has little impact on their outlook (they will not accelerate their process unless forced), but it may trigger some dovish comments. 

We have been looking for good opportunities to fade ECB March and April cuts since the middle of last December. The market has moved in the direction of our thesis, which has made entry points less attractive. Even so, 30bp of cuts priced into April seems too much, and we see value fading that. 

Minutes from the December meeting (Thursday) will be important in understanding how discussions around PEPP’s winddown took place. Any indications that there is scope for an acceleration of the current plan could drive bear-widening in EGB spreads. 

$-Bloc and Rest of G10 Europe

Summary

• The Australian LFS should prove stronger than it looks. We think the underlying details can continue to show the labour market is standing on loose ground.
• Normalisation is likely to continue in the BoC BOS and CPI outturns next week. Is it fast enough for the BoC to cut as the market has priced, though?
• Two data points in New Zealand appear important (NZIER and Manu PMI). But given the RBNZ’s mandate change and the fact New Zealand is services heavy, we will have to wait for other soft data for an insight into the RBNZ’s next steps.
• Swedish core inflation is expected to end up lower than the Riksbank forecasted for the second consecutive month. Follow-ups from Bunge and Thedeen could provide insight into whether the Riksbank are thinking about cuts.

Market Implications

• NOK/SEK needs a dovish turn from the Riksbank for a convincing climb through parity.

Australian Labour Force Survey to Prove Deceivingly Strong

The labour force survey (Thursday) is shaped up to be deceivingly strong. Employment is expected to increase +15.0k, with unemployment to remain at 3.9%, and participation to decline 67.1%. And we could even see unemployment decline to 3.8% (in line with where the RBA forecasted through Q4) if participation declines more than expected, reversing the past three month’s strong increase from 66.8% to 66.7%.

However, this would fail to take away from the sharp decline in softer measures we are seeing alongside the fact that momentum in the labour market is being helped up by part-time workers, not full-time workers (Chart 5). It means the labour market is standing with looser footing.

Normalisation to Continue in Canada

The BoC Business Outlook Survey and CPI will dominate the week in Canada. In the former, we are expecting to see further normalisation, which would allow the BoC to move on their path to eventually cutting the policy rate. We should see inflation and price output expectations further pared, improving supply conditions, and an increased worry about future sales growth instead (Charts 6 to 9). However, their ability to cut sits on top of a further decline in core inflation momentum – which will be updated this week – and a further loosening in the labour market – which we have just seen (Charts 10 to 11).

New Zealand Labour Market Softening to Continue (Though Matters Less)

Now the RBNZ are forced to look just at prices, instead of duly with employment, the NZIER survey weakness does not look as weak. That is because the labour market held a heavier dovish argument. Overall, the RBNZ knew the labour market was likely at MSE (earlier than expected, too) with signs of softening growing (Chart 12). However, the prices side of the argument has moved only minimally over the same period. Moreover, the NZIER survey is less useful as an insight for non-tradables inflation. Instead, you want to wait for the ANZ survey (Chart 13).

We also have PMIs this week, though just the manufacturing PMI. The NZ economy is only 9% manufacturing, less than its neighbour across the ditch. As a result, this outturn will mean less than the services component that comes out on the following Monday. There, we will be watching for a decline back below 50 in services demand (Table A1).

All Eyes on Swedish Inflation and Riksbank Follow-Up

It is an important week for anyone trading the Scandi markets. Core CPIF (consensus settling around +5.2% YoY) is due to come in below forecast (+5.6% YoY), which would make this the second month of a sizeable undershoot versus the Riksbank forecast. And, given the recent dovish tune we have heard from Breman and Jansson on SEK and their policy outlook, next week’s appearances of Breman and Thedeen will be watched closely. We expect:

• Breman’s appearance will likely have more commentary and should directly give hints on her stance of policy following the CPI release, though she has already said on Friday that there is no reason to hike again (a dovish turn from the November minutes).
• Thedeen will be at a lecture, so we may see no comments come out. But, if they do appear, it will be important to note what changes he makes. First, he should align with Breman and Jansson and state happiness with SEK strength – previously, he was uncertain. Second, any comment on no need to hike again should be taken seriously. This is opening the door to the question: how long until we cut?

Emerging Markets

Summary 

• The Taiwan election result is due on Saturday. 
• PBoC is likely to cut rates by 10-25bps on Monday. Monthly data dump to highlight that soft conditions prevailed in Q4.  
• Bank Indonesia should remain on hold. 
• Polish inflation data should confirm slower disinflation in core versus elsewhere in CEE. But with the NBP on hold, politics will continue to dominate headlines. 
• Growth data is due in Brazil and Mexico. 

Market Implications 

• The expected election result is neutral for TWD. A surprise victory for the opposition candidate in Taiwan could trigger a sharp rally in CNH and TWD. 
• Use CNH as funding currency.  
• IDR to remain steady but could weaken if BI cuts unexpectedly.  

Taiwan Elections  

Taiwan will hold presidential and legislative elections on Saturday.  

Market consensus is that DPP, the ruling party, will win the presidential elections, but lose majority control of the legislature. In a surprise outcome where the KMT candidate wins the presidency, Taiwanese assets and CNH are likely to rally significantly. 

The presidential elections are a simple majority vote (highest votes wins), so there is no scenario for a run-off. The votes are hand-counted (no electronic ballots) and constantly updated from 4pm local time. We should have the official results by Saturday night itself, but the result will probably be called sooner that evening from the early trend. 

We expect some economic ‘punishment’ from Chinese authorities, such as expanding import tariffs under ECFA, which could be announced next week. However, we are not expecting a step-up in military action like blockades. 

Historically, Taiwan stocks and FX have rallied modestly after elections. It may be the same this time as long as there is a clear result on the day. We are currently neutral on TWD and bearish on the fwd-fwds. 

PBoC MLF Cut, Monthly Data 

We expect the People’s Bank of China to kick off the week with a rate cut on Monday. China remains mired in deflation as the supply/demand imbalance in the Chinese economy seems to be getting worse. Rate cuts from PBoC will not change the equation much, but with real rates going higher, not cutting could make things worse.  

On Wednesday, China will print fourth-quarter GDP and December activity data will probably underline the soft conditions.  

Bank Indonesia on Hold 

We expect BI to leave its policy rate unchanged at 6% on 17 January.  

BI’s hikes this cycle have been aimed at rupiah stability – not cooling demand-pull price pressures. Indeed, Governor Perry Warjiyo said last year that domestic conditions warranted a lower interest rate, and real rates have continued to rise. We expect BI will prefer to wait till Q2 until the Fed trajectory becomes clear.  

Polish Inflation Details 

Final details of December’s CPI release in Poland and the subsequent confirmation of core should confirm the more muted pace of disinflation in core inflation versus other countries in the region. The headline is unlikely to change from the lower-than-expected 6.1% YoY and we expect core to be around 7.0%.  

But rather than the inflation details – with the NBP firmly on hold until at least March – politics will continue to dominate headlines. President Duda has said he has begun the process to pardon (for the second time) the two MPs recently arrested by the new government. The budget will also remain in focus with the end-month deadline to get it passed by parliament looming. 

Growth Data in Brazil and Mexico 

Inflation data for December in both Brazil and Mexico surprised slightly to the upside on headline, but core measures were more in line with expectations. Next week’s releases for Brazil include payrolls (Monday), retail sales (Wednesday) and GDP proxy (Thursday), while Mexico will print retail sales on Friday.  

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 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.

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.

(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.)