We are up for a massive week where Fed, ECB and BOE will deliver additional rate hikes, we will get employment data from the US and New Zealand, GDP and inflation data from the Eurozone and newest PMI data from China.
USD
Q4 GDP came in at 2.9% annualised vs 2.6% annualised as expected. It was at 3.2% in Q3. The details of the report are less satisfying. Consumer spending rose 2.1% vs 2.9% as expected and contributed with 1.42pp to the overall reading, down from 1.54pp in previous quarter. Net exports showed the biggest drop from previous quarter as they contributed only 0.56pp vs 2.86pp in Q3. The biggest contributor was inventory build (1.46pp) which is never a good sign as it indicates weaker consumer demand. Headline PCE inflation for December came in at 5% y/y, down from 5.5% y.y in November. Core PCE came in at 4.4% y/y as expected and down from 4.7% y/y the previous month.
The yield on a 10y Treasury started the week and year at around 3.49%, fell below 3.43%, then rebounded and finished the week at around 3.54%. The yield on 2y Treasury reached 4.23% during the week and fell below 4.14%, then rebounded and finished the week at around 4.22%. Spread between 2y and 10y Treasuries started the week at -69bp and tightened to -67bp. FedWatchTool sees the probability of a 25bp rate hike in February at 98.1% while probability of a 50bp rate hike is at 1.9%.
This week we will have ISM PMI data, Fed meeting and to cap it all we will get NFP on Friday. Fed is set to deliver 25bp rate hike and markets will be interested if they will signal a pause or more hikes are on the way. Headline NFP is expected to be around 190k with the unemployment rate ticking to 3.6%.
Important news for USD:
Wednesday:
ISM Manufacturing PMI
Fed Interest Rate Decision
Friday:
NFP
Unemployment Rate
ISM Non-Manufacturing PMI
EUR
Preliminary PMI data for the month of January showed continued improvements in all three categories in Eurozone. Manufacturing rose to 48.8, inching closer back to expansion territory. Services returned into expansion with 50.7 vs 50.2 as expected and lifted composite back into expansion with 50.2. Input prices continue to fall indicating that inflation will fall substantially in the coming months. Labour shortages continue to dominate which may lead to wage price spiral. Eurozone started the year stronger than expected thanks to the milder than expected weather which led to lower gas consumption and sharp drop in energy prices. German manufacturing and French services though showed small declines which is a cause of concern and questions the health of the economy as a whole.
This week we will have preliminary Q4 GDP and preliminary January CPI report as well as ECB meeting where a 50bp rate hike is widely expected.
Important news for EUR:
Tuesday:
GDP
Wednesday:
CPI
Thursday:
ECB Interest Rate Decision
GBP
Preliminary PMI data in January saw a big drop in services as they cam in at 48 vs 49.7 as expected and down from 49.9 in December. Manufacturing saw improvement to 46.7 from 45.5 and composite dropped to 47.8 from 49. A huge fall in services, the lowest reading since January of 2021, will put BOE at a tough spot next week. Inflation is way high, labour market is tight, all causes for another 50bp rate hike, however PMI numbers indicate that economy is slowing down significantly.
This week we will have BOE meeting. The latest poll sees 29 of 42 economists see a 50bp hike which would bring rates to 4% and see 4.25% as a terminal rate which will be reached at March meeting.
Important news for GBP:
Thursday:
BOE Interest Rate Decision
AUD
Inflation data showed no signs of slowing down as it came in higher than both expected and in Q3. Headline number was 1.9% q/q and 7.8% y/y vs 1.6% q/q and 7.5% as expected, up from 1.8% q/q and 7.3% y/y in the previous quarter. The yearly increase is highest in almost three decades. Core reading, trimmed mean, came in at 1.7% q/q and 6.9% y/y vs 1.5% q/q and 6.5% y/y as expected. February meeting will see RBA deliver a 25bp rate hike with more to hikes to come. AUD was strong well after the CPI report as markets were positioned for RBA pause in February.
This week we will get official and Caixin PMI data from China.
Important news for AUD:
Tuesday:
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
Wednesday:
Caixin Manufacturing PMI (China)
Friday:
Caixin Services PMI (China)
Caixin Composite PMI (China)
NZD
Q4 inflation data continued to run hot as it came in at 1.4% q/q and 7.2% y/y while expectations were for increases of 1.3% q/q and 7.1% y/y respectively. Accommodation services have printed a 14% y/y increase as international tourism returns. RBNZ sectoral model of CPI rose to 5.8% y/y from 5.4% y/y in Q3. Since RBNZ targets that number to be in 1-3% range we can safely say that February meeting will deliver another 50bp rate hike.
This week we will get a Q4 employment report.
Important news for NZD:
Tuesday:
Employment Change
Unemployment Rate
CAD
BOC delivered a 25bp rate hike as expected and lifted it to 4.5%. They have signalled their intention to pause as they assess the effects of previous rate hikes on the economy. The bank sees GDP at around 1% in 2023 and around 2% in 2024. Projections are that lower energy prices and higher rates will bring inflation significantly down. It should be at around 3% by the middle of the year and then at targeted 2% in 2024. Bank members acknowledged that “there is growing evidence that restrictive monetary policy is slowing activity”. At the accompanying press conference BOC Governor Macklem stated that this pause is conditional and it depends on the incoming data and economic forecast. He added that if they see that inflation is not coming down they are prepared to act further and raise interest rates. He also clarified that they are not thinking about cutting interest rates. CAD has weakened after the interest rate announcement and press conference. BOC is the first major central bank signalling pause and it will weaken investors’ interest in CAD.
JPY
Preliminary January PMI data can be taken as a positive. Manufacturing remained unchanged at 48.9, still in contraction, but services jumped to 52.4 from 51.2 in December and dragged composite back into expansion territory with 50.8 print. Japanese government has downgraded assessment of the Japanese economy in the latest monthly economic report stating “The Japanese economy is picking up moderately, although some weaknesses have been seen recently.” Tokyo area inflation data for January continued to run hot. Headline number came in at 4.4% y/y up from 4% y/y in December. Excluding fresh food category rose by 4.3% y/y which is the highest in over 40 years. Excluding fresh food, energy, the so-called core core, came in at 3% y/y up from 2.7% y/y the previous month.
CHF
SNB total sight deposits for the week ending January 20 came in at CHF531.6bn vs CHF536.2bn the previous week. After a small pause last week, total sight deposits continued to decline as SNB tweaks its policy.
