Weekly Market Recap (08-12 January)

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Fed’s Logan (hawk
– non voter) over the weekend said that the Fed shouldn’t rule out another rate
hike given the recent easing in financial conditions and added that it’s
appropriate to consider a slowdown in the pace of the Fed’s balance sheet
runoff (although we knew that already from the recent FOMC Minutes):

  • We shouldn’t rule
    out rate hike given recent easing in financial conditions
    .
  • Premature easing of
    financial conditions could allow demand to pick back up.
  • If we don’t maintain
    sufficiently tight conditions, there is a risk inflation will pick back
    up, reversing progress.
  • Appropriate to
    consider parameters to guide decision to slow Fed’s balance sheet runoff
    .
  • Labor market ‘still
    tight’ but continues to rebalance.
  • Financial system
    overall has ‘more than ample’ bank reserves and liquidity, though no
    longer ‘super abundant’.
  • Inflation in a ‘much
    better place’ than last January but Fed’s job is not yet complete.
  • We should slow the
    pace of asset runoff as the Fed’s overnight reverse repurchase balances
    approach a low level
    .

Fed’s Logan

Saudi Aramco over the
weekend announced that it would cut its crude prices to all regions. The
official selling price for the Arab Light crude to Asia fell to the lowest
level in 27 months. This has renewed concerns around demand and led to a
selloff on Monday.

Saudi Aramco

The Switzerland December CPI
beat expectations:

  • CPI Y/Y 1.7% vs.
    1.5% expected and 1.4% prior.
  • CPI M/M 0.0% vs.
    -0.2% expected and -0.2% prior.
  • Core CPI Y/Y 1.5% vs.
    1.4% prior.

Switzerland CPI YoY

The Eurozone November
Retail Sales came in line with expectations:

  • Retail Sales M/M -0.3%
    vs. -0.3% expected and 0.4% prior (revised from 0.1%).
  • Retail Sales Y/Y
    -1.1% vs. -1.5% expected and -0.8% prior (revised from -1.2%).

Eurozone Retail Sales YoY

The NY Fed released its
December inflation expectations survey:

  • 1-year seen at 3.0%
    vs. 3.4% prior.
  • Three years seen at
    2.6% vs. 3.0% prior.
  • Five years seen at
    2.5% vs. 2.7% prior.
  • Median expected home
    price change 3.0% vs. 3.0% prior.

New York Federal Reserve

Fed’s Bostic (hawk –
voter) sees a soft landing ahead with much less and much later rate cuts:

  • Rise in unemployment
    would be far less than would be typical in the case given the reduction in
    inflation.
  • Fed is in a very
    strong position right now.
  • Fed can let
    restrictive policy continue to work to slow down inflation; expect the
    process will remain ‘orderly’.
  • Families are
    catching up to past price increases.
  • Pain of higher
    prices is easing, and sentiment should follow.
  • Goods inflation is
    back to pre-pandemic levels.
  • Services inflation
    is moving more slowly and not expecting big drops.
  • Many economic
    measures are back at levels seen in the years immediately before the
    pandemic.
  • At this point
    shorter-term measures of inflation, such as over three and six months, are
    more important.
    They are
    pointing in a positive direction.
  • Not comfortable
    declaring victory. Fed needs to ‘remain diligent’ and ‘short run
    attentive’.
  • Top line job numbers
    have been pretty strong.
  • The recent strength
    in jobs has been focused in a relatively small part of the economy.
  • Concentrated job
    growth means that slowing is occurring. Question is if job growth overall
    falls off a cliff.
  • Sees two quarter
    point rate cuts by the end of the year (the Fed forecast 80 basis points
    of cut in their most recent dot-plot).
  • Risks are balanced
    with employment slowing, but inflation still above target. Bias is still to stay tight.
  • Policy will still
    need to be restrictive at the end of the year, but progress on inflation
    will warrant lower rates.
  • Wants to be sure
    that inflation control is ‘really, really’ there before taking too many
    steps.
  • Outlook now is not
    for inflation to rebound, but Fed still needs to pay attention.
  • Repeats that he sees
    an initial rate cut in Q3.
  • Plans to work with
    team over the next six months to get a better view of how balance sheet
    policy should evolve.
  • Businesses say that
    hiring practices are normalizing as is the ability to pass along price
    increases.
  • Labor market risks
    are much more balanced; many sectors not showing growth.
  • Inflation and
    employment mandates are not yet in conflict.
  • Labor markets remain
    strong in the aggregate and suggest continued momentum in the economy.

Fed’s Bostic

Fed’s Bowman (hawk –
voter) basically echoed what Fed’s Logan and Fed’s Bostic said as the FOMC is
laying out the groundwork for a reduction in rates:

  • Inflation could fall
    further with policy rate held steady for some time.
  • Current policy
    stance appears sufficiently restrictive.
  • It will eventually
    become appropriate to lower Fed’s policy rate, should inflation fall
    closer to 2%.
  • Labor market supply
    and demand coming into better balance.
  • Upside inflation
    risks remain, including geopolitical and easing financial conditions
    .
  • I will remain
    cautious in my approach to considering changes to Fed policy rate.
  • Remain willing to
    raise policy rate at a future Fed meeting, should inflation progress stall
    or reverse.
  • Climate guidance
    from banking regulators diverts resources from core financial risks.

Fed’s Bowman

The Tokyo December CPI
eased further although the Core-Core measure remains stuck at cycle highs:

  • CPI Y/Y 2.4% vs. 2.6%
    prior.
  • Core CPI Y/Y 2.1% vs.
    2.1% expected and 2.3% prior.
  • Core-Core CPI Y/Y 2.7% vs. 2.7% prior.

Tokyo Core-Core CPI YoY

The Australian November Retail
Sales beat expectations by a big margin:

  • Retail Sales M/M
    2.0% vs. 1.2% expected and -0.4% prior (revised from -0.2%).
  • Retail Sales Y/Y 2.2%
    vs. 1.2% prior.

Australia Retail Sales YoY

The Switzerland December non-seasonally
adjusted Unemployment Rate ticked higher:

  • Unemployment Rate non
    s.a. 2.3% vs. 2.1% prior.
  • Unemployment Rate s.a.
    2.2% vs. 2.2% expected and 2.1% prior.

Switzerland Unemployment Rate non s.a.

The Eurozone November
Unemployment Rate ticked lower:

  • Unemployment Rate 6.4%
    vs. 6.5% expected and 6.5% prior.

Eurozone Unemployment Rate

The December US NFIB
Small Business Optimism Index improved:

  • NFIB 91.9 vs. 90.6 prior.

This is
the 24th straight month that the index remains below the 50-year moving average
of 98. NFIB notes that small businesses remain very pessimistic about the
outlook coming into this year, with 23% of firms reporting inflation to be
their single-most important problem in business operations – up 1% from
November. Adding that while 2023 is now “in the rearview mirror, it will
weigh heavily on the 2024 economy”.

US NFIB Small Business Optimism Index

ECB’s Villeroy (neutral –
voter) just repeated what we already knew:

  • Barring any
    surprises, 2024 will be the year of our first rate cut.
  • Our decision will be
    based on data.
  • ECB will not be
    stubborn; we won’t be rushed.
  • We will cut rates
    this year when inflation expectations are solidly anchored at 2%.

ECB’s Villeroy

ECB’s Centeno (dove – non
voter) expects rate cuts to come sooner than expected due to a fast easing in
inflationary pressures:

  • Should not wait
    until May to make a decision.
  • There are no signs
    of additional pressure on inflation
    .
  • Rates have peaked.
  • Expects inflation to
    have fallen to target in Q2.
  • The decision to keep
    nominal rates steady for the moment is appropriate and we will decide when
    to cut them sooner than we thought until recently.
  • I can’t say when,
    but I can … say the most recent developments on inflation and the
    economy have obviously brought the moment of easing (of monetary policy)
    closer.

ECB’s Centeno

The Japanese November Wage
data came in much lower than expected which led to a strong selloff in the Yen
and a rally in the Nikkei index:

  • Average Cash Earnings Y/Y
    0.2% vs. 1.5% expected and 1.5% prior.
  • Real wages Y/Y -3.0%.

Japan Average Cash Earnings YoY

The Australian December Monthly
CPI missed expectations:

  • CPI Y/Y 4.3 vs. 4.4%
    expected and 4.9% prior.
  • CPI M/M 0.4%.
  • Trimmed Mean CPI Y/Y
    4.6% vs. 5.3% prior.

Australia Monthly CPI YoY

Houthi terrorists launched the biggest attack to
date on merchant vessels in Red Sea. The U.S. Navy officials told CNBC that four warships
from Operation Prosperity Guardian were engaged in the fighting and
approximately 50 merchant vessels were in the area of the attack. Meanwhile,
shipping costs continue to rise as we see a rerouting of vessel traffic.

Red Sea

ECB’s de Guindos (neutral – voter) sees
disinflation slowing in the beginning of the year and added that economic
prospects are skewed to the downside:

  • Rapid pace of
    disinflation likely to slow down this year.
  • Disinflation process
    to pause temporarily at the beginning of the year.
  • Growth developments
    are more disappointing.
  • Incoming data
    indicate that future remains uncertain, prospects tilted to the downside.

ECB’s de Guindos

ECB’s Schnabel (neutral – voter) maintained her
neutral stance and added that it’s too early to discuss rate cuts:

  • There is evidence
    that sentiment indicators are bottoming out.
  • The near-term
    economic outlook remains weak in line with our projections.
  • Financial conditions
    have loosened more than projected
    , while energy prices have been weaker.
  • The drop in
    unemployment to a historical low confirms continued strong resilience in
    labour markets, which is broadly in line with the December 2023 staff
    projections.
  • As inflation falls,
    we continue to expect a gradual decline in wage growth in 2024.
  • Markets understand
    well that our policy is data-dependent, and we have clearly defined the
    elements of our reaction function.
  • Our projections
    foresee inflation reaching our 2% target in 2025. So, we are on the right
    track. Geopolitical tensions are one of the upside risks to inflation as
    they could drive up energy prices or freight costs.
    That’s why we need to remain vigilant.
  • It’s too early to discuss
    rate cuts.
  • We expect inflation
    to reach 2% in 2025 and project that we can achieve this without causing a
    deep or prolonged recession.

ECB’s Schnabel

BoE’s Bailey (neutral – voter) just highlighted
the strength of the labour market and how it helped to weather the impact of
higher rates:

  • It’s important to
    return UK inflation to target.
  • The UK hasn’t seen a
    jump in unemployment.
  • UK household incomes
    have risen in recent months.
  • These factors
    mitigate impact of higher rates
    .
  • The events in the
    Middle East haven’t yet had a big economic impact, watching closely.

BoE’s Governor Bailey

Fed’s Williams (neutral – voter) maintained his
neutral stance highlighting the need to keep a restrictive policy for some
time:

  • Our work to bring
    inflation back to 2% is not done.
  • Fed can cut rates
    when confident inflation moving to 2%.
  • Fed will need
    restrictive policy stance for some time.
  • Outlook still
    uncertain, rate decision to be made meeting-by-meeting.
  • Rare decisions will
    be driven by totality of data.
  • Risks to economy are
    two sided.
  • In 2024 sees GDP at
    around 1.25%, unemployment at 4%.
  • Sees inflation
    ebbing to 2.25% in 2024, and 2% in 2025.
  • Things are looking
    very good on jobs front.
  • Inflation situation
    has improved quite a bit.
  • Fed sees
    ‘meaningful’ progress in restoring economic balance.
  • Balance sheet wind
    down working as planned.
  • Fed not near point
    where banking sector liquidity is scarce.
  • We’re watching both
    hard and anecdotal data for economic clues.
  • Fed must be ready to
    react to unexpected events.
  • Inflation has been
    coming down pretty quickly.
  • 2023 big surprise
    was the speed of inflation retreat.
  • Rate cut prospects
    tied to how economy performs.
  • Not worried
    inflation will get stuck at a high level.
  • Fed in ‘good place,’
    has time to think about what’s next for rates.
  • Fed policy is still
    quite restrictive.
  • Eventually Fed needs
    to get policy back to more neutral levels.
  • Not surprised to see
    some money market rate volatility.
  • Money market
    volatility has not affected fed funds rate.
  • Demand for reserves
    likely higher now relative to past.
  • Fed needs to think
    this year about balance sheet end game.
  • Not caught up in
    every twist of financial market shift.
  • Financial markets
    highly reactive to new data.

Fed’s Williams

The SEC has finally
approved the Spot Bitcoin ETFs which began trading on Thursday.

Bitcoin

ECB’s de Cos (dove – voter) highlighted the
risks around monetary policy stance, economic growth and inflation:

  • Economic activity
    has continued to show clear weakness and is only expected to increase its
    degree of dynamism gradually.
  • In the third
    quarter, GDP decreased by 0.1% and available indicators suggest stagnation
    in the fourth.
  • Risks to economic
    growth remain skewed to the downside.
  • The recent slowdown
    in prices is expected to continue in the coming quarters.
  • Although in 2024 the
    decline will be slower due to upward base effects and the gradual
    withdrawal of fiscal measures adopted during the energy crisis.
  • In addition to
    geopolitical developments, the transmission of monetary policy has been surprising
    us for its strength, which, if extended in the coming years, would
    translate into lower growth.
  • We’ll have to pay
    attention in the coming months to different developments that may
    condition the trajectory of inflation and, therefore, our monetary policy
    action.
  • The high level of
    uncertainty means that we must remain very vigilant to avoid both
    insufficient tightening, which would prevent the achievement of our
    inflation target, and excessive tightening, which would unnecessarily harm
    activity and employment
    .

ECB’s de Cos

Jiji reported that the BoJ is considering
lowering the price outlook for fiscal year 2024 to middle 2% range. In the
latest outlook report for October last year, the BoJ noted the projection for
prices for the fiscal year 2024 to be around 2.7% to 3.1%.

BoJ

The December US CPI report beat expectations:

  • CPI Y/Y 3.4% vs.
    3.2% expected and 3.1% prior.
  • CPI M/M 0.3 vs. 0.2%
    expected and 0.1% prior.
  • Core CPI Y/Y 3.9%
    vs. 3.8% expected and 4.0% prior.
  • Core CPI M/M 0.3%
    vs. 0.3% expected and 0.3% prior.
  • Shelter M/M 0.4% vs.
    0.4% prior.
  • Shelter Y/Y 6.2% vs.
    6.5% prior.
  • Services less rent
    of shelter M/M 0.6% vs. 0.6% prior.
  • Core services ex
    housing M/M 0.4% vs. 0.4% prior.
  • Real weekly earnings
    -0.2% vs. 0.5% prior.

US Core CPI YoY

The US Jobless Claims beat expectations across
the board:

  • Initial Claims 202K
    vs. 210K expected and 203K prior (revised from 202K).
  • Continuing Claims
    1834K vs. 1871K expected and 1855 prior (revised from 1868K).

US Jobless Claims

Fed’s Mester (hawk – voter) said that the
December CPI report didn’t change her view and that a rate cut in March is too
early:

  • December CPI report
    shows the job is not done yet.
  • Today’s inflation
    report doesn’t change my view on where the Fed is headed.
  • Forecasts that we
    will continue to see inflation fall this year.
  • We will not get to
    2% target this year.
  • The Fed is in a good
    spot to assess as data comes in.
  • This report doesn’t
    tell us that inflation progress has stalled out, but it tells us we have
    more work to do.
  • Contacts say labour
    market is still tight but not as tight as before.
  • March is too early
    for rate cuts, in my estimation
    .
  • We are not there yet
    to cut rates; we want more evidence the economy is progressing as expected.

Fed’s Mester

Fed’s Barkin (neutral – voter) is not yet
convinced that inflation is heading back to target as he would like to see a
broader improvement:

  • I’m looking to be
    convinced that inflation is headed to target.
  • Improvement on
    inflation is still pretty narrow and focused on goods.
  • Says he’s open to
    lowering rates once inflation is on track to 2%.
  • Conceivable that
    banks want to hold more liquidity than they did before the pandemic.
  • Still seeing
    moderation in overall level of inflation but still a ‘disconnect’ with
    services and shelter.
  • Would have more
    confidence if improvement in inflation was broader.
  • Progress on goods
    has been encouraging and could make the case that it could continue.
  • Some businesses in service
    sector have found they have pricing power and will not give it up until
    there is pushback from consumers and competitors.

Fed’s Barkin

ECB’s Lagarde (neutral – voter) didn’t offer
anything new on the policy outlook as she just reaffirmed that rates have
reached their peak and she cannot give a date on when interest rates may go
down:

  • We are winning a
    battle at the moment.
  • I think we have
    passed the hardest and worst bit of inflation
    .
  • That doesn’t mean we
    will have a smooth inflation decline.
  • I see eurozone
    inflation at 1.9% in 2025.
  • I cannot give a date
    when interest rates may go down
    .
  • I think rates have
    reached their peak.

ECB’s President Lagarde

Fed’s Goolsbee (dove – non voter) echoed his
colleagues in calling the December CPI report as close to their expectations
and therefore not a gamechanger:

  • December services
    inflation was a little more favourable than expected.
  • 2023 was a ‘hall of
    fame’ year on inflation reduction.
  • Overall CPI
    inflation in December was pretty close to what was expected.
  • Housing inflation
    was a little less favourable than expected.
  • Persistently high
    shelter inflation CPI may have less implication for Fed’s personal
    consumption expenditures target.
  • Inflation will be
    the primary determinant of when and how much interest rates should be cut.
  • The Fed still has
    weeks and months of data to come.
  • Can’t answer the
    question of what we’ll do at March meeting without data.
  • Fed so far is on
    golden path, though it could be derailed.
  • Unlike a year ago,
    the risks to golden path are on both sides.
  • Risks include
    persistent housing inflation, potential supply shocks.

Fed’s Goolsbee

The US and UK launched strikes from the air and
the sea against Houthi military targets in Yemen in response to the attacks on
ships in the Red Sea. The United States Embassy in Iraq was bombed shortly
after reports that the United States and Britain had begun striking Houthi
targets in Yemen. Crude oil prices started to climb in the aftermath with the
market fearing a larger escalation.

Yemen

The Chinese December CPI report missed
expectations:

  • CPI Y/Y -0.3 vs. -0.4%
    expected and -0.5% prior.
  • CPI M/M 0.1% vs. 0.2%
    expected and -0.5% prior.
  • Core CPI Y/Y 0.6% vs.
    0.6% prior.
  • Core CPI M/M 0.1% vs. -0.3% prior.

China CPI YoY

The UK November Monthly GDP beat expectations:

  • GDP 0.3% vs. 0.2%
    expected and -0.3% prior.
  • Services output M/M
    0.4%.
  • Industrial output M/M 0.3%.
  • Manufacturing output M/M 0.4%.
  • Construction output M/M -0.2%.

UK Monthly GDP

The US December PPI report missed expectations
across the board:

  • PPI Y/Y 1.0% vs.
    1.3% expected and 0.8% prior (revised from 0.9%).
  • PPI M/M -0.1% vs. 0.1%
    expected and -0.1% prior (revised from 0.0%).
  • Core PPI Y/Y 1.8% vs.
    1.9% expected and 2.0% prior.
  • Core PPI M/M 0.0% vs.
    0.2% expected and 0.0% prior.

US PPI YoY

The highlights for next week will be:

  • Monday: PBoC MLF, US Markets
    closed for MLK Day, BoC Business Outlook Survey.
  • Tuesday: UK Labour Market
    report, Canada CPI.
  • Wednesday: China Industrial
    Production and Retail Sales, UK CPI, US Retail Sales, US Industrial Production,
    US NAHB Housing Market Index.
  • Thursday: Australian Labour
    Market report, US Building Permits and Housing Starts, US Jobless Claims, New
    Zealand Manufacturing PMI.
  • Friday: Japan CPI, UK Retail
    Sales, Canada Retail Sales, US University of Michigan Consumer Sentiment.

That’s all folks. Have a nice weekend!

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