Weekly Market Recap (08-12 January)

Monday

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.

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.

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.

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%).

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.

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.

Tuesday

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.

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.

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.

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.

The Eurozone November Unemployment Rate ticked lower:

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

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".

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 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.

Wednesday

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%.

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.

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.

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 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.

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.

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.

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

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.

Thursday

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%.

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.

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).

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 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.

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.

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.

Friday

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.

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.

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%.

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.

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! This article was written by Giuseppe Dellamotta at www.forexlive.com.