Key events this week – US retail sales & housing data, US Fed Governor Waller speech, CPI; Japan, UK, Eurozone, and Canada
Recap from last week
Speeches by Fed officials reiterated that a range of policy outcomes were still possible – pushing back on markets and the degree of easing so far priced in. The message from Dallas Fed President Logan (speech here) and NY Fed President Williams (speech here); there has been ‘meaningful’ progress on inflation, and data is moving in the right direction, however, we are still ‘a ways from our price stability goal’ and will need to keep a sufficiently restrictive stance ‘for some time’ to ‘fully achieve’ the 2% inflation target. Some frustration was expressed around the easing of financial conditions potentially making the job harder to bring down inflation.
Both Williams and Logan discussed the path of QT suggesting that changes to QT may be on the table, however, Williams pushed back on an imminent need to slow the pace of QT.
US CPI came in slightly higher than expected – indicating less progress on inflation this month. US headline CPI was +3.3% in Dec, up slightly from +3.1% in Nov. Core CPI eased to +3.9% from +4% in Nov. Parts of underlying/core inflation have stayed stickier this month (shelter). The trimmed mean inflation slowed to +3.9% over the year, as the monthly pace accelerated to +0.35% in Dec. The PPI report for Dec reflected faster easing in some prices with final demand prices falling by -0.1% over the month and staying at around +1% over the year. Core PPI also came in lower than expected. The PPI result suggests that the upcoming PCE price index (Fed preferred inflation measure) is likely to continue to improve in Dec.
After the US CPI and PPI reports, markets were pricing rate cuts to start in Mar with potentially seven further rate cuts through the year (source; CME at 15 Jan).
Outlook for the week ahead
So far, the tightening cycle in the US has correlated with an easing in the supply/demand imbalance in the labor market and a more rapid improvement in inflation over the last six months. Growth has slowed from the fast pace of Q3 but is still tracking at around +2.2% for Q4 (latest Atlanta Fed GDPNow 10 Jan). The focus this week shifts to US retail sales and housing data to round out the growth picture at the end of 2023.
US retail sales are expected to increase by +0.4% in Dec, up from +0.3% in Nov.
Housing market data for Dec is expected to show further stabilization in activity as mortgage rates remain below recent peaks. New housing permits are expected to increase to 1.47m (SAAR basis) and housing starts are expected to be somewhat lower at 1.415m (SAAR). Existing home sales are expected to increase slightly to 3.83m on an annualized basis.
There will be a range of Fed speeches throughout the week. The focus will be on Fed Governor Waller speaking on the Economic Outlook at the Brookings Institution. The Q&A from his Nov speech (“Something appears to be giving”- here) was notable for suggesting that if inflation continues falling for several more months, the policy rate could be lower. Waller was unsure whether the FOMC had done enough to achieve price stability, and noted that “data we receive over the next couple of months will help answer that question”. We’ll be looking to Governor Waller this week to review the data since that speech, especially the latest inflation numbers, and what he thinks it means for the path of policy, in preparation for the FOMC meeting at the end of Jan.
The path of inflation remains a key focus outside of the US with CPI reports for; Canada, the UK, the Euro Area (final release), and Japan. Inflation is expected to continue to ease.
The Aus labor market survey for Dec will be released this week. Net employment growth is expected to slow to +16k in Dec, from +61k in Nov. The unemployment rate is expected to stay unchanged at 3.9% while participation is expected to fall slightly.
Growth data out of China will also be in focus with Q4 GDP, industrial production and retail sales for Dec to be released this week.
This week, the US Treasury will auction and settle approx. $539bn in ST Bills, Notes, and Bonds raising approx. $29bn in new money. The US Treasury will also auction the 10-year TIPS and the 20-year Bond this week – to settle at the end of the month.
QT this week: Approx $9.3bn in ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $27.4bn in ST Bills, Notes, Bonds, and TIPS will mature and roll off the Fed balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
