Key events for the week ahead – US retail sales, Fed speak, BoJ policy decision, CPI reports; Japan, Canada, UK, and the Eurozone, China GDP, Davos
Recap from last week
US CPI slowed again in Dec to +6.4% (from +7.1% in Nov). The monthly pace declined slightly. Food, core goods, and (mainly) energy prices contributed to the deceleration between Nov and Dec. The more nuanced view of CPI now taken by the FOMC is to look at underlying inflation via core services ex shelter. The closest metric, services excluding rent of shelter, accelerated from +7.3% in Nov to +7.4% in Dec but is down from the high of +8.2% in Sep.
Despite the peak in headline CPI, the Cleveland Fed core measures of median and trimmed-mean CPI are only easing slowly and remain elevated. The median CPI for Dec slowed to +6.92% from +6.98% in Nov (the peak was +7% in Oct) – and is still showing a broad persistence of inflation. Even the month change remained high BUT is on a slowing trend. The trimmed mean CPI slowed to +6.5% in Dec from +6.6% in Nov (peaked at +7.3% in Sep).
Despite persistent underlying inflation, the soft-landing narrative has quickly gained favor as headline inflation has eased amid robust labor market conditions. Fed speeches last week supported slowing the pace of hikes to 25bps in Feb but reiterated the expectation of a higher for longer policy rate setting.
Aus CPI growth was higher than expected, accelerating to +7.4% in Nov. Inflation likely remains uncomfortably high for the RBA – keeping alive further rate hike expectations. The re-set of higher mortgage rates is a concern for the RBA trying to keep the economy on “an even keel”. The Aus labor market survey for Dec is out this week – and labor market conditions are expected to remain tight. The next RBA meeting is on 6 Feb.
Outlook for the week ahead
US retail sales for Dec will gauge how consumption has been affected during this tightening cycle. US retail sales are expected to fall -0.8% in Dec. US industrial production (including manufacturing) for Dec will be important in the context of the current weakness in manufacturing surveys and falling hours. US industrial production is expected to fall by -0.1% in Dec (after a -0.2% decline in Nov). Rounding out commentary on the trajectory of the US economy this week will be US earnings.
US Fed speak; This is the last week leading up to the blackout period ahead of the FOMC meeting on 1 Feb. US Fed Vice Chair Brainard and Board of Governors member Chris Waller will both speak on the economic outlook this week. They may signal a slower pace of hikes.
The BoJ is not expected to change policy settings this week, but another adjustment can’t be completely ruled out. The BoJ is expected to review the functioning of the wider band around the 10yr yield target.
CPI data should show further easing in headline inflation rates; UK CPI is expected to ease slightly to +10.6% in Dec from +10.9% in Nov. Canada CPI is expected to ease to +6.3% in Dec from +6.8% in Nov. Euro area CPI for Dec is expected to be confirmed at +9.2%. Japan’s core CPI ex-fresh food (BoJ preferred measure) is expected to accelerate to 4% while core ex-energy & fresh food is expected to be little changed at +2.8% in Dec.
Markets will look through weaker data in the lead-up to China’s exit from the Covid-zero policy. Chinese Q4 GDP is expected to contract by -0.8% in Q4.
This week, the US Treasury will auction and settle approx. $409bn in ST Bills (including a CMB), Notes, and Bonds, raising approx. $107bn in new money.
The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – to settle on 31 Jan.
Approx $14bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $19.6bn in Notes, Bonds, TIPS, and ST Bills will mature on the Fed balance sheet this week and will be redeemed/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
