Key events this week – US PCE Price Index, US GDP Q4, Aus & NZ CPI Q4, BoC policy meeting
Recap from last week
US data was mixed last week. Consumer spending and industrial output fell in Dec, while initial jobless claims remained low. Housing data was weak, but there was some sign of stabilizing. The FOMC is likely to step down to 25bps next week.
US retail sales fell more than expected in Dec and the decline was broad-based. The decline in the 6mth annualized change of real retail sales (now -3.8%) shows the slowdown in consumer spending gathered pace in Dec.
US Industrial production data confirmed recent survey weakness. Manufacturing output declined again and has now fallen behind a year ago (-0.5% below Dec 2021 versus up by +3.8% just back in Sep). Output growth has slowed notably over each of the last three months across both durable & non-durable goods industries.
Housing data showed some stabilization in home builder sentiment, while existing home sales continued to fall, albeit at a slower pace. Existing home sales have fallen to be only +0.2% ahead of the 2020 pandemic low. Mortgage purchase applications were stronger in the latest week aided partly by slightly lower mortgage rates.
Despite the weakening Dec data, US initial jobless claims (SA) fell below the 200k/week level to +197k for the week ending 14 Jan. Continuing claims were little changed.
US Fed speeches suggested that a further slowing in the pace of hikes could be expected next week. Vice Chair Brainard noted that the recent ‘downshift’ enables the FOMC to assess more data, while also reiterating that the policy rate will need to be sufficiently restrictive for some time given high inflation. The shift to a 25bps hike was all but confirmed with a WSJ article on 22 Jan – “Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting”.
The BoJ left policy unchanged last week. Guidance remained that the BoJ “will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels”. Inflation is expected to decelerate toward the middle of the year while the median forecast for core inflation over 2023 was revised slightly higher to +1.8%. Actual core inflation (ex-fresh food & energy) increased to +3% in Dec (from +2.8% in Nov). Monthly core inflation slowed to +0.1% in Dec.
Outlook for the week ahead
US headline PCE price inflation for Dec is expected to ease from +5.5% in Nov. Core PCE is expected to ease to +4.4% in Dec from +4.7% in Nov. The advance estimate for US GDP growth in Q4 is expected to slow to an annualized pace of +2.6% (from +3.2% in Q3). Moderating inflation and growth will be important inputs for the FOMC meeting next week on 1 Feb.
Aus and NZ Q4 CPI will be released this week. Aus CPI is expected to moderate to +1.6% in Q4 but accelerate over the year to +7.5%. The next RBA meeting is on 7 Feb. NZ CPI is expected to ease slightly over the year to +7.1%. The next meeting of the RBNZ is on 22 Feb.
The BoC is expected to increase rates by a further 25bps and may then signal a pause in the hiking cycle. Inflation eased to +6.3% in Dec mainly due to lower energy prices. Core median inflation was little changed at 5% in Dec. Retail sales declined in Nov, with core retail falling the most in eleven months.
The prelim S&P PMIs for Jan 2023 will be released this week providing a gauge of global growth momentum going into the new year.
It will be another big week of US Treasury issuance. The US Treasury will auction and settle approx. $368bn in ST Bills (including another CMB) raising approx. $110bn in new money.
The US Treasury will also auction the 2, 5, and 7-year Notes and the 2yr FRN this week – to settle on 31 Jan.
Approx $18bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.3bn in 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
