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Weekly Market Recap (11-15 December)

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China’s inflation
data over the weekend surprised to the downside as the economy continues to
face deflationary pressures:

  • CPI Y/Y -0.5% vs.
    -0.1% and -0.2% prior.
  • CPI M/M -0.5% vs.
    -0.1% expected and -0.1% prior.
  • Core CPI Y/Y 0.6%
    vs. 0.6% prior.
  • Core CPI M/M -0.3% vs. 0.0% prior.
  • PPI Y/Y -3.0% vs.
    -2.8% expected and -2.6% prior.

China Core CPI YoY

The November New York Fed
survey for inflation expectations showed the 1 year ahead expectations falling
but the 3 and 5 years ahead remaining unchanged:

  • One year seen at
    3.4% vs. 3.6% prior.
  • Three year ahead
    unchanged at 3%.
  • Five year ahead
    unchanged at 2.7%.
  • Respondents see
    moderating wage growth.
  • Rent seen at 8% vs.
    9.1% prior.

New York Federal Reserve

The Japanese PPI for
November beat expectations:

  • PPI Y/Y 0.3% vs.
    0.1% expected and 0.8% prior.
  • PPI M/M 0.2% vs.
    0.2% expected and -0.4% prior.

Japan PPI YoY

The UK Labour Market
report showed a steady unemployment rate with lower-than-expected wage growth
and job losses in November:

  • November Payrolls
    Change -12K vs. 39K prior (revised from 33K).
  • October ILO
    unemployment rate 4.2% vs. 4.2% expected and 4.2% prior.
  • October employment
    change 50K vs. 54K prior.
  • Average weekly
    earnings 7.2% vs. 7.7% expected and 8.0% prior (revised from 7.9%).
  • Average weekly
    earnings ex-bonus 7.3% vs. 7.4% expected and 7.8% prior (revised from
    7.7%).

UK Unemployment Rate

The US NFIB Small
Business Optimism Index fell further in November:

  • NFIB 90.6 vs. 90.7 prior.

This is
the 23rd straight month that the index is below its 50-year average of 98. It
reinforces the notion that small business sentiment is still rather languishing
but not really pointing to any major recession-like signals at least. One thing
to note is that NFIB says the net percentage of firms increasing employment has
been negative since March, with more firms decreasing jobs than adding them.

US NFIB Small Business Optimism Index

The US CPI for November
came in line with expectations:

  • CPI Y/Y 3.1% vs.
    3.1% expected and 3.2% prior.
  • CPI M/M 0.1% vs.
    0.0% expected and 0.0% prior.
  • Core CPI Y/Y 4.0%
    vs. 4.0% expected and 4.0% prior.
  • Core CPI M/M 0.3% vs.
    0.3% expected and 0.2% prior.
  • Shelter 0.4% vs.
    0.3% prior.
  • Services less rent
    of shelter M/M 0.6% vs. 0.3% prior.
  • Core services ex-housing
    M/M 0.44%.
  • Real weekly earnings
    0.5% vs. -0.1% prior.

US Core CPI YoY

The UK October monthly
GDP contracted more than expected:

  • October GDP -0.3%
    vs. 0.0% expected and 0.2% prior.
  • GDP Y/Y 0.3% vs.
    0.6% expected and 1.3% prior.
  • Services output M/M -0.2%
    vs. 0.0% expected and 0.2% prior.
  • Industrial output M/M
    -0.8% vs. -0.1% expected and 0.0% prior.
  • Manufacturing output
    M/M -1.1% vs. 0.0% expected and 0.1% prior.
  • Construction output
    M/M -0.5% vs. -0.2% expected and 0.4% prior.

UK Monthly GDP

The Eurozone Industrial
Production for October missed expectations by a big margin:

  • Industrial Production Y/Y
    -6.6% vs. -4.6% expected and -6.8% prior (revised from -6.9%).
  • Industrial Production M/M
    -0.7% vs. -0.3% expected and -1.0% prior (revised from -1.1%).

Eurozone Industrial Production YoY

The US PPI for November
missed expectations across the board:

  • PPI Y/Y 0.9% vs. 1.0% expected and 1.2% prior
    (revised from 1.3%).
  • PPI M/M 0.0% vs. 0.1% expected and -0.4% prior
    (revised from -0.5%).
  • Core PPI Y/Y 2.0% vs. 2.2% expected and 2.3%
    prior (revised from 2.4%).
  • Core PPI M/M 0.0% vs. 0.2% expected and 0.0%
    prior.

US Core PPI YoY

The Federal Reserve kept
interest rates unchanged at 5.25-5.50% with a couple of dovish tweaks to the
statement:

  • “Recent indicators
    suggest that growth of economic activity expanded at strong pace in the
    third quarter” was changed into “has slowed from its strong pace in
    the third quarter”.
  • “In determining the
    extend of additional policy firming that may be appropriate” was changed
    into “the extent of any additional policy firming that may be
    appropriate”.

The Fed has also released
its Summary of Economic Projections (SEP) where it revised growth and inflation
down in 2024 but kept the unemployment rate unchanged (soft landing). The Dot
Plot was revised to show the peak rate in 2024 at 4.6% which translates into 3
rate cuts vs. 2 that were expected.

FOMC December SEP

Moving on to the Press
Conference, Fed Chair Powell did not push back against rate cuts expectations,
on the contrary, he said that they started to discuss rate cuts and that
they are focused on not making that mistake of holding high rates for too
long
, which suggests that a rate cut might come soon:

  • Path forward is
    uncertain. Full effects of tightening to come.
  • Growth in economic
    activity has slowed substantially
    .
  • Given how far we’ve
    come, and given uncertainties, we are proceeding carefully.
  • Inflation has eased
    with a significant rise in unemployment.
  • Labor demand still
    exceeds supply, but gap has narrowed.
  • Wage growth appears
    to be easing
    .
  • Activity in housing
    sector has flattened out.
  • Higher interest
    rates also weighing on business fixed investment.
  • Lower inflation
    readings are welcome, but we will need to see further evidence.
  • We anticipate that
    the process of getting inflation all the way to 2% will take time.
  • We’re highly
    attentive to the risks that high inflation poses to both sides of our
    mandate.
  • We believe that
    we’re at or near peak rates in this cycle.
  • We are prepared to
    tighten further if appropriate.
  • Will keep policy
    restrictive until confident on path to 2% inflation.
  • Officials don’t want
    to keep possibility of hikes off the table.

Q&A:

  • Noted that officials
    talked about path for cuts today and there was a general acknowledgement
    that more of that talk will be coming
    .
  • Far too early to
    declare a soft landing.
  • I have always felt
    there was a possibility economy would avoid recession.
  • There’s always a
    possibility of recession next year.
  • Little basis for
    thinking there’s a recession now.
  • There was a general
    expectation that rate cuts will be a topic of conversation going forward
    .
  • We are pleased with
    progress but need to see further progress on inflation.
  • Fair to say that
    there is a lot of uncertainty.
  • There is a
    back-and-forth with market pricing.
  • In the long run,
    it’s important that market conditions become aligned with policy.
  • People will have
    different forecasts on economy.
  • We’re still well
    above 3% on core PCE.
  • We’re very focused
    on “not making that mistake” of holding high rates too long
    .

Fed Chair Powell

The New Zealand GPD for
Q3 missed expectations by a big margin with negative revisions to the prior
figures:

  • Q3 GDP Q/Q -0.3% vs. 0.2%
    expected and 0.5% prior (revised from 0.9%).
  • Q3 GDP Y/Y -0.6% vs. 0.5%
    expected and 1.5% prior (revised from 1.8%).

New Zealand Q3 GDP

The Australian Labour
Market report for November beat expectations with the unemployment rate rising
more than expected although the participation rate ticked much higher:

  • Employment change 61.5K vs. 11.0K expected and 42.7K prior (revised from
    55.0K).
  • Unemployment rate 3.9% vs. 3.8% expected and 3.8% prior (revised from
    3.7%).
  • Participation rate 67.2%
    vs. 66.9% expected and 67.0% prior.
  • Full-time employment 57.0K vs. 10.7K prior (revised from 17.0K).
  • Part-time employment 4.5K
    vs. 32.0K prior (revised from 37.9K).

Australia Unemployment Rate

The SNB left interest
rates unchanged at 1.75% as expected but removed the line that said “it cannot
be ruled out that further tightening may become necessary”:

  • Will
    adjust monetary policy if necessary to ensure inflation remains in range
    consistent with price stability over the medium-term.
  • Willing to be active in FX market as necessary.
  • 2023
    inflation seen at 2.1% (prior 2.2%).
  • 2024
    inflation seen at 1.9% (prior 2.2%).
  • 2025
    inflation seen at 1.6% (prior 1.9%).

SNB

Moving on to the Press
Conference, Chairman Jordan clearly stated that the central bank is done with
the tightening cycle and added that they will look at inflation very closely
when making next decision, so if inflation continues to drop, we can expect a
rate cut:

  • We are no longer
    focusing on forex sales.
  • Inflation pressures
    have decreased slightly but uncertainty remains high.
  • Swiss inflation
    likely to rise in the coming months.
  • Assessment for
    upside and downside risks for inflation are currently balanced.
  • Will adjust monetary
    policy if necessary to keep within price stability goal.
  • We believe monetary
    conditions are appropriate at the moment
    .
  • We do not forecast
    any tightening given the forecasts so far.
  • Will adapt policy to
    contain inflation within price stability target.
  • Will look at
    inflation very closely when making next decision
    .

SNB’s Chairman Jordan

The BoE left interest
rates unchanged at 5.25% as expected, but did not add any dovish language
as they reaffirmed that they would keep policy restrictive for sufficiently
long
and further tightening will be required if there were evidence of more
persistent inflationary pressures:

  • Bank rate vote 6-3
    vs. 6-3 expected (Greene, Haskel, Mann voted to raise by 25 bps).
  • The decision to hike
    or to hold was again “finely balanced”.
  • Still some way to go
    on inflation.
  • To take necessary
    decisions to get inflation all the way back to 2%.
  • Policy will need to
    be sufficiently restrictive for sufficiently long.
  • Most policymakers
    say it is too early to conclude that services inflation or pay growth are
    on a firmly downward path.
  • Further tightening
    in monetary policy would be required if there were evidence of more
    persistent inflationary pressures.
  • Sees inflation just
    under 4.5% by year-end (previously 4.75%).

BoE

Moving on to the Press Conference,
Governor Bailey pushed back against the market’s rate cuts pricing but what
central bankers are saying is falling on deaf ears now:

  • We cannot say that
    interest rates have peaked
    .
  • Markets form their
    own view.
  • We are more cautious
    than markets.
  • It’s really too
    early to start speculating about rate cuts.
  • There is more to do
    on bringing inflation down to target.
  • But there are
    encouraging signs on inflation.

BoE’s Governor Bailey

The ECB left the deposit
rate unchanged at 4.0% as expected with no dovish tweak as they maintain the
usual data-dependent language:

  • Main refinancing
    rate 4.50% vs. 4.50% prior.
  • Deposit facility
    rate 4.00% vs. 4.00% prior.
  • Marginal lending
    facility 4.75% vs. 4.75% prior.
  • Inflation has
    dropped in recent months but likely to pick up against temporarily in the
    near-term.
  • Past rate hikes are
    continuing to be transmitted forcefully to the economy.
  • Tighter financing
    conditions are dampening demand, and this is helping to push down
    inflation.
  • Expects economic
    growth to remain subdued in the near-term.
  • Future decisions
    will ensure that rates will be set at sufficiently restrictive levels for
    as long as necessary.
  • To continue a
    data-dependent approach in determining the appropriate level and duration
    of restriction.
  • Rate decisions will
    be based on assessment of the inflation outlook in light of incoming
    economic, financial data.
  • ECB intends to
    discontinue reinvestments under the PEPP at the end of 2024.
  • 2023 inflation seen at 5.4% (previously 5.6%).
  • 2024 inflation seen at 2.7% (previously 3.2%).
  • 2025 inflation seen at 2.1% (previously 2.1%).
  • 2026 inflation seen at 1.9%.

ECB

Moving on to the Press
Conference, President Lagarde highlighted the uncertainty around inflation and
the risks to economic growth. Moreover, she pushed back against rate cuts
expectations as she said that they did not discuss rate cuts at all and
stressed that their projections are conditions on data from November
, so
they may have a different view now:

  • Inflation decline
    was broad based.
  • Inflation to
    increase in December due to base effects but will decline slowly
    afterwards.
  • All measures of underlying
    inflation declined in October.
  • Underlying measures
    of inflation rose due to wage growth and falling productivity.
  • Most measures of
    longer-term inflation expectations currently stand at around.
  • The risks to
    economic growth remain tilted to the downside.
  • The prospects are
    weak for construction and manufacturing.
  • Services to soften.
  • We are determined to
    make sure inflation returns to our 2% inflation target in the medium term.

Q&A:

  • We need to see more
    data on wages
    .
  • When we look at wage
    data right now, it’s not declining.
  • We will have a lot
    more data in 2024 and we need that to determine if declining inflation is
    sustainable.
  • We have to keep our
    guard up.
  • Decision on PEPP was
    shared by a “very, very large majority”. Some would have liked a
    different taper, earlier or later.
  • We did not discuss
    rate cuts at all
    .
  • We are at the
    medium-term target that we set for ourselves of reaching the 2% at the end
    of our projection. We are probably a bit severe with ourselves. We
    are going to look very carefully at the end of 2025, where we’re at 2.1%
    right now. The projections we have now are conditions on data from Nov
    23
    .
  • We will be looking
    at our three criteria in the months ahead.
  • There are signs of
    reduced profit margins suggesting that companies are finally absorbing the
    input and wage increases which would be good news going into 2024.

ECB’s President Lagarde

The US Retail Sales for
November beat expectations across the board:

  • Retail sales M/M
    0.3% vs. -0.1% expected and -0.2% prior (revised from -0.1%).
  • Retail sales Y/Y
    4.1% vs. 2.2% prior (revised from 2.5%).
  • Ex-autos 0.2% vs.
    -0.1% expected and 0.1% prior.
  • Control group 0.4%
    vs. 0.2% expected and 0.2% prior.
  • Retail sales ex gas
    and autos 0.6% vs. 0.1% prior.

US Retail Sales YoY

The US Jobless Claims
beat expectations across the board:

  • Initial Claims 202K
    vs. 220K expected and 221K prior (revised from 220K).
  • Continuing Claims
    1876K vs. 1887K expected and 1856K prior (revised from 1861K).

US Jobless Claims

The New Zealand
Manufacturing PMI for November jumped higher although it remains in
contraction:

  • Manufacturing PMI 46.7
    vs. 42.5 prior.

New Zealand Manufacturing PMI

The Australian PMIs
improved in December although they remain in contraction:

  • Manufacturing PMI 47.8
    vs. 47.7 prior.
  • Services PMI 47.6 vs.
    46.0 prior.

Australia Manufacturing PMI

The Japanese PMIs for
December saw once again Manufacturing falling and Services rising:

  • Manufacturing PMI 47.7
    vs. 48.3 prior.
  • Services PMI 52.0 vs.
    50.8 prior.

Japan Manufacturing PMI

The PBoC kept the MLF
rate unchanged at 2.5% as expected.

PBoC

The Chinese Industrial
Production for November beat expectations:

  • Industrial Production Y/Y
    6.6% vs. 5.6% expected and 4.6% prior.

China Industrial Production YoY

The Chinese Retail Sales
for November missed expectations:

  • Retail Sales Y/Y 10.1%
    vs. 12.5% expected and 7.6% prior.

China Retail Sales YoY

ECB’s Muller (hawk –
voter) pushed back against rate cuts expectations:

  • Too early to talk
    about rate cuts in the near-term.
  • Too early to
    celebrate victory over inflation.
  • Still a little bit
    to go to reach 2% inflation target.

ECB’s Muller

ECB’s Villeroy (neutral –
voter) acknowledged that the economy is slowing faster than expected and added
that the next move will be rate cuts as the ECB has ended its tightening cycle:

  • Nobody suggested
    rate cuts at latest meeting
    .
  • We will bring
    inflation back down to 2% target by 2025.
  • Important signal
    yesterday was the changed inflation outlook.
  • Monetary policy
    transmission is slightly faster than initially expected.
  • We are on a plateau,
    “have to take the time to enjoy the view”.
  • Will be guided by
    data when determining next policy steps.
  • Next policy move
    should be lowering rates barring any surprises.
  • Europe will be
    spared from a recession, the same applies to France.

ECB’s Villeroy

The Eurozone PMIs for December
missed expectations across the board:

  • Manufacturing PMI
    44.2 vs. 44.6 expected and 44.2 prior.
  • Services PMI 48.1
    vs. 49.0 expected and 48.7 prior.

Eurozone Manufacturing PMI

The UK PMIs for December
missed expectations on the Manufacturing side but beat on the Services one:

  • Manufacturing PMI
    46.4 vs. 47.5 expected and 47.2 prior.
  • Services PMI 52.7
    vs. 51.0 expected and 50.9 prior.

UK Manufacturing PMI

ECB’s Holzmann (hawk –
non voter) pushed back against rate cuts expectations:

  • There was no
    discussion of a change to rates at latest meeting.
  • Majority said there
    are risks to the upside on inflation
    .
  • For most of us, core
    inflation is what we are looking at.
  • Wouldn’t say we are
    at terminal rate, but the chance has increased.

ECB’s Holzmann

Fed’s Williams (neutral –
voter) pushed back a little on the aggressive market’s pricing as he said that
it’s premature to be even thinking about March cuts. He maintained a generally
neutral stance but the damage has been already done and the market will need
facts to change its pricing and not just words:

  • The question is:
    Have we gotten monetary policy to a sufficiently restrictive stance,
    that’s what we’re thinking about.
  • We’re focused on
    whether interest rates are in the right place.
  • We aren’t really
    talking about rate cuts right now.
  • The base case is
    good, inflation is down.
  • It’s looking like
    we’re at or near ‘sufficiently restrictive’ but things can change.
  • We need to be ready
    to tighten further if progress on inflation were to stall.
  • The market reaction
    to all kinds of news has had a pattern of being larger than normal.
  • The view of the
    committee is a gradual removal of policy easing over the next three years.
  • The market reaction
    has gone further than our predictions.
  • If we get the
    progress I’m hoping to see, it will be natural to cut.
  • Of course, we need
    to move policy back to more-normal levels over a period of time.
  • It’s premature to be
    even thinking about March cuts.
  • The question we’re
    thinking about is ‘do we have the level of rates right’.
  • Right now, we’re
    seeing everything around QT and balance sheet working as intended.
  • Not ready to say
    when balance sheet wind down stops.
  • Financial conditions
    have tightened in the big picture (despite drop in 10y yields).

Fed’s Williams

The US Industrial Production
for November missed expectations across the board:

  • Industrial Production
    M/M 0.2% vs. 0.3% expected and -0.9% prior (revised from -0.6%).
  • Manufacturing output
    M/M 0.3% vs. 0.4% expected and -0.8% prior (revised from -0.7%).
  • Capacity utilization 78.8% vs. 79.1% prior.

US Capacity Utilization

The US PMIs for December
missed expectations on the Manufacturing side and beat on the Services one:

  • Manufacturing PMI 48.2
    vs. 49.3 expected and 48.9 prior.
  • Services PMI 51.3
    vs. 50.6 expected and 49.4 prior.
  • Cost pressures
    gained momentum as input prices increased at the quickest pace since
    September.
  • Although firms
    continued to pass through higher costs to customers, and at a strong rate,
    the overall pace of prices charged inflation softened from November.
  • Employment improves,
    highest since September.

S&P Global US Manufacturing PMI

The highlights for next
week will be
:

  • Monday: US NAHB Housing Market
    Index.
  • Tuesday: RBA Meeting Minutes,
    BoJ Policy Decision, Canada CPI, US Building Permits and Housing Starts.
  • Wednesday: PBoC LPR, UK CPI, US
    Consumer Confidence, BoC Summary of Deliberations.
  • Thursday: Canada Retail Sales, US
    Q3 GDP Final, US Jobless Claims.
  • Friday: Japan CPI, UK Retail
    Sales, Canada GDP, US PCE, University of Michigan Consumer Sentiment Final.

That’s all folks. Have a
nice weekend!

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