Weekly Market Recap (22-26 January)

The PBoC left the
LPR rates unchanged as expected:

• 3.45% for the one year.
• 4.20% for the five year.

The US Leading
Economic Index (LEI) fell by less than expected:

• LEI -0.1% vs. -0.3%
  expected and -0.5% prior.

From the Conference
Board: “The US LEI fell slightly in December, continuing to signal
underlying weakness in the US economy. Despite the overall decline, six out of
ten leading indicators made positive contributions to the LEI in December.
Nonetheless, these improvements were more than offset by weak conditions in
manufacturing, the high interest-rate environment, and low consumer confidence.
As the magnitude of monthly declines has lessened, the LEI’s six-month and
twelve-month growth rates have turned upward but remain negative, continuing to
signal the risk of recession ahead.”

The New Zealand
December Services PMI fell back into contraction:

• Services PMI 48.8
  vs. 51.2 prior.
• Long-term average is
  53.4.

BNZ Comments: “The
softening in the PSI, alongside the weakness in the PMI, is bad news for both
near term growth and employment in New Zealand. Tourism has been a key driver
of the services sector and will continue to support the economy, but it can’t
do all the heavy lifting by itself”.

The BoJ left
interest rates and the YCC setting unchanged as expected:

• Short-term interest
  rate target -0.1%.
• 10-year bond yield
  around 0% with 1% as a reference cap.
• Makes no changes to
  forward guidance on monetary policy.

No
change to core-core inflation forecasts:

• Core-core CPI fiscal
  2023 median forecast at 3.8 vs. 3.8% forecast in the October Outlook
  Report.
• Core-core CPI fiscal
  2024 median forecast at 1.9% vs. 1.9% in October.
• Core-core CPI fiscal
  2025 median forecast at 1.9% vs. 1.9% in October.

But core forecasts trimmed:

• Core CPI fiscal 2023
  median forecast at 2.8% vs. 2.8% in October.
• Core CPI fiscal 2024
  median forecast at 2.4% vs. 2.8% in October.
• Core CPI fiscal 2025
  median forecast at 1.8% vs. 1.7% in October.

GDP forecasts:

• FY 2023 1.8% vs. 2.0% in October.
• FY 2024 1.2% vs. 1.0% in October.
• FY 2025 1.0% vs. 1.0% in October.

BoJ quarterly report:

• Risks to economic
  activity generally balanced.
• Need to closely
  monitor whether virtuous cycle between wages and prices will intensify.
• Will continue with
  QQE with YCC as long as needed.
• Won’t hesitate to
  take additional easing steps if needed.
• BoJ will patiently
  continue with monetary easing while nimbly responding to developments.
• Japan’s financial
  system has maintained stability on the whole.

• Uncertainty remains
  but likelihood of achieving sustained 2% inflation continues to gradually
  heighten.
• Japan’s economy
  likely to continue recovering moderately.
• Must be vigilant to
  financial, FX market moves and their impact on Japan’s economy, prices.
• Inflation expectations gradually heightening.
• Core consumer
  inflation moving below 2.5%, partly reflecting moderate rise in service
  prices.
• Consumption
  continues to rise moderately.
• Inflation likely to
  gradually accelerate toward BoJ’s target through end of projected period
  in quarterly report.
• Japan’s output gap
  improving, likely to gradually expand ahead.
• Medium and long-term
  inflation expectations heightening gradually.
• Positive cycle of
  rising wages, inflation to strengthen.

Moving on to the
Governor Ueda Press Conference:

• Likelihood of
  achieving 2% inflation target is gradually rising.
• Japanese economy to
  gradually pick up moving forward.
• Must carefully watch
  financial, FX market moves and their impact on prices.
• Will not hesitate to
  take additional easing measures if necessary.
• Heard encouraging
  comments from big firms on wage hikes.
• Closely watching the
  outcome of the spring wage negotiations.
• Want to confirm
  virtuous cycle of wages and prices is in place.
• Economy is
  progressing in line with our forecast.
• Our confidence has
  grown in the achievement of price target.
• This confirms
  economy is proceeding based on existing price outlook.
• There is no change
  in our stance to carefully examine price trends.
• Cannot fully grasp
  impact of earthquakes in Western Japan region just yet.
• Uncertainty is still
  high about how widespread wage hikes will be.
• But it is not as
  high as uncertainty seen last year.
• Can’t deny side
  effects to negative interest rate policy.
• Will foresee further
  rate hikes when exiting negative interest rate policy.
• More firms have
  decided on wage hikes this year compared to last year.

Following the free fall
in the stock market, Bloomberg reported on Tuesday, citing people familiar with
the matter that Chinese policymakers are seeking to mobilise about 2 trillion
yuan ($278.53 billion), mainly from the offshore accounts of Chinese
state-owned enterprises, as part of a stabilisation fund to buy shares onshore
through the Hong Kong exchange link. Bloomberg said Chinese officials have
allotted at least 300 billion yuan of local funds to invest in onshore shares
through China Securities Finance Corp or Central Huijin Investment Ltd. They
are also weighing other options and may announce some of them as soon as this
week if approved by the top leadership of the country, according to the report.

The New Zealand Q4 CPI
came in line with expectations:

• CPI Q4 Y/Y 4.7% vs. 4.7%
  expected and 5.6% prior.
• CPI Q4 Q/Q 0.5% vs. 0.5%
  expected and 1.8% prior.

The Australian
Manufacturing and Services PMIs improved in January:

• Manufacturing PMI 50.3
  vs. 47.6 prior.
• Services PMI 47.9
  vs. 47.1 prior.

The Japanese
Manufacturing and Services PMIs improved in January:

• Manufacturing PMI
  48.0 vs. 47.9 prior.
• Services PMI 52.7
  vs. 51.5 prior.

The PBoC Governor Pan delivered some supporting
remarks and announced a 50 bps RRR cut (the last two RRR cuts in 2023 were both
of 25 bps):

• Will use various
  policy tools to keep liquidity reasonably ample.
• Will keep yuan
  exchange rate basically stable.
• Will steadily
  promote yuan internationalisation.
• Financial risks are
  generally under control.
• Monetary policy is
  mainly based on domestic conditions.
• There is still
  sufficient room for monetary policy.
• China’s economy
  faces some difficulties, but there are also positive factors.

The Eurozone January Manufacturing PMI beat
expectations while the Services PMI missed forecasts:

• Manufacturing PMI
  46.6 vs. 44.8 expected and 44.4 prior.
• Services PMI 48.4
  vs. 49.0 expected and 48.8 prior.

The UK Manufacturing and
Services PMIs beat expectations in January:

• Manufacturing PMI
  47.3 vs. 46.7 expected and 46.2 prior.
• Services PMI 53.8
  vs. 53.2 expected and 53.4 prior.

The US Manufacturing and
Services PMIs beat expectations in January:

• Manufacturing PMI
  50.3 vs. 47.9 expected and 47.9 prior.
• Services PMI 52.9
  vs. 51.0 expected and 51.4 prior.

The BoC left interest
rates unchanged at 5.00% as expected and dropped the language about being
prepared to hike if needed:

• Still concerned
  about risks to the outlook for inflation, particularly the persistence
  in underlying inflation.
• Statement no longer
  says it “remains prepared to raise the policy rate further if
  needed”.
• The Canadian economy
  stalled since the middle of 2023 and growth will likely remain close to
  zero through the first quarter of 2024.
• Economic growth is
  expected to strengthen gradually around the middle of 2024.
• BoC forecasts GDP
  growth of 0.8% in 2024.
• BoC expects
  inflation to remain close to 3% during the first half of this year before
  gradually easing, returning to the 2% target in 2025.
• Core measures of
  inflation are not showing sustained decline.
• Consumers have
  pulled back their spending in response to higher prices and interest rates.
• Economy now looks to
  be operating in modest excess supply.
• Labour market
  conditions have eased, with job vacancies returning to near pre-pandemic levels
  and new jobs being created at a slower rate than population growth.
• Growth in the United
  States has been stronger than expected but is anticipated to slow in 2024.
• Inflation rates in
  most advanced economies are expected to come down slowly, reaching central
  bank targets in 2025.
• Forecast for 2.8%
  inflation this year is down from 3.0% in October.
• There was a clear
  consensus to maintain our policy rate at 5%.
• We are trying to
  balance the risks of over- and under-tightening.
• We need to see
  further and sustained easing of core inflation.

Moving on to the Governor
Macklem Press Conference:

• We are not
  forecasting a deep recession.
• We don’t need to
  think that we need to get a recession to get inflation back to target.
• Inflation is still
  somewhat broad-based. That we become the persistence of underlying
  inflation.
• It’s important that
  we don’t give Canadians a false sense of precision as regards to timing of
  a rate cut.
• Risk of a rate hike
  is not at 0%, but raising rates is not the base case.
• We are at a point
  where there is a lot of push and pull. There are mixed signals. When have
  confidence we will open the door toward easing policy.
• Need more progress
  on inflation before discussing cutting rates.
• Asked if anyone
  wanted to cut, said the focus was ‘very much on holding’.
• Repeats there was a
  ‘clear consensus’ to hold.
• Our latest forecasts
  have increased our confidence that we’ve raised rates enough.
• We’re concerned
  about persistence in underlying inflation.
• It’s premature to
  discuss reducing our policy rate.
• We need to see more
  progress on inflation before having a discussion about cutting rates.
• On QT, will take it
  one decision at a time; we’re still ‘some ways’ from too tight.
• We’re trying to
  balance the risks of too-high rates with too-low rates.
• We need to give
  monetary policy “a bit more time” to let it do its work.

The Federal Reserve announced
that its bank term funding program will cease making new loans as scheduled on
March 11. The central bank adjusted interest rate on new BTFP loans to be no
lower than interest rate on reserve balances on day loan was made. The new
rate on BTFP loans effectively increases rate by nearly 50 bps; change is
effective immediately. Says change to BTFP rate ensures the program
continues to support its goals in current rate environment.

The German January IFO
Business Climate Index missed expectations:

• IFO 85.2 vs. 86.7
  expected and 86.3 prior (revised from 86.4).
• Current conditions
  87.0 vs. 88.6 expected and 88.5 prior.
• Outlook 83.5 vs.
  84.8 expected and 84.2 prior (revised from 84.3).

The ECB left interest
rates unchanged at 4.00% as expected:

• Incoming
  information has broadly confirmed previous assessment of the medium-term
  inflation outlook.
• Aside from an energy-related upward base effect on headline inflation,
  the declining trend in underlying inflation has continued.
• Tight
  financing conditions are dampening demand, and this is helping to push down
  inflation.
• Future
  decisions will ensure that policy rates will be set at sufficiently restrictive
  levels for as long as necessary.
• Stands
  ready to adjust all of its instruments within its mandate to ensure that
  inflation returns to its 2% target over the medium-term.
• Based on current assessment, interest rates are at levels that,
  maintained for a sufficiently long duration, will make a substantial
  contribution to this goal.
• Intends
  to continue to reinvest, in full, principal payments from maturing securities
  purchased under PEPP during 1H 2024.

Moving on to President
Lagarde Press Conference:

• Risks to economic
  data remain tilted to the downside.
• Economy likely
  stagnated in Q4.
• Some surveys point
  to a pickup in 2024.
• Demand for labour is
  slowing.
• Upside risks to
  inflation include heightened geopolitical tensions, including in Middle
  East.
• Market interest
  rates have moved broadly sideways since our last meeting.
• We are determined to
  ensure inflation returns to our 2% target in a timeline manner.
• We will continue to
  follow a data-dependent approach.
• The consensus was
  that it was premature to discuss rate cuts.
• I stand by my
  comments (regarding possible summer rate cuts).
• We are data dependent,
  not date-dependent.
• We’re watching
  shipping cost increases and delays.
• Seeing some
  stabilization in wage tracker.
• Seeing slight
  reduction of vacancies advertised.
• Wage growth is
  already declining.
• Not seeing second
  round effects.
• We are trying to be
  a little simpler in our words, so don’t pay too much attention to word
  changes in our statement.
• 80% of our survey
  respondents say they are happy to work at the ECB.
• I’m honoured to lead
  the ECB.
• It’s often said that
  wage data is backwards looking.
• PMI numbers are a
  small signal of stabilization and that a pickup is coming into place.
• In terms of data,
  we’re seeing hard data that’s weak (notes industrial production and retail
  sales). If we look at PMIs, we’re seeing some encouraging numbers.

The US Advance Q4 GDP
beat expectations:

• Q4 GDP 3.3% vs. 2.0%
  expected.
• Consumer spending 2.8% vs. 3.1% prior.
• Consumer spending on
  durables 4.6% vs. 6.7% prior.
• GDP final sales 3.2%
  vs. 3.6% prior.
• GDP deflator 1.5%
  vs. 2.3% expected and 3.3% prior.
• Core PCE 2.0% vs.
  2.0% expected and 2.0% prior.
• Business investment 2.1% vs. 10.0% prior.

The US Jobless Claims
missed expectations across the board:

• Initial Claims 214K
  vs. 200K expected and 189K prior (revised from 187K).
• Continuing Claims
  1833K vs. 1828K expected and 1806 prior.

The Tokyo January CPI saw
all the measures easing further:

• CPI Y/Y 1.6% vs. 2.4%
  prior.
• Core CPI Y/Y 1.6%
  vs. 1.9% expected and 2.1% prior.
• Core-Core CPI Y/Y 2.2% vs. 2.7% prior.

ECB’s Vujcic (hawk –
voter) seemed to suggest that he prefers to wait patiently for clear signs and
if something breaks before that they can always cut more aggressively:

• There was no dovish
  tilt on Thursday.
• It is possible to cut
  rates later but with bigger steps.
• Personally prefer 25
  bps rate cuts to begin with though.
• Economy is more in a
  stagnation phase rather than recession.
• The overall picture
  is good at the moment.

ECB’s Simkus (hawk –
voter) shared his scepticism on market’s expectations:

• I am confident that
  the data will not support a rate cut in March.
• Rate cuts will be
  more likely as the year progresses.
• We are still less
  optimistic than markets are on rate cuts at the moment.

ECB’s Kazaks (hawk –
voter) continues to support a patient approach:

• Confident about
  monetary policy but preaches patience for now.
• Interest rates
  should start to go down.
• But ECB is in no
  rush to begin the process for now.
• Cutting rates too
  early would be by all mean worse than waiting just a bit.
• There’s the risk
  that inflation starts to come back and then one would need to raise rates
  much more.

The US December PCE came
in line with expectations:

• PCE Y/Y 2.6% vs.
  2.6% expected and 2.6% prior.
• PCE M/M 0.2% vs. 0.2%
  expected and -0.1% prior.
• Core PCE Y/Y 2.9%
  vs. 3.0% expected and 3.2% prior.
• Core PCE M/M 0.2% vs.
  0.2% expected and 0.1% prior.

Consumer
spending and income:

• Personal income 0.3%
  vs. 0.3% expected and 0.4% prior.
• Personal spending 0.7%
  vs. 0.4% expected and 0.4% prior (revised from 0.2%).
• Real personal
  spending 0.5% vs. 0.5% prior (revised from 0.3%).

The highlights for next
week will be:

• Tuesday: Japan Unemployment
  Rate, Eurozone Q4 GDP, US Job Openings, US Consumer Confidence.
• Wednesday: BoJ Summary of
  Opinions, Japan Industrial Production and Retail Sales, Australia CPI, Chinese
  PMIs, Switzerland Retail Sales, US ADP, Canada GDP, US ECI, FOMC Policy
  Decision.
• Thursday: China Caixin
  Manufacturing PMI, Switzerland Manufacturing PMI, Eurozone CPI, Eurozone
  Unemployment Rate, BoE Policy Decision, US Challenger Job Cuts, US Jobless
  Claims, Canada Manufacturing PMI, US ISM Manufacturing PMI.
• Friday: Australia PPI, US NFP.

That’s all folks. Have a
nice weekend!