Weekly Market Outlook (11-15 December)

UPCOMING EVENTS:

• Tuesday: Japan
  PPI, UK Labour Market report, German ZEW, NFIB Small Business Optimism
  Index, US CPI.
• Wednesday: UK
  GDP, Eurozone Industrial Production, US PPI, FOMC Policy Decision, New
  Zealand GDP.
• Thursday:
  Australia Labour Market report, SNB Policy Decision, BoE Policy Decision,
  ECB Policy Decision, US Retail Sales, US Jobless Claims, New Zealand
  Manufacturing PMI.
• Friday:
  Australia/Japan/Eurozone/UK/US Flash PMIs, China Industrial Production and
  Retail Sales, Eurozone Wage data, US Industrial Production, PBoC MLF.

Tuesday

There’s no consensus estimates for the UK
jobs data at the time of writing except for the wage growth figures where the
average earnings including bonus are seen falling to 7.7% vs. 7.9% prior while
the average earnings excluding bonus are expected to come down to 7.4% vs. 7.7%
prior. As a reminder, the last
report beat expectations across the board
with strong job gains and steady wage growth. The market is now looking for
rate cuts, so a strong release is unlikely to prompt the market to price in
rate hikes, but it could definitely make it to price out some of the rate cuts.

The US CPI Y/Y is expected to tick down to
3.1% vs. 3.2% prior, while the M/M reading is seen at 0.0% vs. 0.0% prior. The
Core CPI Y/Y is expected to remain unchanged at 4.0% vs. 4.0% prior, while the
M/M figure is seen at 0.3% vs. 0.2% prior. As a reminder, the last
report missed expectations across the board
and triggered some strong reactions with the US Dollar selling off and the US
Equity and Bond markets rallying. The major central banks have ended their
tightening cycles, so the markets’ reaction function has changed from “strong
data equals more rate hikes” to “strong data equals less rate cuts”.

Wednesday

The FOMC is expected to keep the FFR
steady at 5.25-5.50% with no change to their quantitative tightening (QT). The
market’s focus will be on the Summary of Economic Projections (SEP) and the Dot
Plot. In its September
projections, the Fed expected to
deliver one last rate hike in 2023 followed by 2 rate cuts in 2024. Given the
disinflationary trend and the softening in the general economic data in the
past few months, the chances for a rate hike in December quickly dwindled with
the market now not only 100% sure that the Fed is done with the tightening
cycle but even expecting 4 rate cuts in 2024 (it was 5 rate cuts beginning as
soon as March before the NFP report).

It’s very unlikely to see the Fed
projecting as much rate cuts as the market’s currently assumes, but I feel
like the market would be more than fine if the Fed projects 3 rate cuts in 2024
as it would be a nod that they indeed see their conditions being met earlier
than expected. Things got a bit complicated with the latest
NFP report where the unemployment
rate dipped to 3.7% vs. 3.9% prior and wage growth on a monthly basis came in
on the hotter side. The CPI report on Tuesday should shed some more light
though.

Consider this: if you were the Fed, would
you have the confidence to cut rates in Q1 2024 given such volatility in the
data and the fear of making the 70s mistakes (as they keep repeating)? Probably
not. We can certainly see 125+ bps of rate cuts in 2024, but it’s likely to
be aggressive in response to a hard landing. Thus, it would always be above
the expected market rate cut for a given meeting in order to create a faster
easing in financial conditions. And this fear around the 70s and the
uncertainty around the data might lead the Fed to cut too late or too slowly,
eventually triggering a “hard-er” landing. I feel like this
uncertainty could transpire from their projections if they keep just 2 rate
cuts on the table, or worse, revise it to just one, especially if it’s
accompanied by lower inflation expectations.

Thursday

The Australian Unemployment Rate is
expected to tick higher to 3.8% vs. 3.7% prior with 10K jobs added. The last
labour market report showed an increase in
employment of 55K, which was much higher than expected although the bulk of it
was part-time jobs. The market is likely to react more to weakness rather than
strength as it’s looking forward to rate cuts in 2024. The RBA will see another
jobs report before its next meeting in February 2024.

The SNB is expected to keep interest rates
steady at 1.75% vs. 1.75% prior,
probably accompanied by the usual caveat that “it cannot be ruled out that
further tightening may become necessary”. The inflation
rate in Switzerland has been
within the central bank 0-2% target for many months on both the headline and
core measures, so they should actually start to
considering rate cuts in 2024.

The BoE is expected to keep the bank rate
steady at 5.25% vs 5.25% prior,
but this time there should be a bigger consensus among the MPC for no change,
although this is likely to be shaped by the UK Labour Market report on Tuesday.
As a reminder Greene, Mann and Haskel voted for a rate hike the last time. The
central bank will reaffirm once again their commitment to keep rates high for
as long as necessary to ensure that inflation returns to their 2% target. The
market expects 3 rate cuts in 2024 with the first one coming in June.

The ECB is expected to keep the deposit
rate unchanged at 4.00% vs. 4.00% prior.
The central bank is likely to repeat that they will keep rates high as long as
necessary to return to their 2% target. The rate cuts expectations for 2024
increased recently following the big miss in the Eurozone
CPI report and the ECB
member Schnabel’s comments where
she acknowledged that further rate hikes are rather unlikely after the latest
inflation data. The market now sees 150 bps worth
of rate cuts in 2024 with the first one coming as soon as March.

The US Retail Sales M/M are expected at
-0.1% vs. -0.1% prior.
Retail Sales have been strong for most of the year, although they contracted in
the previous month. The Control Group though, came in line with expectation at
0.2% with a positive revision to the prior figure. A strong report might make
the market to trim the amount of rate cuts expected in 2024 while a weak
release could increase them.

The US Jobless Claims continue to be one
of the most important releases every week as it’s a more timely indicator on
the state of the labour market. Initial Claims keep on hovering around cycle
lows, which shows us that layoffs have not yet picked up notably, but
Continuing Claims have been rising at a fast pace and that’s indicative of
people finding it harder to get another job after being laid off. This week the
consensus sees Initial Claims at 221K vs. 220K prior,
while there’s no estimate at the time of writing for Continuing Claims,
although the last week’s number was 1861K vs. 1925K prior.

Friday

Friday is the Flash PMIs day where we will
see how business activity in the Manufacturing and Services sector is faring in
December:

• Eurozone Manufacturing
  PMI 44.5 expected vs. 44.2 prior.
• Eurozone Services PMI 49.0
  expected vs. 48.7 prior.
• UK Manufacturing PMI 47.5
  expected vs. 47.2 prior.
• UK Services PMI 51.0
  expected vs. 50.9 prior.
• US Manufacturing PMI 49.1
  expected vs. 49.4 prior.
• US Services PMI 50.5
  expected vs. 50.8 prior.