Weekly Market Recap (11-15 December)

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.

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.

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.

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%).

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.

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.

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.

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%).

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.

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.

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.

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%).

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).

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%).

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.

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%).

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.

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%.

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.

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.

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).

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

• Manufacturing PMI 46.7
  vs. 42.5 prior.

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.

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.

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

The Chinese Industrial
Production for November beat expectations:

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

The Chinese Retail Sales
for November missed expectations:

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

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 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.

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.

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.

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.

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).

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.

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.

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!