Weekly Market Recap (15-19 January)

Taiwan’s Presidential
election was held over the weekend. William Lai, of the pro-sovereignty
Democratic Progressive Party (DPP) has been elected President. The party has
governed Taiwan for the past eight years. This will be
its third consecutive presidential term.

• Lai won 40% of the
  vote.
• Ahead of the main
  opposition Kuomintang (KMT) party’s Hou Yu-ih (the KMT is friendlier with
  the mainland CCP) on 33%.
• The third candidate
  Ko Wen-je, from the Taiwan People’s Party, scored just over a quarter of
  the vote.

Voters also chose
legislature candidates, Seats won:

• Kuomintang (KMT) won 52.
• Democratic
  Progressive Party (DPP) won 51 seats, a net loss of 11 seats, dropping
  from 62.
• Taiwan People’s
  Party (TPP) won 8.
• two independent
  legislators won seats, both of whom are ideologically most aligned with
  the KMT.

Thus:

• The DPP has lost its
  majority.
• The opposition KMT
  gained ground.
• No party has enough
  seats to control Parliament, this would require 57 seats.
• Taiwan political
  pundits expect the most likely parliamentary outcome is for the KMT and
  TPP to hammer out a deal to govern.

The PBoC left the
MLF rate unchanged at 2.50% vs. 2.40% expected:

• MLF 2.50%.
• Injected cash via
  MLF for the 14th month in a row.
• Added net CNY 216bn.

The Eurozone
November Industrial Production came in line with expectations:

• Industrial
  Production M/M -0.3% vs. -0.3% expected and -0.7% prior.
• Industrial
  Production Y/Y -6.8% vs. 6.6% prior.
• Durable consumer goods -2.0%.
• Capital goods -0.8%.
• Intermediate goods -0.6%.
• Energy 0.9%.
• Non-durable consumer goods 1.2%.

ECB’s Holzmann
(hawk – non voter in January) pushed back aggressively on rate cuts
expectations:

• Should not count on
  rate cuts at all this year.
• Rate cut
  expectations are optimistic.
• Geopolitical developments
  pose a risk to prices outlook.
• Does not see a real
  recession coming to the Eurozone.

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

• It is too early to
  talk about rate cuts.
• Markets are
  sometimes overly optimistic.
• We are data dependent.
• Inflation is still
  too high.
• Maybe can wait until
  summer break before contemplating rate cuts.

The BoC Business
Outlook Survey showed even more contraction in Q4 2023:

• Sentiment fell every
  month in Q4, from 22% at the start of the quarter to 9% at the end.
• 38% of firms expect
  a recession in the year ahead vs. 33% in Q3.
• 54% of firms expect
  inflation to remain above 3% for the next two years vs. 53% in Q3.
• 75% of firms think
  wage growth will be back to normal by 2025.
• Consumer survey
  inflation expectations for 5 years to 2.62% from 2.75%.
• Future sales 20% vs. 14%.
• Indicators of future
  sales vs. a year ago -10% vs. 0% prior.
• Firms see slight
  improvement in labour availability.

The Japanese December
PPI beat expectations:

• PPI M/M 0.3% vs. 0.0%
  expected and 0.2% prior.
• PPI Y/Y 0.0% vs.
  -0.3% expected and 0.3% prior.

The UK December
Labour Market report showed job losses and lower wage growth:

• December Payrolls
  change -24K vs. 9K prior (revised from -13K).
• November ILO
  unemployment rate 4.2% vs. 4.2% expected and 4.2% prior.
• November employment
  change 73k vs. 50k expected and 50K prior.
• Average weekly
  earnings 6.5% vs. 6.8% expected and 7.2% prior.
• Average weekly
  earnings (ex bonus) 6.6% vs. 6.6% expected and 7.2% prior (revised from
  7.3%).

The German January
ZEW index improved further:

• ZEW 15.2 vs. 12.0
  expected and 12.8 prior.
• Current conditions
  -77.3 vs. -77.0 expected and 77.1 prior.
• Expectations 15.2 vs. 12.8 prior.

ECB’s Villeroy
(neutral – voter) pushed back against the aggressive rate cuts expectations:

• Too early to declare victory over inflation.
• Next
  move will be a rate cut some time this year.

ECB’s Centeno
(dove – non voter in January) he sounded a bit more neutral compared to his
previous dovish comments:

• Need to be prepared
  for all topics, including rate cuts.
• Recent data have
  confirmed December projections.
• But inflation was
  slightly below forecast.
• We should avoid
  undershooting on inflation.
• Q1 GDP is still looking
  stagnant.
• Do not see reasons
  for concern about wages.
• Inflation trajectory is good.

ECB’s Valimaki
(hawk – voter) pushed back against the aggressive rate cuts expectations:

• Must not jump the
  gun on rate cuts.
• Better to wait a bit
  longer than cut rates prematurely.
• Inflation is on the
  right track, but the job is not done.
• Restrictive monetary
  policy is still called for.
• Soft landing for the
  economy is still the baseline but risks are tilted to the downside.

The US January
Empire State Manufacturing Index missed expectations by a big margin with the
lowest reading on record (excluding covid):

• Empire State
  Manufacturing Index –43.7 vs. -5.0 expected and -14.5 prior.
• New orders -49.4 vs.
  -11.3 last month.
• Shipments -31.3 vs. -6.4 last month.
• Prices paid 13.2 vs.
  16.7 last month.
• Prices Received 9.5
  vs. 11.5 last month.
• Employment -6.9 vs. -8.4 last month.
• Average Employee
  workweek -6.1 vs. -2.4 last month.
• Unfilled orders
  -24.2 vs. -24.0 last month.
• Delivery times -8.4
  vs. -15.6 last month.
• Inventories -7.4 vs. -5.2 last month.

The 6-month forward index:

• General business
  condition 18.8 vs. 12.1 last month.
• new orders 25.2 vs.
  11.3 last month.
• shipments 24.6 vs. 15.8 last month.
• prices paid 40.0 vs.
  25.0 last month.
• prices received 32.6
  vs. 27.1 last month.
• employment 16.8 vs. 10.9 last month.
• average employee
  workweek 14.7 vs. 10.4 last month.
• unfilled orders 16.8
  vs. 5.2 last month.
• delivery times 11.6 vs.
  -1.1 last month.
• inventories 5.3 vs. 9.4 last month.
• capital expenditures
  13.7 vs. 4.2 last month
• technology spending
  9.5 vs. 10.3 last month

The Canadian
December CPI report came in line with expectations although the underlying
inflation measures ticked higher:

• CPI Y/Y 3.4% vs.
  3.4% expected and 3.1% prior.
• CPI M/M -0.3% vs.
  -0.3% expected and 0.1% prior.
• Core CPI Y/Y 2.6% vs.
  2.8% prior.
• Core CPI M/M -0.5% vs. 0.1% prior.
• Trimmed Mean CPI Y/Y
  3.7% vs. 3.5% expected and 3.5% prior.
• Median CPI Y/Y 3.6%
  vs. 3.4% expected and 3.6% prior (revised from 3.4%).
• Common CPI Y/Y 3.9%
  vs. 3.9% prior.

Fed’s Waller (neutral – voter) pushed back against the
aggressive rate cuts expectations although he did it in a balanced way keeping
some optionality on the table:

• Data in the last few
  months allowing Fed to consider cutting rates this year.
• Changes in policy
  path must be ‘carefully calibrated’ and ‘not rushed’.
• I am more confident
  that we are within striking distance of achieving sustainable 2% inflation.
• We are close but I
  will need more info in coming months to be sure.
• I view risks to
  Fed’s mandates as more closely balanced.
• Fed will be able to
  cut rates this year as long as inflation doesn’t rebound or stay high.
• This view is
  consistent with Fed projections for three 25 bps cuts in 2024.
• Timing and actual
  number of cuts will depend on data.
• Economic activity has moderated.
• Setting of policy
  needs to proceed with more caution to avoid over-tightening.
• Financial conditions remain restrictive.
• Highlights signs
  that the labour market continues to come into better balance.
• Data on job openings
  indicates ongoing moderation in labour demand.
• It will be up to
  committee on timing of when to start cuts.
• The economy is doing
  and giving us the flexibility to move carefully and methodically.
• We have to see firm
  evidence of improvement on rates.
• If we think we have
  to move faster on rates, we can but key is that we have flexibility.
• We’re in an unusual
  place where we can move rates down without a shock to the economy.
• There are things we
  want to be careful about.
• Whether we miss the
  timing on rate cuts by six weeks, it hard to believe that’s going to have
  a big effect on the economy.
• Once supply
  adjustment is complete (from the pandemic), it will be clearer whether
  demand is falling enough to finish the inflation fight, it’s an issue to
  watch.
• Approx endpoint for
  reserves is likely around 10-11% of GDP … overnight repo doesn’t need to
  have anything in it.
• 4% wage growth is a
  ‘little high’ but not much.

ECB’s Simkus (hawk- voter) pushed back against the
aggressive rate cuts expectations:

• I am far less
  optimistic than markets on rate cuts.
• Cuts may begin
  around the summer.
• Wage data is going
  to be very important.

ECB’s Muller (hawk- voter) pushed back against the
aggressive rate cuts expectations:

• Market expectations
  for 2024 ECB rate cuts are aggressive.
• Wage growth is not
  in line with the inflation target.

The Chinese Q4 GDP missed expectations slightly
although still above the 5% CCP target:

• Q4 GDP Y/Y 5.2% vs.
  5.3% expected and 4.9% prior.
• GDP Q/Q 1.0% vs.
  1.0% expected and 1.5% prior.

The Chinese December Industrial Production beat
expectations:

• Industrial
  Production Y/Y 6.8% vs. 6.6% expected and 6.6% prior.

The Chinese December Retail Sales missed expectations:

• Retail Sales Y/Y
  7.4% vs. 8.0% expected and 10.1% prior.

The UK December CPI report beat expectations across
the board:

• CPI Y/Y 4.0% vs. 3.8%
  expected and 3.9% prior.
• CPI M/M 0.4% vs.
  0.2% expected and -0.2% prior.
• Core CPI Y/Y 5.1%
  vs. 4.9% expected and 5.1% prior.
• Core CPI M/M 0.6%
  vs. 0.4% expected and -0.3% prior.

ECB’s Lagarde (neutral – voter) pushed back against
the aggressive rate cuts pricing:

• Confident inflation
  will reach 2% target.
• Inflation is not
  where the ECB wants it.
• But on the right
  path towards 2% target, though no victory yet.
• Too optimistic
  markets not helpful in fight against inflation.

ECB’s Knot (hawk – non voter in January) pushed back
against the aggressive rate cuts expectations:

• Markets are getting
  ahead of themselves on rate cuts.
• A lot must go well
  for inflation to hit 2% in 2025.
• We need to see a
  turnaround in wages.
• Policy easing, if
  and when it happens, will be very gradual.
• Rate path priced by
  markets can be self-defeating.
• The more easing
  markets are doing, the less likely we’ll cut.

ECB’s Panetta (dove – voter) kept a neutral stance with
a focus on incoming data to confirm the disinflationary trend:

• Disinflation is
  happening, is strong and will continue.
• Monetary conditions
  should adjust but awaiting data first to confirm disinflation outlook.
• Awaiting data to
  confirm disinflation outlook.

The US December Retail Sales beat expectations across
the board:

• Retail Sales Y/Y
  5.6% vs. 4.0% prior.
• Retail Sales M/M
  0.6% vs. 0.4% expected and 0.3% prior.
• Ex-autos M/M 0.4% vs.
  0.2% expected and 0.2% prior.
• Control group M/M
  0.8% vs. 0.2% expected and 0.5% prior (revised from 0.4%).
• Retail sales ex gas
  and autos M/M 0.6 vs. 0.6% prior.

The US December Industrial Production beat
expectations:

• Industrial
  Production Y/Y 1.0% vs. -0.6% prior (revised from -0.4%).
• Industrial
  Production M/M 0.1% vs. 0.0% expected and 0.0% prior (revised from 0.2%).
• Capacity utilization
  78.6% vs. 78.7% expected and 78.6% prior (revised from 78.8%).

The US December NAHB Housing Market Index beat
expectations:

• NAHB 44 vs. 39
  expected and 37 prior.
• Single family 48 vs. 41 prior.
• Next six months 57
  vs. 45 prior.
• Traffic of
  prospective buyers 29 vs. 24 prior.

The Federal Reserve released the Beige Book for Q4
with most districts reporting little or no change in economic activity:

• Of the four
  Districts that differed, three reported modest growth and one reported a
  moderate decline.
• Consumers delivered
  some seasonal relief over the holidays by meeting expectations in most
  Districts and by exceeding expectations in three Districts.
• Contacts from nearly
  all Districts reported decreases in manufacturing activity.
• Districts continued
  to note that high interest rates were limiting auto sales and real estate
  deals; however, the prospect of falling interest rates was cited by
  numerous contacts in various sectors as a source of optimism.
• concerns about the
  office market, weakening overall demand, and the 2024 political cycle were
  often cited as sources of economic uncertainty.
• Seven Districts
  described little or no net change in overall employment levels, while the
  pace of job growth was described as modest to moderate in four Districts.
• Six Districts noted
  that their contacts had reported slight or modest price increases, and two
  noted moderate increases. Five Districts also noted that overall price
  increases had subsided to some degree from the prior period, while three
  others indicated no significant shift in price pressures.
• Firms in most
  Districts cited examples of steady or falling input prices, especially in
  the manufacturing and construction sectors, and more discounting by auto
  dealers.
• Premium increases
  for property and casualty insurance and for health insurance continue to
  impact most firms.

The Australian December Labour Market report missed
expectations by a big margin:

• Employment Change
  -65.1K vs. 17.6K expected and 72.6K prior (revised from 61.5K).
• Unemployment Rate
  3.9% vs. 3.9% expected and 3.9% prior.
• Participation Rate
  66.8% vs. 67.1% expected and 67.3% prior (revised from 67.2%).
• Full-time
  employment -106.6K vs. 57K prior.
• Part-time
  employment 41.4K vs. 15.7K prior (revised from 4.5K).

The US Jobless Claims beat expectations by a big
margin (this report corresponds with the NFP survey week):

• Initial Claims 187K
  vs. 207K expected and 203K prior (revised from 202K).
• Continuing Claims
  1806K vs. 1845K expected and 1832K prior (revised from 1834K).

The US December Housing Starts and Building Permits
beat expectations:

• Housing starts
  1.460M vs. 1.426M expected and 1.525M prior (revised from 1.560M).
• Housing starts M/M
  -4.3% vs. 10.8% prior (revised from 14.8%).
• Building permits
  1.495M vs. 1.480M expected and 1.467M prior.
• Building permits M/M
  1.9% vs. -2.1% prior.

The New Zealand December Manufacturing PMI fell
further into contraction:

• Manufacturing PMI
  43.1 vs. 46.7 prior.

The Japanese December CPI eased further across all
measures:

• CPI Y/Y 2.6% vs.
  2.8% prior.
• Core CPI Y/Y 2.3%
  vs. 2.3% expected and 2.5% prior.
• Core-Core CPI Y/Y
  3.7% vs. 3.8% prior.

The UK December Retail Sales missed expectations by a
big margin:

• Retail sales M/M
  -3.2% vs. -0.5% expected and 1.4% prior (revised from 1.3%).
• Retail sales Y/Y
  -2.4% vs. 1.1% expected and 0.2% prior (revised from 0.1%).
• Retail sales (ex
  autos, fuel) M/M -3.3% vs. -0.6% expected and 1.5% prior (revised from
  1.3%).
• Retail sales (ex
  autos, fuel) Y/Y -2.1% vs. 1.3% expected and 0.5% prior (revised from
  0.3%).

The Canadian November Retail Sales missed
expectations:

• Retail Sales M/M
  -0.2% vs. 0.0% expected and 0.5% prior (revised from 0.7%).
• Retail Sales Y/Y
  1.8% vs. 1.9% prior (revised from 2.2%).
• Ex auto M/M -0.5%
  vs. -0.1% expected and 0.4% prior (revised from 0.6%).
• Ex auto and gas M/M
  -0.6% vs. -1.2% prior.
• December advance estimate 0.8%.

Fed’s Goolsbee (dove – non voter) reiterated that rate
cuts can come just from inflation progress but if that progress were to
reverse, then a rate hike would be warranted:

• If we make good
  progress on inflation, we need to factor that into rates.
• Goods price
  inflation is back to normal and surprising progress on services inflation
  too.
• Says they need to
  see more progress on housing inflation.
• When the
  unemployment rate goes up, it tends to go up rapidly; we haven’t had that.
• We’re coming into
  2024 in a much better place than we came into 2023.
• The market should be
  focusing on economic data.
• “We are
  definitely not off the Golden Path”.
• The Fed is not
  facing an imminent threat from the labour market.
• If inflation
  progress reverses, it could merit a rate hike.

The January University of Michigan Consumer Sentiment
survey beat expectations across the board:

• Consumer sentiment 78.8 vs. 70.0 expected and
  69.7 prior.
• Current
  conditions 83.3 vs. 73.3 prior.
• Expectations
  75.9 vs. 66.4 prior.
• One-year inflation 2.9% vs. 3.1% prior.
• Five-year inflation 2.8% vs. 2.9% prior.

The highlights for next week
will be:

• Monday: PBoC LPR, New Zealand Services PMI.
• Tuesday: BoJ Policy Decision, New Zealand CPI, Australia
  Flash PMIs.
• Wednesday: Japan/Eurozone/UK/US Flash PMIs, BoC Policy
  Decision.
• Thursday: ECB Policy Decision, US Durable Goods Orders, US
  Jobless Claims, US Q4 Advance GDP.
• Friday: Tokyo CPI, US PCE.

That’s all folks. Have a nice weekend!