Weekly Market Recap (18-22 December)

The New Zealand Services PMI for November jumped back
into expansion:

• Services
  PMI 51.2 vs. 49.2 prior.

BNZ Senior Economist Doug
Steel:

“Despite
November’s lift, the PSI remains below its long-term norm of 53.5. And the
combination of contracting activity/sales and rising inventories raises
questions about the sustainability of the nudge higher”.

The German IFO Business
Climate Index for December missed expectations across the board:

• German IFO 86.4 vs.
  87.8 expected and 87.2 prior (revised from 87.3).
• Current conditions
  88.5 vs. 89.7 expected and 89.4 prior.
• Expectations 84.3
  vs. 85.9 expected and 85.1 prior (revised from 85.2).

ECB’s Vasle (hawk – voter) pushed back against the
aggressive rate cuts expectations adding that he expects rates to be held
steady for 1H 2024:

• Market pricing for
  both start of rate cuts and totality of cuts in 2024 is excessive.
• Recent accommodation
  priced into rates is inconsistent with policy stance to get inflation back
  to target.
• Inflation will
  rebound in 1H 2024 and ECB should only reassess policy outlook after
  this period.
• Wage formation in Q1
  2024 will be crucial for policy outlook.

BoE’s Broadbent (dove – voter) emphasised the
uncertainty around the economic data and added that he’s focused on wage growth
to conclude if inflation is clearly on a downward trend:

• Policy
  reaction to shocks likely to be delayed than in a perfect world.
• In
  the real world, there’s inevitably a degree of inaccuracy in economic
  measurement.
• Currently,
  there’s a little more uncertainty than usual about the behaviour of
  unemployment.
• Official
  estimates of wage growth have been volatile.
• Other
  indicators have exhibited slightly lower rates of growth through much of this
  year.
• It
  takes time to understand the forces driving the economy, particularly services
  inflation and wage growth.
• It will probably require a more protracted and clearer decline in wage
  growth data before we can safely conclude that things are on a firmly downward
  trend.

Fed’s Mester (hawk – voter in 2024) pushed back
against the aggressive rate cuts expectations but did not deny that they will
need to reduce rates if inflation keeps falling to avoid overtightening:

• Markets are ‘a little bit ahead’ of central banks on rate cuts.
• The
  next phase is not when to reduce rates, even though that’s where the markets
  are at.
• It
  is about how long do we need monetary policy to remain restrictive in order to
  get inflation back to 2% target.
• They have jumped to the end part i.e. “we are going to normalise
  quickly”, and I don’t see that.
• Fed’s
  policy settings are now in a good place.
• But
  you don’t want to inadvertently become more restrictive than what you think is
  appropriate.

ECB’s Kazimir (hawk – voter) is maintaining his
neutral stance as he wants to see more moderation in wage growth before easing
policy rates:

• Inflation optimism
  not enough to declare victory and move on to next stage.
• Drop in inflation
  observed in past few months is positive.
• Increasingly
  confident that inflation will reach target in 2025, can achieve soft
  landing.
• Policy mistake of
  easing too early would be more significant than tightening for too long.
• Closely watching
  economic indicators, not making any hasty moves.
• Need to see clear
  signs of wage moderation.

Fed’s Goolsbee (dove – non voter in
2024) is further elaborating on the Fed’s view that since inflation is getting
closer to the Fed’ target, the central bank is more willing to ease the policy
rate to avoid overtightening as they don’t want to cause a big increase in
unemployment if that’s unneccesary to achieve their dual-mandate:

• We’ve seen
  significant improvement on inflation.
• Inflation is the key
  spot we’ve missed on our mandate and that’s where we should be focused.
• If we get
  improvement on inflation, back into the range of our dual mandate, then we
  have more-symmetric concerns.
• We don’t debate on
  specific policies for the future, that’s not how the Fed works.
• We vote on the
  current meeting.
• Far be it from me to
  get into the head of what the market is thinking.
• We don’t choose our
  actions based on how we think markets will react.
• I don’t know if
  markets have gone too far.
• The market-based
  projection of rates is greater than the SEP.
• I was surprised that
  the market tried to say there was some difference between what Williams
  said and what Powell said.
• Our job as central
  bankers is to be paranoid all the time.
• Market has gotten
  ahead of themselves on euphoria.
• If inflation keeps
  coming down, Fed can reconsider how restrictive it is.
• Fed’s decisions are
  not political.
• What determines
  whether Fed can be less restrictive is inflation.
• Fed should not be
  bullied by what the market wants.

The US NAHB Housing Market Index slightly beat
expectations:

• NAHB 37 vs. 36
  expected and 40 prior.
• Single family 40 vs. 40 prior.
• Next six months 45
  vs. 39 prior.
• Traffic of
  prospective buyers 24 vs. 21 prior.

BoC Governor Macklem acknowledged that rate cuts are
expected sometime next year but he’s uncertain on the timing as he wants to see
some more months of weakness in the underlying inflation measures:

• If you look at our
  projection, rate cuts are likely sometime next year, but I’m not going to
  put it on a calendar.
• We’re very focused
  on core inflation.
• The BoC need to see
  a number of months with sustained downward momentum in core inflation
  before it cuts interest rates.
• We are certainly
  feeling more confident that monetary policy is working and increasingly,
  the conditions are in place to get us back to two-per-cent inflation, but
  that is not yet assured, we’re not there yet.
• There are a few more
  things we need to see to be more confident that we’re headed back to two
  per cent and we’re watching those closely.

The RBA released the Minutes of its December Monetary
Policy Meeting:

• Board considered
  whether to raise rates by 25bp or hold steady.
• Decided case for
  steady rates was the stronger one at this meeting.
• Board saw
  “encouraging signs” of progress on inflation, this needed to
  continue.
• Whether further
  tightening required would be decided by data, assessment of risks.
• Recent data had not
  warranted a material change to the economic outlook.
• Board saw value in
  waiting for more data to assess balance of risks.
• Risk inflation could
  stay high too long balanced by risk of sharper slowdown in demand.
• Liaison with firms
  showed they expected price increases to moderate in year ahead.
• Consumption growth
  quite weak, many households facing painful squeeze on finances.
• But domestic demand
  still running ahead of supply, inflation above several other countries.
• Board noted RBA
  staff forecast had inflation returning to top of band by end 2025
  rather than midpoint.
• Board discussed RBA
  plans for govt bond holdings, agreed for now to keep to maturity.
• Board to continue
  “active consideration” of whether to sell bonds before maturity.
• Discussed whether
  best to sell bonds to market or to government’s AOFM.
• Judged selling bonds
  to AOFM would have several practical benefits.

The BoJ left interest rates unchanged at -0.10% with
YCC to target the 10-year JGBs at 0% with 1% as a reference cap:

• YCC decision unanimous.
• BOJ makes no change
  to forward guidance.
• Economy has recovered moderately.
• Private consumption
  continues to rise moderately.
• Y/Y rate of rise in
  CPI slower than a while ago mainly due to effects of pushing down
  energy prices.
• But CPI has been
  around 3% recently due to pass-through of cost increases to consumer
  prices.
• Inflation
  expectations have risen moderately.
• Economy likely to
  continue recovering moderately for time being.
• Japan economy
  projected to continue growing at pace above potential growth rate.
• Rate of rise in CPI
  likely to be above 2% through fiscal 2024.
• Thereafter, rate of
  rise projected to slow down.
• Underlying CPI
  inflation likely to increase gradually toward achieving price stability
  target.

• Japan’s economy
  likely to continue recovering moderately.
• Inflation expectations heightening moderately.
• Trend inflation
  likely to gradually accelerate.
• Inflation likely to
  move above 2% then slow pace of increase thereafter.
• Uncertainty
  regarding Japan’s economy, prices remain very high.
• Must scrutinise FX,
  market moves and their impact on economy, prices.

Moving on to the Press Conference, BoJ Governor Ueda
emphasized once again the central bank’s focus on wage growth and added already
that they will keep everything unchanged at the next meeting as well:

• Will not hesitate to
  take additional easing measures if necessary.
• Japan economy is
  gradually picking up.
• Must carefully watch
  financial, FX market moves and impact on economy, prices.
• Still need to gauge
  whether prices will rise moving ahead.
• Need to keep
  scrutinising wage-price virtuous cycle.
• Will attach great
  importance to data but also to companies’ wage growth.
• We are still not
  foreseeing sustainable, stable inflation with enough confidence.
• Likelihood of
  achieving inflation target is slightly higher but we want to look at more data.
• Food price inflation
  is finally past the peak.
• Want to look at wage
  trends, future wage moves and impact on prices/inflation.
• Little chance for us
  to say ‘we will change policy’ next month.
• There will be some
  data between now and next policy meeting, but not many.
• Not much new data
  will be available before January policy meeting.

ECB’s Villeroy (neutral – voter) reaffirmed that the
ECB has ended its tightening cycle and it’s preparing to cut interest rates
sometime in 2024:

• We will not raise
  interest rates anymore.
• Inflation will
  continue to slow down.
• We will be able to
  lower interest rates.
• Lowering interest
  rates should happen “some time” in 2024.

BoE’s Breeden (neutral – voter) reaffirmed the BoE’s
high for longer stance:

• Important for policy
  to be restrictive for an extended period.
• Inflation is falling
  but still high.
• I have no
  pre-determined policy path in mind.
• Labour market is
  loosening but remains tight.

The Canadian CPI for November beat expectations across
the board:

• CPI Y/Y 3.1% vs. 2.9%
  expected and 3.1% prior.
• CPI M/M 0.1% vs.
  -0.1% expected and 0.1% prior.
• Core CPI Y/Y 2.8% vs.
  2.7% prior.
• Core CPI M/M 0.1% vs. 0.3% prior.
• Trimmed Mean Y/Y
  3.5% vs. 3.3% expected and 3.5% prior.
• Median Y/Y 3.4% vs. 3.3%
  expected and 3.4% prior (revised from 3.6%).
• Common Y/Y 3.9% vs.
  4.0% expected and 4.2% prior.

The US Housing Starts and Building Permits for
November beat expectations:

• Housing starts 1.560M
  vs. 1.360M expected and 1.359M prior.
• Building permits
  1.460M vs. 1.465M expected.
• Housing starts M/M
  14.8% vs. 0.2% prior (revised from 1.9%).
• Building permits M/M
  -2.5% vs. 1.1% prior.

Fed’s Barkin
(neutral – voter in 2024) basically repeated what Goolsbee said as the fall in
inflation closer to the central bank’s target is giving them more room to focus
on the dual mandate:

• Inflation remains a
  focus for the Fed.
• Says they are now
  looking to balance this focus with other aspects of the Fed’s mandate,
  considering the progress made in reducing inflation.
• Clarifies that the
  Fed’s forecasts are not meant to be taken as guidance but are simply
  projections.
• Downplays the
  optimistic Q3 GDP data, noting that his ground-level contacts do not
  reflect this level of growth.
• Observations
  indicate that demand, employment, and inflation are stabilizing and not as
  excessively high as Q3 data suggested.
• Remarks on the
  significant decrease in inflation and anticipates further cooling.
• Notes that demand is
  normalizing but not dramatically declining.
• The Fed is seeking
  strong evidence that inflation is returning to its target and notes signs
  of weakening in certain areas of the consumer economy.
• Regarding potential
  rate cuts, Barkin states that if inflation decreases as anticipated, the
  Fed will respond appropriately.
• Believes inflation
  is proving to be more persistent than most Fed officials think.
• Feels that the
  Federal Reserve is well-positioned given the current economic outlook.
• When asked about
  financial market conditions, he comments that the markets will behave
  independently.

Fed’s Bostic
(neutral – voter in 2024) echoed his colleagues’ views as he emphasized that
the reduction in rates will be just a strategy to avoid overtightening given
that the fall in inflation will make the neutral rate to fall as well:

• Still a way to go on
  inflation even though Fed has made “tremendous” progress.
• Pandemic policies
  left families and businesses in much stronger position able to absorb
  restrictive policy.
• Expect inflation to
  continue to come down slowly and unevenly.
• Expect tight labour
  markets to continue moving forward.
• Paying a lot of
  attention to 3 and 6-month inflation figures, they are coming down.
• Wages have been a
  trailing indicator and a way to retain workers.
• Have to keep an eye
  out to ensure output does not become too weak.
• Businesses and
  employers still see the economy as strong, with robust demand.
• Fed is in a good
  play with a pathway to fixing inflation without much labour market pain.
• Businesses
  increasingly say they do not have the same price power as early in the
  pandemic.
• Fed is not going to
  jump at the first data point.
• Policy will need to
  be resolute.
• There “is not
  going to be urgency” for Fed to back away from restrictive stance.
• Continues to predict
  two rates cuts in 2024.
• Fed cannot wait to
  get to 2% to reduce rates or it will ‘overshoot’, that is the strategy
  behind rate cuts.
• Now is not the time
  to consider changing the inflation goal, but nothing should be etched in
  stone.

RBNZ Governor Orr acknowledged
the complex situation they are into with the latest GDP figures showing a
contraction in Q3:

• Inflation remains too high.
• The committee
  remains weary of ongoing inflationary surprises.
• Internalizing
  complex situation of subdued 3Q GDP, historic downgrades.
• Neutral interest
  rate is now at 2.55%.

The PBoC left the
LPR rates unchanged as expected:

• LPR 1 year 3.45% vs. 3.45% prior.
• LPR 5 years 4.20% vs. 4.20% prior.

The UK CPI for
November missed expectations across the board by a big margin:

• CPI Y/Y 3.9% vs.
  4.4% expected and 4.6% prior.
• CPI M/M -0.2% vs.
  0.1% expected and 0.0% prior.
• Core CPI Y/Y 5.1%
  vs. 5.6% expected and 5.7% prior.
• Core CPI M/M -0.3%
  vs. 0.2% expected and 0.3% prior.
• Core CPI 6-month annualised 2.2%.

ECB’s Nagel (hawk
– voter) warned traders on impending rate cuts:

“I
would say to everyone who is speculating on an imminent interest rate cut: Be
careful, some people have already miscalculated that. We must initially remain
at the current interest rate plateau so that monetary policy can fully develop
its inflation-dampening effect.”

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

• A rate cut in the
  first half of 2024 rather unlikely based on current info.
• We have to see how
  wages data develops, will see data around the middle of 2024.
• Optimal path for
  rates closer to market pricing at cut-off date than now.
• Any structural bond
  portfolio should be as small as possible.

The US Consumer
Confidence for December beat expectations by a big margin:

• Consumer Confidence
  110.7 vs. 104.0 expected and 101.0 prior (revised from 102.0).
• Present situation
  index 148.5 vs. 136.5 prior (revised from 138.2).
• Expectations 85.6 vs.
  77.4 prior (revised from 77.8).
• 1 year inflation
  expectations 5.6% vs. 5.7% prior.
• Jobs hard-to-get
  13.2 vs. 15.4 prior.

Fed’s Harker (neutral –
non voter in 2024) warned that things are softening faster than the data
suggests although he pushed back against imminent rate cuts expectations:

• The job of
  controlling inflation is not done.
• Things are looking
  better for the inflation outlook.
• Hearing things are
  starting to soften faster than data suggests.
• We don’t need to
  raise rates anymore.
• Soft landing process
  will likely be bumpy.
• Expect unemployment
  to take up not by a lot.
• A lot of things
  could thwart a soft landing.
• US economy is
  incredibly resilient.
• Reasons for some
  people’s bad economic vibes are real.
• High-priced level
  over many parts of the economy weighing on many.
• Firms are having
  better luck finding new work.
• Fed won’t cut rates
  right away.
• Infrastructure
  investment is very important.

The BoC released the
Minutes of its December Monetary Policy Meeting:

• Agreed the
  likelihood that monetary policy was sufficiently restrictive had
  increased.
• Agreed that risks to
  the inflation outlook remained and it might still be necessary to hike.
• Expressed concern
  that shelter price inflation could remain elevated, which could make it
  more difficult to return inflation to 2%.
• Felt that
  significant and sustained increase in new home construction would be
  needed to resolve long-standing structural shortage in supply.
• Agreed monetary policy
  couldn’t solve housing supply problems.
• Considerable
  uncertainty surrounding the outlook for inflation.

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

• Rates to remain at
  4.00% for some time before likely cut.
• Says he’s not as
  optimistic as markets on the timing of the first cut.
• First rate cut could
  come around middle of 2024.

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

• Interest
  rates are doing what they are supposed to do, which is bring inflation down.
• Once we see inflation converging to 2% target, then monetary policy
  might start to ease.
• But
  it’s still too early for that to happen now.
• The
  ECB remains data dependent.
• Recent data have been favourable but not enough to change policy.
• It is too early to talk about rate cuts.

Angola
announced its withdrawal from OPEC. Angola has been part of OPEC since 2007 and
they alongside Congo and Nigeria, have failed to meet their respective output
targets for years now. This resulted in pressure from Saudi Arabia to force
them to accept lower output targets for next year. According to Reuters (citing
independent sources from OPEC), Angola has been pumping less than its quota for
2024 as of October this year. For some context, Angola had last month rejected
the new output quota handed to it by OPEC and said it planned to breach it.
That played a part in the spat among OPEC members that delayed the meeting in
late November.

The Canadian Retail Sales
for October beat expectations:

• Retail Sales October
  0.7% vs. 0.8% expected and 0.6% prior.
• Retail Sales Y/Y
  2.2% vs. 2.7% prior (revised from 2.2%).
• Ex auto 0.6% vs.
  0.5% expected and 0.1% prior (revised from 0.2%).
• Ex auto and gas 1.2%
  vs. -0.3% prior.
• November Advance estimate 0.0%.

The Final reading for US Q3
GDP was revised lower:

• GDP Q3 4.9% vs. 5.2% expected.
• Consumer spending 3.1% vs. 3.6% prelim.
• Consumer spending on
  durables 6.7% vs. -0.3% prior.
• GDP final sales 3.6%
  vs. 3.7% prelim.
• GDP deflator 3.3% vs. 3.5% prelim.
• Core PCE 2.0% vs. 2.3% prelim.
• Corporate profits 3.7% vs. 4.1% prelim.
• Business investment 5.2% vs. 3.9% prelim.

The US Jobless Claims
beat expectations once again. The Initial Claims data comprises the NFP survey
week.

• Initial Claims 205K
  vs. 215K expected and 203K prior (revised from 202K).
• Continuing Claims
  1865K vs. 1888K expected and 1866K prior (revised from 1876K).

The Japanese CPI for
November eased further across all measures:

• CPI Y/Y 2.8% vs. 3.3%
  prior.
• CPI M/M -0.1% vs. 0.7% prior.
• Core CPI Y/Y 2.5% vs.
  2.5% expected and 2.9% prior.
• Core-Core CPI Y/Y 3.8% vs. 4.0% prior.

The UK Retail Sales for
November beat expectations across the board with positive revisions to the
prior figures:

• Retail sales M/M
  1.3% vs. 0.4% expected and 0.0% prior (revised from -0.3%).
• Retail sales Y/Y 0.1%
  vs. -1.3% expected and -2.5% prior (revised from -2.7%).
• Retail sales ex
  autos, fuel M/M 1.3% vs. 0.4% expected and 0.2% prior (revised from -0.1%).
• Retail sales ex
  autos, fuel Y/Y 0.3% vs. -1.5% expected and -2.1% prior (revised from
  -2.4%).

The UK Final GDP for Q3
was revised lower:

• Q3 GDP Q/Q -0.1% vs. 0.0%
  expected and 0.0% prior (revised from -0.1%).

The US Durable Goods
Orders beat expectations:

• Durable Goods Orders M/M 5.4%
  vs. 2.2% expected and -5.1% prior (revised from -5.4%).
• Durable Goods Orders ex
  Transportation M/M 0.5% vs. 0.1% expected and -0.3% prior (revised from 0.0%).
• Durable Goods Orders ex
  Defence M/M 6.5% vs. -6.4% prior (revised from -6.7%).
• Non-defence Goods Orders
  Ex Air M/M 0.8% vs. 0.2% expected and -0.6% prior (revised from -0.1%).

The Canadian GDP for
October missed expectations:

• Canada GDP October 0.0%
  versus 0.2% expected and 0.0% prior (revised from 0.1%).
• Service producing industries rose 0.1%.
• Goods producing industries unchanged.
• The advanced GDP for
  November is a gain of 0.1%.

The US Core PCE for November missed
expectations with negative revisions to the prior figures:

• PCE Y/Y 2.6% vs.
  2.8% expected and 2.9% prior (revised from 3.0%).
• PCE M/M -0.1% vs.
  0.0% and 0.0% prior.
• Core PCE Y/Y 3.2%
  vs. 3.3% expected and 3.4% prior (revised from 3.5%).
• Core PCE M/M 0.1% vs.
  0.2% expected and 0.1% prior (revised from 0.2%).

Consumer spending and
income for November:

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

The
6-month annualised rate fell to 1.9%. Fed’s Bostic recently said “Paying a
lot of attention to 3 and 6-month inflation figures, they are coming down”.

The
highlights for next week will be:

• Tuesday: Japan Jobs data.
• Wednesday: BoJ Summary of
  Opinions.
• Thursday: Japan Industrial
  Production and Retail Sales, US Jobless Claims.

That’s all folks. Wish
you a Merry Christmas and a Happy New Year!