Weekly Market Recap (27-01 December)

BoJ Governor Ueda
continues to be uncertain about them hitting the 2% target sustainably:

• Cannot say with
  conviction that inflation will hit 2% sustainably.
• Japan economy is
  recovering moderately.
• The output gap has
  narrowed to near zero.
• Some positive signs
  seen in wages and inflation.
• But there is still
  high uncertainty on whether this cycle can strengthen further.

BoE Governor
Bailey (neutral – voter) pushed back on rate cuts expectations:

• It is too soon to
  discuss about cutting interest rates.
• Getting inflation
  down to 2% will be hard work.
• A lot of the recent
  fall in inflation is due to unwinding of energy cost surge.

ECB President Lagarde
(neutral – voter) acknowledged the stagnation in the Eurozone economy but
remains wary of prematurely declaring victory against inflation:

• Euro area activity
  has stagnated in recent quarters and is likely to remain weak for the rest
  of the year.
• Advises that it is
  premature to start declaring victory in the current economic scenario.
• There are
  indications of potential job growth slowdown towards the end of the year,
• Emphasizes the need
  to stay focused on the mandate of price stability, considering various
  forces affecting inflation.
• Notes that wage
  pressures remain strong.
• Looking beyond 2024,
  the ECB’s Governing Council is committed to exploring ways to further
  decarbonize corporate portfolios.
• Expects the
  weakening of inflationary pressures to continue.
• States that the
  medium-term outlook for inflation is still surrounded by considerable
  uncertainty.
• Says the PEPP will
  be discussed in the not-so-distant future.
• We will re-examine a
  proposal to keep reinvesting until the end of 2024.

The Australian Retail
Sales for October missed expectations:

• Retail Sales M/M
  -0.2% vs. 0.1% expected and 0.9% prior.
• Retail Sales Y/Y
  1.2% vs. 2.0% prior.

RBA Governor Bullock
highlighted that the strength in the labour market is keeping inflation high
for longer than expected:

• High employment is
  helping people to pay expensive mortgages.
• Says Australia
  inflation path is similar to overseas.
• Says again she
  expects inflation to decline to just under 3% in 2025.
• Notes uncertainty on
  inflation’s path.
• Monetary policy is restrictive.
• Rate hikes are
  dampening demand but demand being propped up by immigration, this has
  contributed to second round effects of cost rises.
• Sticky services inflation.

BoE’s Ramsden (neutral –
voter) reiterated that the central bank will keep interest rates high for an
extended period of time to ensure that inflation goes back to the 2% target:

• Monetary policy is
  likely to need to be restrictive for an extended period of time to get
  inflation back to 2% target.
• UK inflation is more
  homegrown.
• The path of rates
  will be data dependent.
• We are not making
  any commitments on where rates will be.

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

• Rate hikes are not
  necessarily over.
• Would have to hike
  again if inflation outlook worsened.
• Premature to discuss
  about rate cuts, would prefer to err on the side of caution.
• Inflation outlook is
  encouraging but core inflation dynamics continue to be strong.

BoE’s Haskel (hawk –
voter) pushed back against rate cuts expectations citing labour market
tightness as a reason for persistently high inflation:

• Labour market
  tightness continues to impart inflation pressures.
• This will need higher
  rates for longer to get inflation sustainably to target.
• Current outlook does
  not suggest scope for moderation in rates any time soon.
• This is why I have
  been voting for higher rates at recent meetings.
• At current rate of
  change, it would take at least a year to fall back to average pre-pandemic
  tightness.
• Rates will have to
  be held higher and longer than many seem to be expecting.

The US Consumer
Confidence beat expectations, although the labour market details continue to
show weakness:

• Consumer Confidence
  102.0 vs. 101.0 expected and 99.1 prior (revised from 102.6).
• Present situation
  index 138.2 vs. 138.6 prior (revised from 143.1).
• Expectations index 77.8 vs. 75.6 prior.
• 1 year inflation
  expectations 5.7% vs. 5.9% prior.
• Jobs hard-to-get
  15.4 vs. 13.1 prior.

Fed’s Waller (hawk –
voter) delivered mostly neutral remarks, but the market reacted on him saying
that they could start lowering rates if inflation continues to fall for several
more months, which is consistent with the current market pricing:

• Need some
  improvement in services inflation ex-housing for overall inflation to
  reach 2%.
• Increasingly
  confident policy is well-positioned to slow economy, get inflation back to
  2%.
• Cannot say for sure
  if Fed has done enough.
• Data over the next
  couple months will hopefully tell if the Fed has done enough.
• Recent loosening of
  financial conditions a reminder to be careful about relying on market
  tightening to do Fed’s job.
• Encouraged by signs
  of moderating economic growth.
• Inflation still too
  high, too early to say if slowing will be sustained.
• Supply-side problems
  mostly behind us. Monetary policy will need to do the work from here.
• Premature to rely on
  productivity growth gains to guide stance of Fed policy.
• Consumer spending is
  slowing, manufacturing and nonmanufacturing activity has slowed.
• Labor market is
  cooling off, but still fairly tight and will watch closely.
• Will closely monitor
  goods, services prices in coming weeks to see if inflation still on
  downward path.
• If the decline in
  inflation continues for several more months, three months, four months,
  five months, we could start lowering the policy rate just because
  inflation is lower.

Fed’s Bowman (hawk –
voter) remains one of the most hawkish members as she still sees a rate hike as
her baseline scenario:

• Says she Favors
  hiking if inflation progress stalls.
• Inflation remains
  high, recent progress is uneven.
• Baseline outlook is
  that the Fed will need to increase rates further to keep policy
  sufficiently restrictive.
• Fed should keep in
  mind risks with prematurely declaring victory on inflation.

Fed’s Williams (neutral –
voter) welcomed the decline in inflation:

• Encouraging to see
  decline in inflation pressure.
• Fed has signalled
  strong commitment to get inflation back to 2%.
• Longer run inflation
  expectations have been very stable.

Fed’s Goolsbee (dove –
voter) is focused on housing inflation:

• Of all pieces of
  data, housing inflation is most paramount.
• Market-based
  inflation expectations have been anchored.
• Have some concern
  about keeping rates too high for too long.
• Once you believe you
  are on path to 2% inflation, amount of restrictiveness needs to be less.
• Data will determine
  how fast we go.

The Australian Monthly
CPI for October missed expectations:

• CPI Y/Y 4.9% vs.
  5.2% expected and 5.6% prior.
• CPI M/M -0.4% vs. 0.3% prior.
• CPI Trimmed Mean Y/Y
  5.3% vs. 5.4% prior.
• Goods inflation Y/Y
  4.6% vs. 5.7% prior.
• Services inflation
  5.0% vs. 5.3% prior.

BoJ’s Adachi, as other
BoJ members, continue to highlight the importance of wage inflation as a key
decision maker for any BoJ policy normalisation:

• Japan yet to see
  positive wage-inflation cycle become embedded enough.
• Appropriate to
  patiently maintain easy policy.
• If needed BoJ will
  take additional easing steps.
• Steps BoJ took in
  October to make YCC flexible not aimed at laying the groundwork for policy
  normalisation.
• Japan’s inflation
  expectations heightening moderately.
• See risk to Japan’s
  inflation outlook skewed to upside.
• Companies starting
  to shed deflationary price-setting practices.
• Hard to predict now
  whether wage hikes will continue next fiscal year.
• Given high
  uncertainty over global economic outlook, there is risk Japan’s inflation,
  wages face downward pressure.
• If positive
  wage-inflation cycle strengthens, that could further push up prices.
• Positive
  wage-inflation cycle has not happened yet.
• But if chances of it
  happening increases, then we can start discussing exit strategy.
• Don’t need to
  necessarily wait for it to turn positive to debate exit from negative
  rates.
• Will probably need to wait until the start of the next fiscal year in determining
  wage talks outcome.
• The
  outcome will be crucial in making any big policy decisions.
• Does
  not think BoJ are at the stage to discuss an end to negative rates.

The RBNZ left the OCR
unchanged at 5.5% as expected:

• Interest rates are restricting
  spending in the economy and consumer price inflation is declining, as is
  necessary to meet the committee’s remit.
• Interest rates will
  need to remain at a restricted level for a sustained period of time.
• However, inflation
  remains too high, and the committee remains wary of ongoing inflationary
  pressures.
• Demand growth has
  eased, but by less than anticipated over the first half of 2023 in part due to
  strong population growth.
• The committee is confident
  that the current level of the OCR is restricting demand.
• The OCR will need to
  stay restrictive, so demand growth remains subdued, and inflation returns
  to the 1 to 3 percent target range.
• If inflationary
  pressures were to be stronger than anticipated, the OCR would likely need
  to increase further.

Forecasts:

• Sees official cash
  rate at 5.63% in March 2024 (prior 5.58%).
• Sees official cash
  rate at 5.66% in December 2024 (prior 5.5%).
• Sees official cash
  rate at 5.56% in March 2025 (prior 5.36%).
• Sees official cash
  rate at 3.55% in December 2026.
• Sees NZD TWI at
  around 70.7% in December 2024 (prior 71.0%).
• Sees annual CPI 2.5%
  by December 2024 (prior 2.4%).

From
the minutes of the meeting:

• Committee agreed
  that interest rates will need to remain at a restrictive level for longer.
• Members agreed they remain
  confident that monetary policy is restricting demand.
• Ongoing excess
  demand and inflationary pressures were of concern, given high core
  inflation.
• Members discussed
  the possibility of the need for increases to the OCR.
• Members agreed that
  with interest rates already restrictive, it was appropriate to wait for
  further data and information.
• Members agreed that
  monetary policy was supportive of sustainable house prices.
• Pressure in the
  labour market is easing, although employment remains above its maximum
  sustainable level.
• Members also noted
  that most major central banks have indicated that they intend to retain
  current restrictive policy rates for longer, and are willing to tighten
  further, if required.
• While growth in
  parts of the economy is slowing, there has been less of a decline in
  aggregate demand growth than expected earlier in the year.
• Committee noted that
  the estimate of the long-run nominal neutral OCR has increased by 25 basis
  points to 2.50%.

Moving on to the Governor
Orr Press Conference:

• Meeting with new PM
  was highly constructive.
• We’ve been adamant
  on holding rates through next year.
• Projection shows
  upward bias to rates, but it is not a done deal.
• Risk to inflation is
  still more to upside.
• We did discuss
  raising rates at this meeting.
• Had a robust
  discussion about rates.
• Nervous that
  inflation has been outside the band for so long.
• Concerned that
  longer-term inflation expectations are creeping up.
• Global rates do
  matter to us, very tuned into that outlook.
• Will make decision
  on debt-to-income restrictions early next year.
• Seeing credit growth
  slowing rapidly, our message on rates is being heeded.
• We are saying rates
  need to be this high for some time to come, banks should listen.
• We are not bound by
  policy meeting dates, can act on shocks if needed.
• Comfortable on
  waiting until the February meeting right now.
• Domestic inflation
  is causing the challenge, big part of that is dwelling costs.

ECB’s de Guindos (neutral
– voter) just explained why they raised interest rates:

• Our objective is to
  bring inflation back to 2% target.
• Rate hikes are both
  for borrowers and savers.
• That is part of our
  monetary policy transmission.
• If savings become
  more attractive, consumers will spend less, reducing demand.
• This is what we aim
  for to push down inflation.

Fed’s Barkin (neutral –
non voter) pushed back on rate cuts expectations as he sees inflation being
more stubborn than expected:

• Revised consumer
  spending data is more consistent with what I am hearing on the ground.
• I’m hearing
  consumers slowing down, but not falling off the table.
• Sceptical that price
  setters at this point have gone back to where they were pre-Covid.
• 5.2% GDP tells
  companies that they can still try to raise prices.
• The goods inflation
  has clearly come down. It’s basically back to pre-Covid levels.
• While I think that
  entry rates have clearly come down, but housing inflation is still going
  up.
• A lot of services
  prices are still going up driven by wages.
• I am still in the
  “looking to be convinced category” that inflation is coming down.
• Not willing to take
  another rate hike off the table.
• Want the option of
  doing more on rates if inflation flairs again.
• Markets have a
  different forecast than me on inflation.
• I believe inflation
  will be stubborn then we’d like.
• Talking about rate
  cuts is premature.
• We do hope the
  messages we send go into the financial conditions in the markets.
• Try not to get
  overly focused on the financial conditions in the markets.
• Market bets on 4
  rate cuts next year might be based on expectations for soft landing. I hope they are right.
• My forecast is that
  inflation will come down but stubbornly.
• We will in the end
  have some kind of slowdown.
• To lower rates you’d
  need to be confident inflation is headed back to 2%.

Fed’s Mester (hawk – non
voter) toned down her hawkish stance as she’s comfortable with the current
policy setting:

• Monetary policy is
  in a good place.
• Sees “clear progress”
  in getting inflation to 2%.
• It will take time to
  get to 2% but Fed will do it.
• Fed has time to vet
  incoming data.
• Monetary policy must
  be nimble in current circumstances.
• Monetary policy well
  positioned to be flexible.

The Fed’s Beige Book showed
slowing economic activity with the index now at levels consistent with a recession:

• On balance, economic
  activity slowed since the previous report.
• Retail sales,
  including autos, remained mixed; sales of discretionary items and durable
  goods, like furniture and appliances, declined, on average, as consumers
  showed more price sensitivity.
• Four Districts
  reported modest growth, two indicated conditions were flat to slightly
  down, and six noted slight declines in activity.
• Demand for
  transportation services was sluggish.
• Manufacturing
  activity was mixed, and manufacturers’ outlooks weakened.
• Consumer credit
  remained fairly healthy, but some banks noted a slight uptick in
  consumer delinquencies.
• The economic outlook
  for the next six to twelve months diminished over the reporting period.
• Price increases
  largely moderated across Districts, though prices remained elevated.
• Most Districts
  expect moderate price increases to continue into next year.
• Demand for labour
  continued to ease, as most Districts reported flat to modest increases in
  overall employment.
• Several Districts
  continued to describe labour markets as tight with skilled workers in
  short supply.

The 2^nd
estimate for the US Q3 GDP was revised upwards, but personal consumption and
Core PCE were revised downwards:

• US Q3 GDP 2nd Estimate
  5.2% vs. 5.0% expected and 4.9% for the advance reading.
• Q2 final reading was 2.1%.
• Personal consumption
  3.6% vs. 4.0% advance reading.
• Core PCE prices 2.3%
  vs. 2.4% expected.
• PCE prices 2.8% vs. 2.9% advance.
• GDP deflator 3.5% vs. 3.5% expected.
• GDP final sales 3.7%
  vs. 3.5% advance.
• Corporate profits
  after tax 4.1% vs. 0.5% in Q2.

The Japanese Industrial
Production for October beat expectations:

• Industrial
  Production M/M 1.0% vs. 0.8% expected and 0.5% prior.
• Industrial
  Production Y/Y 0.9% vs. -4.4% prior.

The Chinese PMIs for
November missed expectations:

• Manufacturing PMI 49.4
  vs. 49.7 expected and 49.5 prior.
• Services PMI 50.2 vs 51.1
  expected and 50.6 prior.

BoJ’s Nakamura reiterated
the central bank’s dovish stance as they remain uncertain on inflation hitting
the 2% target sustainably:

• Will need some more
  time before we can modify easy monetary policy.
• Now is a time to be
  cautious in our policy response.
• Current inflation is
  mostly driven by cost-push factors.
• We haven’t reached a
  stage where we can say with conviction that sustained, stable achievement
  of 2% inflation accompanied by wage growth is in sight.
• We are seeing signs
  Japan will see wage growth exceeding rate of inflation.
• Must patiently
  maintain current monetary easing for time being.

The Eurozone CPI for
November missed expectations across the board:

• CPI Y/Y 2.4% vs.
  2.7% expected and 2.9% prior.
• CPI M/M -0.5% vs. 0.1% prior.
• Core CPI Y/Y 3.6%
  vs. 3.9% expected and 4.2% prior.
• Core CPI M/M -0.6% vs. 0.2% prior.

The Eurozone Unemployment
Rate remained unchanged at 6.5% vs. 6.5% prior.

ECB’s Panetta (dove –
voter) reaffirmed the central bank’s “wait and see” approach:

• Current interest rates level consistent to bring inflation down to
  target.
• May
  be able to ease monetary conditions if persistently weak output accelerates the
  decline in inflation.
• Monetary
  tightening has not yet had full impact and will continue to dampen demand in
  the future.
• Risks to Eurozone economy are tilted to the downside.
• The
  economy remains weak in Q4 2023.

The Canadian Q3 GDP
missed expectations coming in with a negative print:

• Q3 GDP Q/Q -0.3% vs.
  0.2% expected.
• Annualized Q/Q GDP
  -1.1% vs. 0.2% expected.
• Q2 annualized Q/Q
  GDP revised to 1.4% from -0.2%.
• September GDP 0.1% vs. 0.0% expected.
• August GDP was 0.0%.
• Preliminary October GDP 0.2%.
• Q2 GDP revised to 0.3%
  from 0.0%.
• GDP implicit price
  Q/Q 1.8% vs. 0.4% prior (revised from 0.7%).
• Q3 final domestic
  demand 0.3% vs. 0.3% prior.

The US PCE came in line
with expectations:

• PCE Y/Y 3.0 vs. 3.0%
  expected and 3.4% prior.
• PCE M/M 0.0% vs.
  0.1% expected and 0.4% prior.
• Core PCE Y/Y 3.5%
  vs. 3.5% expected and 3.7% prior.
• Core PCE M/M 0.2%
  vs. 0.2% expected and 0.3% prior.

The US Initial Claims
beat expectations once again while the Continuing Claims missed by a big
margin:

• Initial Claims 218K
  vs. 220 expected and 211K prior (revised from 209K).
• Continuing Claims
  1927K vs. 1872K expected and 1841 prior (revised from 1840K).

Fed’s Daly (neutral – non
voter) pushed back against rate cuts expectations as she continues to support
the “high for longer” stance:

• It’s still too early
  to know if Fed is done hiking rates.
• Should take our time
  now and remain vigilant.
• Need to better
  understand what’s happening with the economy and inflation.
• Latest data is encouraging.
• I’m not thinking
  about rate cuts at all right now.
• Economy needs to
  cool down a little more.
• Further rate hikes
  are not our base case.
• Hearing more and
  more it is harder for companies to pass along price hikes.
• People’s fear of
  recession has faded into the background.

Fed’s Williams (neutral –
voter) delivered mostly neutral comments. The interesting part is this line “Key
for policy is persistence of easing in financial conditions”. It looks like the
higher the stock market (or bond market) goes, the less incentive he’s going to
have to cut:

• If inflation
  pressures persist, we could hike again.
• We are at or near
  the peak of interest rate target.
• Sees inflation
  falling to 2.25% in 2024.
• Inflation will close
  in on 2% in 2025.
• Financial conditions have tightened.
• Sees GDP at 1.25%
  next year.
• Sees unemployment at
  4.25% next year.
• Sees upside and
  downside risks for inflation.
• Says he’s not losing
  sleep over market views of Fed funds path.
• Key for policy is persistence of easing in
  financial conditions.
• Notes a significant
  decline in inflation.
• Financial conditions
  are volatile, and markets are sensitive.

BoE’s Greene (hawk –
voter) continues to maintain her hawkish stance:

• Policy may have to
  be restrictive for an extended period of time.
• I believe r* may
  have risen.
• The labour market
  has shown signs of inflation persistence.
• Data on activity
  remains mixed though, so I continue to worry more about the risk of
  inflation persistence.

The OPEC+ producers
failed to agree on a group cut and proceeded with voluntary output cuts of
about 2.2 million BPD with Saudi Arabia extending its 1 million BPD voluntary
output cut into Q1 2024 and then phasing them out. Russia increased its
voluntary cut from 300K to 500K until the end of Q1 2024. Finally, Brazil was
invited to join OPEC+ effective from January 1^st.

The Japanese Unemployment
Rate ticked lower to 2.5% vs. 2.6% prior.

The Chinese Caixin
Manufacturing PMI beat expectations:

• Manufacturing PMI 50.7
  vs. 49.8 expected and 49.5 prior.

Key
points in the report:

• Production returns
  to growth amid sustained rise in total new work.
• Softer reduction in employment.
• Business confidence
  ticks up to four-month high.

The Switzerland Q3 GDP
beat expectations:

• Q3 GDP Q/Q 0.3% vs. 0.1%
  expected and -0.1% prior (revised from 0.0%).

The Switzerland
Manufacturing PMI slightly beat expectations:

• Manufacturing PMI 42.1
  vs. 42.0 expected and 40.6 prior.

The Canadian Labour Market
report beat expectations, but the unemployment rate keeps on increasing:

• Employment Change
  24.9K vs. 15.0K expected and 15.0K prior.
• Unemployment rate
  5.8% vs. 5.8% expected and 5.7% prior.
• Full-time employment
  59.6K vs. -3.3K prior.
• Part-time employment
  -34.7K vs. 20.8k prior.
• Participation rate
  65.6% vs. 65.6% prior.
• Average hourly wages
  permanent employees Y/Y 5.0% vs. 5.0% prior.

The Canadian
Manufacturing PMI fell further into contraction:

• Manufacturing PMI 47.7 vs. 48.6 prior.

The US ISM Manufacturing
PMI missed expectations with all the sub-indexes in contraction:

• Manufacturing PMI 46.7
  vs. 47.6 expected and 46.7 prior.
• Prices paid 49.9 vs. 45.1 prior.
• Employment 45.8 vs. 46.8 prior.
• New orders 48.3 vs. 45.5 prior.
• Inventories 44.8 vs. 43.3 prior.
• Production 48.5 vs. 50.4 prior.

Fed Chair Powell (neutral
– voter) delivered mostly neutral comments as the FOMC continues to prefer a “wait
and see” approach:

• FOMC is moving
  forward carefully as risks around rates becoming more balanced.
• It’s premature to
  say that monetary policy is restrictive enough.
• Fed will raise rates
  if needed to lower inflation.
• Fed is making rate
  decisions meeting by meeting.
• Uncertainty over
  economic outlook is unusually elevated.
• Fed funds range well
  into restrictive territory.
• Fed has made
  considerable progress in lowering inflation.
• Welcomes recent
  softening in inflation data.
• Need to see more
  progress on lowering inflation to 2%.
• Wage growth still
  high but moderating to more sustainable levels.
• Unemployment up but
  still historically low.
• As the demand and
  supply related effects of the pandemic continue to unwind, uncertainty
  about the outlook for the economy is unusually elevated.

The highlights for next
week will be:

• Monday: Switzerland CPI.
• Tuesday: Tokyo CPI, China Caixin
  Services PMI, RBA Policy Decision, Eurozone PPI, Canada Services PMI, US ISM
  Services PMI, US Job Openings.
• Wednesday: Australia GDP, Eurozone
  Retail Sales, US ADP, BoC Policy Decision.
• Thursday: China Trade data,
  Switzerland Unemployment Rate, US Challenger Job Cuts, US Jobless Claims.
• Friday: Japan Wage data, US
  NFP, University of Michigan Consumer Sentiment.

That’s all folks. Have a
nice weekend!