Weekly Market Recap (04-08 December)

BoJ Noguchi reiterated the central bank’s focus on
wage growth to reach their 2% target sustainably with no policy change in
sight:

• It’s true the impact
  of elevated global inflation is reaching Japan’s economy with consumer
  inflation exceeding the BoJ’s 2% target since the spring of 2022.
• But the rise (in
  inflation) is mostly due to cost-push factors amid higher import prices.
• To achieve our 2% inflation
  target, we must see price rises backed by sustained wage increases.
• While annual spring
  wage negotiations this year achieved wage hikes unseen in 30 years, we’ve
  only just reached a stage where the possibility of achieving our target
  has come into sight.

The Switzerland November CPI missed expectations with
both the measures comfortably in the SNB’s 0-2% target range:

• CPI Y/Y 1.4% vs.
  1.7% expected and 1.7% prior.
• CPI M/M -0.2% vs.
  -0.1% expected and 0.1% prior.
• Core CPI Y/Y 1.4% vs.
  1.5% prior.

ECB’s de Guindos (neutral – voter) maintained his
neutral stance as the central bank keeps a “wait and see” approach:

• Recent inflation
  data is good news.
• It’s been a
  ‘positive surprise’.
• But it is too early
  to declare victory.
• Increase in wages
  can still have an impact on inflation.
• Monetary policy
  stance will be data dependent.

The Tokyo CPI for
November fell further:

• CPI
  Y/Y 2.6% vs. 3.3% prior.
• Core
  CPI Y/Y 2.3% vs. 2.4% expected and 2.7% prior.
• Core-Core
  CPI Y/Y 2.7% vs. 2.7% prior.

The Chinese Caixin Services
PMI for November beat expectations:

• Caixin Services PMI
  51.5 vs. 50.8 expected and 50.4 prior.

Key
points from the report:

• Business activity
  and new orders increase at quickest rates in three months.
• Confidence around
  the year-ahead improves.
• Inflationary pressures weaken.

The RBA left the cash
rate unchanged at 4.35% as expected with a slightly dovish tone:

• Whether further
  tightening of monetary policy is required to ensure that inflation returns
  to target in a reasonable timeframe will depend upon the data and the
  evolving assessment of risks.
• Board remains
  resolute in its determination to return inflation to target.
• The limited
  information received on the domestic economy since the November meeting
  has been broadly in line with expectations.
• Outlook for
  household consumption also remains uncertain.
• The monthly CPI
  indicator for October suggested that inflation is continuing to moderate,
  driven by the goods sector; the inflation update did not, however, provide
  much more information on services inflation.
• Measures of
  inflation expectations remain consistent with the inflation target.
• Conditions in the
  labour market also continued to ease gradually, although they remain tight.
• Domestically, there
  are uncertainties regarding the lags in the effect of monetary policy.
• Higher interest
  rates are working to establish a more sustainable balance between
  aggregate supply and demand in the economy.
• Holding the cash
  rate steady at this meeting will allow time to assess the impact of the
  increases in interest rates on demand, inflation and the labour market.

The Eurozone PPI
for October came in line with expectations:

• PPI Y/Y -9.4% vs.
  -9.5% expected and -12.4% prior.
• PPI M/M 0.2% vs.
  0.2% expected and 0.5% prior.

ECB’s Schnabel
(hawk – voter) changed her tone to a more neutral stance after the latest
inflation report:

• Further rate hikes
  “rather unlikely” after latest inflation data.
• Inflation developments
  are encouraging, fall in core prices remarkable.
• Must be careful
  about guiding policy for many months out.
• Current level of
  restriction is sufficient, has increased confidence 2% target will be met
  in 2025.
• But must not declare
  victory prematurely.
• Inflation is on the
  right track, but more progress is needed.
• No prolonged
  recession is seen.
• Data suggests
  economy may be bottoming out.

The US ISM
Services PMI for November beat expectations:

• ISM Services PMI
  52.7 vs. 52.0 expected and 51.8 prior.
• Employment index 50.7 vs. 50.2 prior.
• New orders index
  55.5 vs. 55.5 prior.
• Prices paid index
  58.3 vs. 58.6 prior.
• New export orders
  53.6 vs. 48.8 prior.
• Imports 53.7 vs. 60.0 prior.

The US Job Openings for
October missed expectations by a big margin with a negative revision to the
prior reading:

• Job Openings 8.733M
  vs. 9.300M expected and 9.350M prior (revised from 9.553M).
• Hires 3.7% vs. 3.7% prior.
• Separations rate 3.6% vs. 3.6% prior.
• Quits 2.3% vs. 2.3%
  prior.

The Australian Q3 GDP
missed expectations:

• GDP Q/Q 0.2% vs.
  0.4% expected and 0.4% prior.
• GDP Y/Y 2.1% vs.
  1.8% expected and 2.1% prior.

BoJ’s Himino just echoed
the other members’ comments with the usual focus on wage growth:

• BoJ will patiently
  maintain easy policy until sustained, stable achievement of price target
  is in sight.
• Japan’s financial
  system is likely resilient enough to weather stress from transition to
  higher interest rates.

• If we do not get the
  timing exit procedures wrong, the impact of a positive wage-inflation
  cycle will likely benefit wide range of households, companies.

• Must make
  appropriate decision on exit timing, procedure by scrutinising wage,
  inflation developments.
• BoJ must achieve
  situation where inflation slows ahead, but not too much.

• Japan is seeing
  steadily changes in price, wage behaviour.

• Solid progress is
  observed in the transformation of firms’ wage- and price-setting
  behaviour.
• Price rises
  beginning to affect wages.
• Pass-through from
  wages to inflation is also returning somewhat.
• Without virtuous
  cycle between wages and prices, Japan will most likely revert to the
  deflationary state in the past.

• When Japan returns
  to an economy with positive interest rate, that could improve households’
  balance as a whole.
• If inflation
  expectations have heightened, that would mean impact of rise in real
  interest rate could be smaller than that of nominal rate.

The Eurozone
Retail Sales for October missed expectations:

• Retail
  Sales M/M 0.1% vs. 0.2% expected and -0.1% prior (revised from -0.3%).
• Retail
  Sales Y/Y -1.2% vs. -1.1% expected and -2.9% prior.

BoE’s Bailey
(neutral – voter) reaffirmed the central bank’s “wait and see” approach:

• Outlook for
  inflation is uncertain.
• Rates likely to need
  to remain around current levels.
• We remain vigilant
  to financial stability risks that might arise.

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

• Further
  rate hike is unlikely to be needed but market bets for Q1 rate cut are science
  fiction.

The US ADP missed
expectations:

• ADP 103K vs. 130K
  expected and 106K prior (revised from 113K).

Details:

• Small (less than 50
  employees) 6K vs. 19K prior.
• Medium firms (500 –
  499) 68K vs. 78K prior.
• Large (greater than
  499 employees) 33K vs. 18K prior.

Changes in pay:

• Job stayers 5.6% vs.
  5.7% prior – slowest since September 2021.
• Job changers 8.3% vs. 8.4% prior.

The BoC left
interest rates unchanged at 5.00% as expected:

• Statement repeats
  that BoC “is prepared to raise the policy rate further if
  needed”.
• Data “suggest
  the economy is no longer in excess demand”.
• BoC saw
  “further signs that monetary policy is moderating spending and relieving
  price pressures”.
• The slowdown in the
  economy is reducing inflationary pressures in a broadening range of goods
  and services prices.
• Governing Council
  wants to see further and sustained easing in core inflation.
• The global economy continues
  to slow, and inflation has eased further.
• US growth has been
  stronger than expected but is likely to weaken in the months ahead.
• Growth in the euro
  area has weakened.
• Oil prices are about
  $10-per-barrel lower than was assumed in the October MPR.
• The US dollar has
  weakened against most currencies, including Canada’s.
• Higher interest
  rates are clearly restraining spending: consumption growth in the last two
  quarters was close to zero.
• The labour market
  continues to ease: job creation has been slower than labour force growth.

ECB’s Villeroy
(neutral – voter) reaffirmed that the central bank is done with rate hikes and
the next step is rate cuts in 2024:

• Disinflation is
  happening more quickly than we thought.
• This is why, barring
  any shocks, there will not be any new rise in rates. The question of a
  rate cut could arise in 2024, but not right now.

BoJ Governor Ueda didn’t
say anything explicitly about an exit from the current easy policy BUT you can
clearly read between the lines that they are considering rate hikes:

• Japan’s economy to
  continue recovering moderately, supported mainly by accommodative
  financial conditions and effects of economic stimulus measures.
• Uncertainty over
  Japan’s economy extremely high.
• Closely watching the
  impact of financial, forex markets on the Japanese economy, prices.

• Will patiently
  continue monetary easing under YCC to support economic activity, cycle of
  wage growth.

• We have not yet
  reached a situation in which we can achieve price target sustainably and
  stably and with sufficient certainty.

• Challenging situation remains.
• It’ll become even
  more challenging towards the end of this year and into early 2024.

• BoJ has not made
  decision on which interest rate to target once we end negative interest
  rate policy.
• Options include
  raising rate applied to financial institutions’ reserves at BoJ, or revert
  to policy targeting overnight call rate.

• Don’t have any
  specific idea in mind on how much we will raise rates once we end negative
  rate policy.

• Whether to keep
  interest rate at zero or move it up to 0.1%, and at what pace short-term
  rates will be hiked after ending negative rate policy, will depend on
  economic and financial developments at the time.
• Achieving 2% trend
  inflation can be defined as a state where economy, void of new shocks, can
  see inflation sustained around 2% and wage growth somewhat above that
  level.
• Would be difficult
  to choose which monetary policy tools to mobilise when exit from stimulus
  draws near.
• BoJ to work closely
  with govt while monitoring currency, financial market moves.
• Service spending
  increasing moderately as a trend.
• What’s important
  from here is for wages to keep rising and underpin consumption.

The Switzerland
Unemployment Rate for November ticked higher to 2.1% vs. 2.0% prior, while the
Seasonally adjusted unemployment rate remained unchanged at 2.1% vs. 2.2%
expected.

The US Challenger
Job Cuts for November increased to 45.51K vs. 36.84K prior. Compared to the
same month last year, job cuts are down by roughly 41% but then again there was
an exceptional number of tech layoffs in November of 2022. The 45.51K layoffs
last month brings the year-to-date total to 686,860 and that’s roughly a 115%
increase to the year-to-date total for last year through to November.

The US Jobless
Claims beat expectations across the board:

• Initial Claims 220K
  vs. 222K expected and 219K prior (revised from 218K).
• Continuing Claims
  1861K vs. 1910K expected and 1925K prior (revised from 1927K).

BoC’s Gravelle
acknowledged the progress on inflation:

• Gravelle noted that
  housing imbalances have serious consequences for shelter price inflation,
  contributing 1.8 percentage points to the total October inflation rate of
  3.1%.
• Emphasized the need
  for Canada to have more homes and a housing supply that is more responsive
  to increases in demand.
• Pointed out that a
  jump in demographic demand, coupled with existing structural supply
  issues, could explain why rent inflation continues to climb.
• Stressed the
  importance of all levels of government working together on housing
  policies to boost supply.
• Urged the reduction
  of barriers to adding capacity and ensuring market flexibility to meet
  future changes in housing demand.
• Warned that without
  more house building, inflationary pressures in the shelter sector could
  continue to build.
• Highlighted that
  rent inflation reached a 40-year high in October, with housing supply not
  keeping pace with recent increases in immigration.
• Reported that
  housing activity grew 8.3% in Q3 but remains far below the level needed to
  meet growing housing needs.
• Commented that
  recent increases in immigration have boosted near-term consumption but
  haven’t significantly affected inflation.
• Noted that the
  economy is now roughly in balance, with a focus on monitoring inflation
  expectations, wage growth, and corporate pricing behaviour.
• Stressed the
  importance of indicators in assessing whether inflation is on a sustained
  path to the 2% target.
• Said that the market
  has been relatively right on their previous two or three decisions, so it
  seems like it’s taking in the data in the same way they are.

The Japanese Average Cash Earnings increased in
October on a year-over-year basis marking the 22^nd consecutive month
of rising wages:

• Average Cash
  Earnings Y/Y 1.5% vs. 0.6% prior (revised from 1.2%).
• Real wages Y/Y -2.3%.

The US NFP report beat expectations across the board
by a big margin:

• NFP 199K vs. 180K
  expected and 150K prior.
• Two-month net
  revision -35K vs -101K prior.
• Unemployment rate 3.7%
  vs. 3.9% expected and 3.9% prior.
• Participation rate 62.8% vs. 62.7% prior.
• U6 underemployment
  rate 7.0% vs. 7.2% prior.
• Average hourly
  earnings M/M 0.4% vs. 0.3% expected and 0.2% prior.
• Average hourly
  earnings Y/Y 4.0% vs. 4.1% expected and 4.0% prior (revised from 4.1%).
• Average weekly hours
  34.4 vs. 34.3 expected and 34.3 prior.
• Change in private
  payrolls 150K vs. 153K expected.
• Change in
  manufacturing payrolls 28K vs. 30K expected.
• Household survey 747K
  vs. -348K prior.
• Birth-death
  adjustment 4K vs. 412K prior.

The highlights for next week will be:

• Tuesday: Japan PPI, UK Labour Market report, 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.

That’s all folks. Have a nice weekend!