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Weekly Market Recap (18-22 December)

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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”.

New Zealand Services PMI

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).

German IFO Business Climate Index

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.

ECB’s Vasle

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.

BoE’s Broadbent

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.

Fed’s Mester

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.

ECB’s Kazimir

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.

Fed’s Goolsbee

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.

US NAHB Housing Market Index

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.

BoC’s Macklem

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.

RBA

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.

BoJ

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.

BoJ Governor Ueda

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.

ECB’s Villeroy

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.

BoE’s Breeden

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.

Canada Inflation Measures

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.

US Housing Starts and Building Permits

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 Barkin

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.

Fed’s Bostic

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%.

RBNZ Governor Orr

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.

PBoC

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%.

UK Core CPI YoY

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 Nagel

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.

ECB’s Knot

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.

US Consumer Confidence

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.

Fed’s Harker

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.

BoC

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 Kazaks

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.

ECB’s de Guindos

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.

OPEC

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%.

Canada Retail Sales YoY

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.

US Final Q3 GDP

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).

US Jobless Claims

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.

Japan Core-Core CPI YoY

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%).

UK Retail Sales YoY

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%).

UK Final Q3 GDP

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%).

US Durable Goods Orders MoM

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%.

Canada GDP MoM

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
”.

US Core PCE YoY

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!

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