UPCOMING EVENTS:

Tuesday: US ECI, US Consumer Confidence.

Wednesday: ISM Manufacturing PMI, US JOLTs Job Openings, FOMC Policy Decision.

Thursday: BoE Policy Decision, ECB Policy Decision, US Jobless Claims.

Friday: US NFP, ISM Services PMI.

If the last week was a pretty dull one with lack of big catalysts and a choppy price action, this one is going to be the complete opposite. We will have the FOMC and other major central bank policy decisions and lots of economic reports that the market is particularly focused on.

The "soft landing" narrative is dominating the scene at the moment with moderation in inflation and the resilience in the labour market. This has led to an easing in financial conditions.

I think the labour market data is more important now to the market given that the Fed has complained many times about the “extremely tight” labour market. We’ve finally been seeing disinflation in the past few months and the market has rallied on that, but the labour market data has consistently beat expectations.

This is something that should keep the Fed on its track to hike to their projected terminal rate because from a risk management perspective they can’t risk another spike in inflation given the tightness in the labour market, the easing in financial conditions and the China reopening.

Tuesday: The Employment Cost Index (ECI) is expected at 1.1% for Q4, down from the 1.2% of Q3. Wage inflation is something the Fed and the markets are keeping an eye on for the risk of a wage price spiral, but in the past months this risk subsided as data showed a moderation in wage growth.

Since the labour market is what in my opinion the market is more focused on now, I would look at the US Consumer Confidence Present Situation Index, which correlates with the unemployment rate, and generally foreshadows changes in employment by a couple of months.

Wednesday: The ISM Manufacturing PMI is expected to slip to 48.0 from the prior 48.4. The employment and prices paid sub-indexes will also be important to watch, with the former carrying more weight now for me. This is also why the US JOLTs Job Openings should also be market moving in case of a notable fall in the data.

The FOMC is expected to hike by 25 bps bringing the FFR to 4.50-4.75%. This move has been well telegraphed in the past weeks by further moderation in inflation and Fed members leaning on the smaller increase. In fact, the market is pricing a 98.4% chance of the Fed raising rates by 25 bps. The Fed generally follows market pricing, so it’s very unlikely to see them surprising with a 50 bps hike. I can see them raising by 50 bps only if they wanted to break the current “animal spirits” that made financial conditions to ease quite strongly in the recent months. Such a move would certainly trigger a big risk off across the board.

I would also add that the market is underestimating a lot the Fed’s resolve of hiking to their projected terminal rate and stay there for a while. Their projections saw a 5.1% terminal rate with 4.6% unemployment rate in 2023. This means that they would be comfortable to not only hiking to their projected rate but also stay there for longer as long as the unemployment rate stays below 4.6%. The current unemployment rate is 3.5%.

Thursday: The BoE is expected to hike by 50 bps bringing the Bank Rate to 4%. We will likely see dissent again within the MPC with Tenreyro and Mann probably voting for unchanged. The market expects further 25 bps hikes at the next meetings with the terminal rate seen at 4.50%.

The ECB is expected to hike by 50 bps bringing the deposit rate to 2.50%. The ECB members and especially President Lagarde have been showing a more resolute and aggressive stance on their tightening in recent months with calls of multiple 50 bps hikes. A recent report from Bloomberg though citing “ECB Sources” (which are generally right) suggested that policymakers are beginning to consider a step down to a 25 bps pace from March onwards. However, in recent speeches ECB members leaned against such a report. The ECB is also expected to start QT in March 2023.

The US Jobless Claims is expected to show an increase to 200K from the prior 186K and unchanged for the Continuing Claims at 1675K. Jobless Claims reports have been consistently showing strength. A big miss should catch the market’s attention.

Friday: The NFP report is expected to show 185K jobs added, down from the prior 223K. The rate of jobs growth has been moderating month after months, but the labour market remains extremely tight. The unemployment rate is seen at 3.6%, up from the prior 3.5%. Average Hourly Earnings are seen moderating again with the Y/Y reading expected at 4.3%, down from the prior 4.6% and the M/M figure to remain unchanged at 0.3%.

The ISM Services PMI is expected to return in expansionary territory at 50.3 after a surprisingly big dive to 49.6 in the prior report. Another miss should be bad for risk sentiment.

This article was written by Giuseppe Dellamotta.