The upcoming week will be packed with economic events, but it will start with bank holidays in Japan and China due to the National Foundation Day and the Spring Festival, respectively.
On Tuesday, New Zealand will release its inflation expectations quarter-on-quarter (q/q) data. Last month, two-year ahead inflation expectations declined to 2.76%. While this remains above the Reserve Bank of New Zealand's (RBNZ) 2% target, short-term expectations have seen a more pronounced drop, but long-term expectations (5 years ahead) have been much stickier. The continued strength in domestic inflation remains a concern for the RBNZ so the bank will closely monitor this survey to assess if the downward trend continues.
The focal point of the week will be the U.S. inflation data. Expectations suggest a 0.3% increase in core CPI month-on-month (m/m), compared to the previous 0.3%; a 0.2% rise in CPI m/m, down from the prior 0.3%; and a projected drop in CPI year-on-year (y/y) to 2.9% from 3.4%. While inflation in the U.S. appears to be moving in the desired direction overall and it will likely reach the Fed's target of 2% eventually, concerns remain over the high levels of core inflation which ended the year at 3.9% from 5.7% at the start.
Although headline inflation is seeing a slowdown, attributable in part to declining gasoline prices and only moderated price increases for groceries, core inflation -- which excludes food and energy prices -- remains uncomfortably high for the Fed. The market has pushed back its expectations for rate cuts from March to May and this can shift even further depending on future data, for example to June.
The U.K. inflation data expected Wednesday will provide further insights into future monetary policy decisions by the Bank of England (BoE). At the previous meeting, the Bank surprised with a more hawkish stance, noting that while there are indications of decreasing inflation, it remains way above target and more time is needed to see progress. Some analysts speculate that the tightening cycle has ended, but rate cuts won't happen very soon. The current market expectation is for rate cuts to start in August.
Projections for this week's data are for headline inflation to increase to 4.2% from 4.0% y/y while core inflation is expected to rise to 5.2% from 5.1%. Although expectations are for the inflation downtrend to resume in the future, the BoE is currently fighting with persistent inflationary pressures.
On Thursday, Australia will get the employment change and unemployment rate data. At the last meeting the Reserve Bank of Australia (RBA) kept rates unchanged and stressed that: "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out."
Inflation levels remain concerning, but many analysts argue that the tightening cycle ended. However, rate cuts are off the table for the near future.
The latest data suggests that the labor market in Australia is cooling down with supply and demand being more balanced. Analysts point out that the data for November and December was influenced by seasonal patterns, but going forward the labor market should see some softening. Westpac analysts expect an employment change of +15K for January, which would be a below-trend pace of growth.
The unemployment rate is likely to rise from 3.9% to 4.0%. Westpac argues that January is the most seasonal time of the year for the labor market and since the reopening from COVID-19 there were two dynamics that played an important role during this time in previous years: One is the fact that individuals found it easier to change jobs leading in an increase in "marginally attached workers" after the holidays who were previously unemployed; and the second is the recovery of tourism which led to more workers taking time off over the holidays.
"January’s data should hence be interpreted carefully, given the risk that one–off dynamics may cause large swings in hours worked or unemployment," the Westpac analysts said.
Later on Thursday, we expect the U.S. retail sales data m/m. Last month, retail sales figures printed above expectations, but for this week's release analysts anticipate a drop in core retail sales from 0.4% to 0.1% and a drop in retail sales from 0.6% to -0.2%.
Preliminary credit card spending data suggests a rise in January spending levels, but analysts from Wells Fargo expect a spending moderation as the year progresses due to softening in the labor market. "The unique factors of excess liquidity and easy access to cheap credit are tales of the past in the story of consumption," they said.