UPCOMING EVENTS:
- Tuesday: Japan PPI, UK Labour Market report, German ZEW, 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.
Tuesday
There’s no consensus estimates for the UK jobs data at the time of writing except for the wage growth figures where the average earnings including bonus are seen falling to 7.7% vs. 7.9% prior while the average earnings excluding bonus are expected to come down to 7.4% vs. 7.7% prior. As a reminder, the last report beat expectations across the board with strong job gains and steady wage growth. The market is now looking for rate cuts, so a strong release is unlikely to prompt the market to price in rate hikes, but it could definitely make it to price out some of the rate cuts.
The US CPI Y/Y is expected to tick down to 3.1% vs. 3.2% prior, while the M/M reading is seen at 0.0% vs. 0.0% prior. The Core CPI Y/Y is expected to remain unchanged at 4.0% vs. 4.0% prior, while the M/M figure is seen at 0.3% vs. 0.2% prior. As a reminder, the last report missed expectations across the board and triggered some strong reactions with the US Dollar selling off and the US Equity and Bond markets rallying. The major central banks have ended their tightening cycles, so the markets’ reaction function has changed from “strong data equals more rate hikes” to “strong data equals less rate cuts”.
Wednesday
The FOMC is expected to keep the FFR steady at 5.25-5.50% with no change to their quantitative tightening (QT). The market’s focus will be on the Summary of Economic Projections (SEP) and the Dot Plot. In its September projections, the Fed expected to deliver one last rate hike in 2023 followed by 2 rate cuts in 2024. Given the disinflationary trend and the softening in the general economic data in the past few months, the chances for a rate hike in December quickly dwindled with the market now not only 100% sure that the Fed is done with the tightening cycle but even expecting 4 rate cuts in 2024 (it was 5 rate cuts beginning as soon as March before the NFP report).
It's very unlikely to see the Fed projecting as much rate cuts as the market’s currently assumes, but I feel like the market would be more than fine if the Fed projects 3 rate cuts in 2024 as it would be a nod that they indeed see their conditions being met earlier than expected. Things got a bit complicated with the latest NFP report where the unemployment rate dipped to 3.7% vs. 3.9% prior and wage growth on a monthly basis came in on the hotter side. The CPI report on Tuesday should shed some more light though.
Consider this: if you were the Fed, would you have the confidence to cut rates in Q1 2024 given such volatility in the data and the fear of making the 70s mistakes (as they keep repeating)? Probably not. We can certainly see 125+ bps of rate cuts in 2024, but it's likely to be aggressive in response to a hard landing. Thus, it would always be above the expected market rate cut for a given meeting in order to create a faster easing in financial conditions. And this fear around the 70s and the uncertainty around the data might lead the Fed to cut too late or too slowly, eventually triggering a "hard-er" landing. I feel like this uncertainty could transpire from their projections if they keep just 2 rate cuts on the table, or worse, revise it to just one, especially if it’s accompanied by lower inflation expectations.
Thursday
The Australian Unemployment Rate is expected to tick higher to 3.8% vs. 3.7% prior with 10K jobs added. The last labour market report showed an increase in employment of 55K, which was much higher than expected although the bulk of it was part-time jobs. The market is likely to react more to weakness rather than strength as it’s looking forward to rate cuts in 2024. The RBA will see another jobs report before its next meeting in February 2024.
The SNB is expected to keep interest rates steady at 1.75% vs. 1.75% prior, probably accompanied by the usual caveat that “it cannot be ruled out that further tightening may become necessary”. The inflation rate in Switzerland has been within the central bank 0-2% target for many months on both the headline and core measures, so they should actually start to considering rate cuts in 2024.
The BoE is expected to keep the bank rate steady at 5.25% vs 5.25% prior, but this time there should be a bigger consensus among the MPC for no change, although this is likely to be shaped by the UK Labour Market report on Tuesday. As a reminder Greene, Mann and Haskel voted for a rate hike the last time. The central bank will reaffirm once again their commitment to keep rates high for as long as necessary to ensure that inflation returns to their 2% target. The market expects 3 rate cuts in 2024 with the first one coming in June.
The ECB is expected to keep the deposit rate unchanged at 4.00% vs. 4.00% prior. The central bank is likely to repeat that they will keep rates high as long as necessary to return to their 2% target. The rate cuts expectations for 2024 increased recently following the big miss in the Eurozone CPI report and the ECB member Schnabel’s comments where she acknowledged that further rate hikes are rather unlikely after the latest inflation data. The market now sees 150 bps worth of rate cuts in 2024 with the first one coming as soon as March.
The US Retail Sales M/M are expected at -0.1% vs. -0.1% prior. Retail Sales have been strong for most of the year, although they contracted in the previous month. The Control Group though, came in line with expectation at 0.2% with a positive revision to the prior figure. A strong report might make the market to trim the amount of rate cuts expected in 2024 while a weak release could increase them.
The US Jobless Claims continue to be one of the most important releases every week as it’s a more timely indicator on the state of the labour market. Initial Claims keep on hovering around cycle lows, which shows us that layoffs have not yet picked up notably, but Continuing Claims have been rising at a fast pace and that’s indicative of people finding it harder to get another job after being laid off. This week the consensus sees Initial Claims at 221K vs. 220K prior, while there’s no estimate at the time of writing for Continuing Claims, although the last week’s number was 1861K vs. 1925K prior.
Friday
Friday is the Flash PMIs day where we will see how business activity in the Manufacturing and Services sector is faring in December:
- Eurozone Manufacturing PMI 44.5 expected vs. 44.2 prior.
- Eurozone Services PMI 49.0 expected vs. 48.7 prior.
- UK Manufacturing PMI 47.5 expected vs. 47.2 prior.
- UK Services PMI 51.0 expected vs. 50.9 prior.
- US Manufacturing PMI 49.1 expected vs. 49.4 prior.
- US Services PMI 50.5 expected vs. 50.8 prior.
