Monday

The Chinese January Caixin Services PMI missed expectations:

• Caixin Services PMI 52.7 vs. 53.0 expected and 52.9 prior.

The Eurozone December PPI came in line with expectations:

• PPI M/M -0.8% vs. -0.8% expected and -0.3% prior.
• PPI Y/Y -10.6% vs. -10.5 expected and -8.8% prior.

Fed’s Kashkari (hawk – non voter) debated whether the neutral rate in the US is higher than expected and what that could mean for monetary policy:

• Possibly higher neutral rate means Fed can take more time to assess upcoming data before starting rate cuts.
• Higher neutral rate means monetary policy may not be as tight as thought.
• That will entail "less risk" to the economic recovery.
• Core inflation making "rapid progress" towards Fed's target.
• But economic data not "unambiguously positive".
• There are some signs of weakness including rising consumer delinquencies.

The US January ISM Services PMI beat expectations across the board with the employment component jumping back into expansion and the prices paid index spiking above 60:

• ISM Services PMI 53.4 vs. 52.0 expected and 50.5 prior.
• Business activity 55.8 vs. 55.8 prior.
• Employment 50.5 vs. 43.8 prior.
• New orders 55.0 vs. 52.8 prior.
• Prices Paid 64.0 vs. 57.4 prior.

Fed’s Goolsbee (dove – non voter) said that a March cut was unlikely given the recent economic data, but he didn’t want to rule it out either:

• March cut is unlikely.
• Economy has been quite strong.
• If we keep getting inflation going down despite strong jobs in GDP growth, then we might be in a period like mid-1990s.
• He does not want to rule out a March cut but does want to see more data and not tie the Fed's hands.
• Fed's goal is PCE measure of 2%.
• Inverted yield curve, as a rule of thumb, is not applicable as a recession indicator.
• Does not see widening problems in the regional banking system.

BoE’ Pill (neutral – voter) doesn’t see reasons to cut rates at the moment:

• UK economic activity has been quite weak.
• Supply side constraints are committing GDP growth.
• The pickup in GDP is not going to be dramatic.
• It is early days to say that inflation has been suppressed.
• Expects UK inflation to fall close to or even below its target.
• Rates would be restrictive even after cuts.
• Not yet confident to reduce rates.
• Emphasize now is on when there is no evidence to cut rates, not live.

Fed’s Bostic (neutral – voter) didn’t comment on the rate path outlook although he mentioned that wage growth is settling back into more normal patterns.

The Federal Reserve released the Senior Loan Officer Opinion Survey (SLOOS) where US banks reported tighter lending standards and weaker demand for C&I loans although improving relative to the prior readings:

Tuesday

The Japanese January Average Cash Earnings missed expectations:

• Average Cash Earnings Y/Y 1.0% vs. 1.3% expected and 0.2% prior.
• Spending M/M -0.9% vs. 0.2% expected and -1.0% prior.
• Overtime pay Y/Y -0.7% vs. 0.9% prior.

The RBA left the Cash Rate unchanged at 4.35% as expected and kept the tightening bias:

• While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range.
• Inflation continued to ease in the December quarter. Despite this progress, inflation remains high at 4.1 per cent.
• Goods price inflation was lower than the RBA’s November forecasts.
• Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high.
• While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia.
• Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target.
• The outlook is still highly uncertain.
• While there are encouraging signs, the economic outlook is uncertain, and the Board remains highly attentive to inflation risks.
• Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases.
• The Board needs to be confident that inflation is moving sustainably towards the target range.
• To date, medium-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.

Moving on to the RBA Governor Bullock’s Press Conference:

• We still have got a "little way to go" to get inflation down.
• We are not ruling anything in or out on policy.
• We still think risks are balanced.
• What we're really looking for is data that assures that inflation is coming back to target.
• We've had good news so far on inflation, but it still has a '4' in front of the inflation rate.
• We don't want inflation expectations to rise.
• Tax cuts are not a material issue for inflation and spending.
• We need to be sure we won't have to backtrack on inflation.
• I feel we are potentially on the narrow path to getting inflation back to target, cites 2.8% 2025 inflation forecast.
• Says confidence level on getting there is 5/10, more data needed.
• I'm really convinced we can bring inflation down without too much pain in the labour market.
• We judge risks to inflation as fairly balanced.
• Employment is still growing and the board, I can assume you, is very, very focused on that.
• We've got to be confident that we'll get to the midpoint of the target to think about interest rate cuts.

The Eurozone December Retail Sales missed expectations:

• Retail Sales M/M -1.1% vs. -1.0% expected and 0.3% prior (revised from -0.3%).
• Retail Sales Y/Y -0.8% vs. -0.9% expected and -0.4% prior (revised from -1.1%).

BoE’s Dhingra (uber dove – voter) was the only member to vote for a rate cut at the last policy meeting and she continues to support her view:

• I'm not worried about cutting rates too early being the worst thing to do.
• We took a long time to get rates up.
• Couple that with the transmission lags, we're still looking at a pretty restrictive period of monetary policy even after you start the moderation.
• Fairly convinced that falling prices are not solely driven by energy alone.
• At this point, about 97% of annual CPI inflation items have turned down.
• Fall in retail sales is pretty convincing and unexpected.
• Not fully convinced of sharp excess demand in the economy from the consumption side.
• Does not see a reason to trade off weak consumption when inflation is on a sustainable path at this point.
• If you do the right policy and if you even deviate for the right reasons, people will understand.

ECB’s Vujcic (neutral – voter) continues to push back against premature rate cuts:

• Should not rush start of rate cutting cycle.
• Important for ECB's credibility to be right with rate cuts.
• Still quite a lot of resilience in services inflation and wages.
• The equilibrium level of interest rates is likely to be higher than it was some years ago.

Fed’s Mester (hawk – voter) gave some broad comments on different topics and the TL;DR is that she doesn’t see the need to cut rates in the first half of the year given the strength in the data and the uncertainty around the last mile to the 2% target, although she still expect 3 rate cuts in 2024:

• Monetary policy in good place to assess what’s next for rates.
• Fed can lower rates later this year if economy performs as expected.
• When Fed cuts rates will likely be at gradual pace.
• If inflation doesn't fall Fed can maintain current policy.
• Inflation must be moving sustainably lower to open rate cut door.
• Expects to move back to 2% inflation over time.
• Sees growth and employment moderating this year.
• Must be attentive to risk labour market will cool faster-than-expected.
• Recent news on inflation has been ‘encouraging’.
• Can't be sure last stage of move to 2% inflation will be swift.
• So far Red Sea trouble hasn’t rattled supply chains.
• It would be a mistake to cut rates prematurely.
• Possible inflation may be more persistent than expected.
• Wage gains still too high for getting to 2% inflation.
• Higher productivity levels may change wage-inflation calculus.
• Does not believe us is moving to only large bank model.
• Fed will not launch Fed digital dollar unless told to do so by elected officials.
• Sees progress in getting banks ready to use discount window.
• Doesn't want to offer timing on rate cut.
• Sees no rush to lower Fed rate target.
• Still leans toward three rate cuts for 2024.
• Wants more data before deciding on rates.
• Expects to see rate cuts later this year.
• Fed should not rule out asset sales for balance sheet.
• Expects balance sheet run off to slow before being stopped.

Fed’s Kashkari (hawk – non voter) gave some extra remarks on the current economic stance:

• Inflation has come down very quickly.
• Labor market is very strong.
• It is a conundrum.
• A recession is not my base case.
• We do not think about politics, or the election, when we set interest rates.
• We are not quite there on year over year inflation data, but 3-month and 6-month data is basically there.
• We are not done yet, on inflation, but data is looking positive.
• Most of the disinflationary gains have come from supply-side.
• The yield curve is not a reliable indicator of recession, because disinflation isn't being mostly caused by the Fed.
• I feel optimistic about the dollar’s role in the world.
• The dollar’s value in the long run is a set by economic competitiveness.
• Household savings are being spent down more slowly than expected.
• Delinquencies are creeping up, though from very low levels.
• Monetary policy may not be putting as much downward pressure on demand as we think.
• If labour market continues to be strong, we can dial back policy rate quite slowly.
• At this moment, 2-3 cuts seem appropriate.
• If we can see a few more months of good inflation data, will give confidence on way back to 2% inflation.
• Most commercial real estate sector, aside from office segment is doing well.
• Economy showing to be remarkably resilient.
• So far data has been resoundingly positive. We're going to have to see how the economy performs.

BoC Governor Macklem remains confident that the current level of policy setting is enough to bring inflation back to target but he still wants to see some more progress in the underlying measures before deciding when to start cutting rates:

• Monetary policy is working; it has slowed demand, rebalanced the economy, and brought down inflation.
• Shelter price inflation is now the biggest contributor to above-target inflation.
• Years of supply shortages and the recent increase in newcomers have meant house prices have declined only modestly with higher rates.
• Housing affordability is a significant problem in Canada — but not one that can be fixed by raising or lowering interest rates.
• Canada's structural shortage of housing is not something monetary policy can fix.
• More time is needed to bring down inflation.
• Volatility in global oil and transportation costs related to wars in Europe and the Middle East could add volatility to Canadian inflation.
• The path back to 2% inflation is likely to be slow and risks remain.
• Policy interest rate at 5% is the level we think is needed to take the remaining steam out of inflation.
• Discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current stance.
• We want to see inflationary pressures continue to ease and clear downward momentum in underlying inflation.
• BoC targets overall CPI inflation, but we cannot ignore shelter costs.
• Looking ahead, neutral interest rate will probably be a bit higher than the 2% to 3% range.
• There will be modest increase in housing prices this year versus decreases last year.
• There is certainly considerable uncertainty around what will happen to housing prices.

Wednesday

Fed’s Harker (neutral – non voter) sees the US on track for a soft landing:

• Sees 'real progress' on getting inflation back to 2%.
• Fed decision to hold rates was the correct decision.
• Data shows inflation falling and labour market in better balance.
• Consumer spending has been resilient.
• Economy on track for a soft landing.

The New Zealand Q4 labour market report beat expectations:

• Unemployment Rate 4.0% vs. 4.2% expected and 3.9% prior.
• Job growth 0.4% vs. 0.3% expected and -0.2% prior.
• Participation rate 71.9% vs. 72.0% expected and 72% prior.
• Labour cost index Q/Q 1.0% vs. 0.8% expected and 0.8% prior.
• Labour cost index Y/Y 3.9% vs. 3.8% expected and 4.1% prior.

BoE’s Breeden (neutral – voter) is confident that the current level of rates is enough to bring inflation back to target and she’s just patiently waiting for some more progress before cutting rates:

• I have become less concerned that rates might need to be tightened further.
• Need more evidence to be confident that UK economy is progressing as per forecast.
• My focus has shifted to thinking about how long rates need to remain at current level.
• Will look at how pay growth and demand are influencing firms' pricing decisions.

ECB’s Schnabel (hawk – voter) remains cautious about risks of a reacceleration in inflation due to premature rate cuts, so she continues to be patient waiting for more progress before leaning towards rate cuts:

• The last mile in bringing inflation down may be the most difficult one.
• We see sticky services inflation, resilient labour market.
• There is a loosening of financial conditions as markets aggressively priced in rate cuts.
• Recent events in the Red Sea also spark fears of renewed supply chain disruptions.
• Taken together, this cautions against adjusting policy stance too soon.
• We have made substantial progress on inflation, but we are not there yet.
• We must be patient, cautious as inflation can flare up again.

Fed’s Kugler (neutral – voter) gave a comprehensive speech on the state of the economy and monetary policy:

• Pleased with 'great progress' on inflation. Optimistic it will continue.
• Fed's job on inflation 'not done yet'.
• Will remain focused on Fed's inflation goal until confident inflation is returning durably to 2% target.
• Risks to our dual mandate 'roughly balanced'.
• Our policy stance is restrictive.
• At some point, cooling inflation and labour markets may make rate cut appropriate.
• If disinflation progress stalls, may be appropriate to hold policy rate steady for longer.
• Sees 'reasons for optimism' on services inflation, where there has been less progress.
• Core-services ex-housing 'still elevated,' but expect improvement.
• Continued moderation of wage growth, normalization of price-setting, anchored inflation expectations 'likely to contribute' to continued disinflation.
• Pleased that cooling of labour demand has not led to rise in layoffs.
• How spending momentum will evolve this year an open question' affecting disinflationary process.
• Expects consumer spending to grow more slowly this year. Should help with disinflation.
• Some measures of financial conditions have eased but remain relatively tight and are consistent with continued progress on inflation.
• Paying close attention to upside inflation risks from geopolitics.
• Disinflation was rapid in the second half of 2023.
• Inflation on 3–6-month basis as moved to 2% level.
• Wage growth moderation is key.
• Services ex-housing is one of the elements to be watched for continued declines.
• Housing inflation has been persistent but is expected to come down.
• Layoffs in US are spotty and not showing up in aggregate data.
• Immigration is helped in some sectors including construction.
• We need further moderation in wage data especially the service sector, but it is moderating and this filtering through to prices.
• Wage moderation needs to continue, though level that is consistent with inflation target depends on factors like productivity.
• Too early to assess AI's potential on productivity.
• Progress on inflation has been aided by both Fed policy impact on demand and healing of the supply-side.
• There is still room for healing on the supply-side help lower inflation.
• 20% of companies are still seeing shortage of goods supplies.
• There is much uncertainty around the neutral rate of interest.
• At the policy interest rate will depend on performance of inflation.
• Aware that unemployment rate can move fast when it starts to change.
• Watching commercial real estate for source of financial stress.
• Keeping a close eye on regional bank exposure.
• May be some upward pressure coming on goods prices given global shipping, other risk.
• Every meeting is 'live' from here and moving forward.

Fed’s Collins (neutral – non voter) echoed his colleagues as she continues to expect “gradual and methodical” rate cuts later this year:

• Likely to cut rates later this year if the economy meets expectations.
• Monetary policy is well positioned for current outlook.
• Progress back to 2% inflation could be uneven and bumpy.
• When cuts start, they should be gradual and methodical.
• Supported FOMC decision to keep rates steady last week.
• Needs more data before supporting rate cut.
• Strong January jobs data shows why caution warranted.
• Economy needs to moderate to get to 2% inflation.
• Needs to see wage gains moderate to aid move to 2% inflation.
• Recent data shows economic resilience, demand to take time to moderate.
• Economic risks have come into better balance.
• Important for Fed to be sure it's on path to lower inflation.
• Fed doesn't need to go all the way back to 2% inflation to ease.
• Sees limits to supply chain improvement aiding lower inflation.
• Jury is out when it comes to neutral rate level.
• It's possible future interest rate might be higher than pre-pandemic levels.
• In future deflation risks likely lower relative to before pandemic.
• Recent data has been quite volatile.

Fed’s Barkin (neutral – voter) preached patience on policy rate path as he wants to see some more “broad-based” progress on inflation:

• Makes sense to be patient on rate cuts.
• In all honesty my forecast is uncertain. That's why it's important to be patient on rate cuts.
• Inflation has been coming down nicely over the last seven months.
• Concerned that goods prices coming down might be a head fake and may move back the upside in coming months.
• I don't have a rate path focus. Have an economy focus.
• If inflation continues to calm down, and if it starts to broaden out in many categories, that's a kind of signal I am looking for to start cutting rates.
• Still a tight labour market.
• Challenge on inflation coming down is that it's not that broad.
• Services and rent inflation have stayed more elevated.
• We have to see if it still more inflationary pressure to calm.
• Firms still feel like they have a little more price power than they used to.
• I’m very supportive of being patient to get to where we need to get on inflation.
• I am waiting to see if disinflation becomes more broad-based.
• I didn't expect the strength of the last jobs report.
• I am in no particular hurry on policy rate.

The BoC released the Minutes of its January Monetary Policy Meeting:

• Bank of Canada was 'particularly concerned about persistent inflation and lowering rates 'prematurely' in January policy-setting meetings.
• Governing council discussed risk that monetary policy could have greater than expected impact on consumer spending, requiring lower rates earlier and more quickly.
• Governing council saw risk of inflation being more persistent than expected, requiring rate to stay restrictive for longer.
• Governing council discussed risk that housing market would rebound more than expected and keep inflation above target even as other price pressures wane.
• Governing council saw mixed picture of underlying inflation, the need for more time for past rate hikes to sink in.
• Governing council recognized 'it was difficult to foresee when it would be appropriate to begin cutting rates'.
• Governing council expect wage growth to moderate gradually.
• Governing council agreed most likely explanation for rise in overnight repo interest rate above policy rate was increase in demand for government bonds.
• Governing council agreed need for overnight repo operations was operational issue related to implementing monetary policy.

The Atlanta Fed Wage Growth tracker fell to 5.0% vs. 5.2% prior in the latest reading.

Thursday

The Chinese January CPI missed expectations with even the Core Y/Y measure now approaching deflationary territory:

• CPI M/M 0.3% vs. 0.4% expected and 0.1% prior.
• CPI Y/Y -0.8% vs. -0.5% expected and -0.3% prior.
• Core CPI M/M 0.3% vs. 0.1% prior.
• Core CPI Y/Y 0.4% vs. 0.6% prior.
• PPI Y/Y -2.5% vs. -2.6% expected and -2.7% prior.

BoJ’s Uchida slammed hawks’ expectations as he downplayed an eventual rate hike:

• BoJ won't aggressively hike rates even after ending negative rate.
• Japan's real interest rate is in deep negative territory, monetary conditions are very accommodative.
• We don't expect this to change in a big way.
• Uncertainty over outlook remain high, but likelihood of sustainably achieving our price target gradually heightening.
• We expect Japan's economic recovery to continue, positive wage-inflation cycle to strengthen.
• Consumer inflation has exceeded 2% but this is mainly due to cost-push factors.
• If sustained, sustainable achievement of price target comes into sight, role of massive stimulus will have been met and we will consider reviewing it.
• Regardless of when we tweak policy, we see need to take steps in communication, market operations to ensure there is no disruptive moves in financial markets.
• Before we introduced negative rates, B0J applied a 0.1% interest on excess reserves, overnight call rate moved in a range of 0-0.1%.
• If we were to move back to that situation, it would be equivalent to a 0.1% interest rate hike.

• What is more important is the future short-term rate path, which will be set at appropriate level, so consumer inflation moves around BoJ's 2% target.
• YCC and BoJ's bond buying management are intertwined.
• When we end or tweak YCC, we will think about how we would communicate our bond buying operation.

• Tweak to YCC would mean allowing yields to move more freely but we will ensure this does not lead to big change in our bond buying amount, sharp rise in yields.
• It would be natural to end ETF, J-REIT buying if achievement of 2% inflation can be foreseen.
• Even if we were to end ETF, J-REIT buying, impact on markets won't be big.
• What to do with our very huge ETF, J-REIT holding is a different problem, this is something we need to consider taking time.

• We would like to maintain stable, accommodative monetary environment.
• Expects service prices to rise alongside wage increases.
• Government, BoJ share common understanding in guiding policy.
• Inflation won't sustainably hit 2% unless accompanied by wage growth.
• We will ensure to support the economy in order to achieve that.

ECB’s Wunsch (hawk – non voter in March) wants to see a normalisation in wage growth to give him some more conviction for rate cuts:

• There is value in waiting to get more comforting wage data.
• Wage rises are holding up rate cuts.
• But have some indications, not strong ones, that wage growth is softening.

The US Jobless Claims beat expectations:

• Initial Claims 218K vs. 220K expected and 227K prior (revised from 224K).
• Continuing Claims 1871K vs. 1878K expected and 1894K prior (revised from 1898K).

ECB’s Lane (dove – voter) expanded on the central bank’s focus on wage growth as they want to be sure that the disinflation back to their target is sustainable:

• In terms of an overall evaluation of our policy trajectory, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will hit the target in a timely manner and settle at target sustainably.
• The incoming data suggest that the process of disinflation in the near term in fact may run faster than previously expected, although the implications for medium-term inflation are less clear.
• Monetary policy needs to carefully balance the risk of overtightening by keeping rates too high for too long against the risk of prematurely moving away from the hold-steady position that we have been in since September.
• Many wage agreements will be renewed in the early months of 2024, and updates to the wage trackers will provide essential information in projecting wage dynamics.
• The available survey indicators are broadly consistent with the decreasing wage profile foreseen in the latest Eurosystem staff projections.
• According to our most recent discussions with large European non-financial corporations, the wage growth expectations of this set of companies for 2024 are 4.4 percent on average, which is a marked easing compared to the average 2023 wage growth of 5.3 per cent.

BoE’s Mann (uber hawk – voter) remains firm on her views that the central bank should at very least remain on hold for longer as she still sees risks around inflation momentum and persistence:

• My vote to hike was a "finely balanced" decision.
• Sees risk of continued inflation momentum and embedded persistence.
• Labour market still "relatively tight".
• Financial conditions have eased substantially; have eased 'too much'.
• Headline inflation moves are not a good measure of inflation.
• A drop in services inflation could persuade me to vote to hold.
• It's unclear what could persuade me to vote to cut rates.

ECB’s Holzmann (uber hawk – voter) is the most hawkish member of the central bank and he sees a chance that the ECB will not cut rates at all this year:

• There is a certain chance that the ECB will not cut rates this year.
• Must be sure inflation is in check before first cut.
• High wage deals will show up in inflation eventually.

Friday

RBA Bullock delivered her remarks to Parliament:

• RBA Board is focused on bringing inflation down.
• Remain acutely aware that the cost of living is rising much faster than it has over recent decades.
• Recent developments in inflation are encouraging.
• We have some way to go to meet our target.
• Even if the economy evolves along the central path, inflation will still have been outside the target range for four years.
• While there are some encouraging signs, Australia's inflation challenge is not over.
• The longer inflation remains high and outside the target range, the greater is the risk that inflation expectations of households and businesses adjust higher.
• At this stage, the board hasn’t ruled out a further increase in interest rates but neither has it ruled it in.
• Given the substantial costs to the economy and the Australian people of continued high inflation, the board is committed to bringing inflation back to target in a reasonable time frame.
• Trying to bring inflation back to target without slowing the economy more than necessary on the one hand or risking high inflation for longer.
• Inflation doesn’t need to be in 2-3% band for us to think about rate cuts.
• If consumption slows more quickly than expected will be opportunity to cut rates.
• We considered range of policy scenarios at February meeting.

The Canadian January Labour Market report beat expectations although we saw a fall in wage growth and full-time jobs:

• Employment change 37.3K vs. 15K expected and 12.3K prior (revised from 0.1K).
• Unemployment rate 5.7% vs. 5.9% expected and 5.8% prior.
• Full time employment -11.6K vs. -23.5K last month.
• Part-time employment 48.9K vs. 23.6 last month.
• Average hourly wages permanent employees Y/Y 5.3% vs. 5.7% last month.
• Participation rate 65.3% vs. 65.4% last month.

The BLS released the revisions for the prior CPI readings:

• December CPI 0.2% vs. 0.3% prior.
• December CPI ex-food and energy unrevised at 0.3%.
• November 0.2% vs. 0.1%.
• October 0.1% from unchanged.
• Q4 core CPI unrevised at a 3.3% annualized increase.
• Core six-month annualized CPI down to 3.0% from 3.3%.

The highlights for next week will be:

• Tuesday: Japan PPI, UK Labour Market report, Switzerland CPI, German ZEW, US NFIB Small Business Optimism Index, US CPI.
• Wednesday: UK CPI, Eurozone Industrial Production.
• Thursday: Japan GDP, Australia Labour Market report, UK GDP, UK Industrial Production, Switzerland PPI, US Retail Sales, US Jobless Claims, US Industrial Production, US NAHB Housing Market Index, New Zealand Manufacturing PMI, PBoC MLF.
• Friday: UK Retail Sales, Switzerland Industrial Production, US PPI, US Housing Starts and Building Permits, US University of Michigan Consumer Sentiment.

That’s all folks. Have a nice weekend!