Monday

Over the weekend the PBoC left the MLF rate unchanged at 2.50% as expected.

The New Zealand Services PMI jumped back into expansion in January:

• Services PMI 52.1 vs. 48.8 prior.

The Canadian January PPI came in line with expectations with a negative revision to the prior figure:

• PPI M/M -0.1% vs. -0.1% and -1.6% prior (revised from -1.5%).
• PPI Y/Y -2.9% vs. -2.8% prior (revised from -2.7%).
• Raw materials prices M/M 1.2% vs. -4.9% prior.
• Raw materials prices Y/Y -6.4% vs. -7.9% prior.

Tuesday

The PBoC left the 1-year LPR rate unchanged but delivered the biggest 5-year LPR cut on record:

• 3.45% for the one-year (previously 3.45%).
• 3.95% for the five-year (previously 4.20%).
• First cut to the 5-year since August, it was only 10bp that time.
• 25bp is the largest cut ever.

The RBA released the Minutes of its February Monetary Policy Meeting:

• Board considered case to hike by 25 bps or to hold steady.
• Case to hold steady was the stronger one, appropriate given balanced risks to outlook.
• Data gave board more confidence inflation would return to target in reasonable timeframe.
• However, it would "take some time" before board could be confident enough on inflation.
• So, board agreed it was appropriate not to rule out another rise in rates.
• Board noted hiking rates would not prevent it from cutting should economy weaken.
• Noted forecasts of inflation back in target in 2025 assumed no further rate hikes.
• Goods inflation had fallen faster than expected service inflation still high.
• Data on labour market, consumption had been weaker than expected.
• High inflation, higher tax, and interest payments had weighed on consumption.
• Labour market relatively tight, wage growth slowing in some sectors.
• Financial conditions restrictive on some measures, less so on others.

The Eurozone Q4 wages data eased slightly from the prior quarter:

• Q4 2023 Y/Y 4.5% vs. 4.7% prior.

The Canadian January CPI missed expectations across the board by a big margin:

• CPI Y/Y 2.9% vs. 3.3% expected and 3.4% prior.
• CPI M/M 0.0% vs. 0.4% expected and -0.3% prior.
• Core CPI Y/Y 2.4% vs. 2.6% prior.
• Core CPI M/M 0.1% vs. -0.5% prior.
• Trimmed Mean CPI Y/Y 3.4% vs. 3.6% expected and 3.7% prior.
• Median CPI Y/Y 3.3% vs. 3.6% expected and 3.5% prior (revised from 3.6%).
• Common CPI Y/Y 3.4% vs. 3.8% expected and 3.9% prior.

The US Leading Economic Index (LEI) fell further in January:

• LEI M/M -0.4% vs. -0.3% expected and -0.2% prior (revised from -0.1%).

“The U.S. LEI fell further in January, as weekly hours worked in manufacturing continued to decline and the yield spread remained negative,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While the declining LEI continues to signal headwinds to economic activity, for the first time in the past two years, six out of its ten components were positive contributors over the past six-month period (ending in January 2024). As a result, the leading index currently does not signal recession ahead. While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3.”

Wednesday

The Australian Q4 Wage Index came in line with expectations:

• Q4 Wage Index Q/Q 0.9% vs. 0.9% expected and 1.3% prior.
• Q4 Wage Index Y/Y 4.2% vs. 4.1% expected and 4.1% prior (revised from 4.0%).

Fed’s Barkin (neutral – voter) downplayed the January’s inflation data as the Fed is still confident on the disinflationary trend and wants to see more evidence of that in the next couple of months:

• The big picture of US data on inflation and jobs has been remarkable.
• Recent data on PPI and CPI have been 'less good', showing dependence of disinflation on goods.
• January data 'made things harder' but should not put too much weight on the month's information given known seasonality issues.
• Ease of hiring is not yet back to normal, but conditions are improving.
• Productivity metrics are 'poor' and need to be viewed over longer time periods.
• It's too soon to say there's been a sea change in productivity, but firms are investing.
• Weaker growth overseas should not have much impact on the US recovery.
• The US still has a way to go to get a soft landing.
• The US is on the back end of its inflation problem, the question is how much longer it will take.

BoE’s Dhingra (uber dove – voter) continues to support her case for rate cuts due to policy lags and risks around overtightening:

• UK consumption remains below pre-pandemic in contrast to US and eurozone.
• We have a long way to go before coming to a finely tuned estimate of the medium-term resting place for bank rate.
• The outlook for headline inflation appears bumpy but downwards.
• Evidence to err on the side of overtightening is not compelling as it often comes with hard landings and scarring of supply capacity.
• Monetary policy needs to be forward-looking because moderation of the policy stance requires time to implement and to feed through to the real economy.
• Price developments strongly signal that inflation is already on a path of sustainably meeting our target over the medium term.

ECB’s Wunsch (hawk – non voter in March) doesn’t expect early rate cuts due to tightness in the labour market and high wages:

• May be too early to get hopes up on rate cuts.
• Cannot exclude policies to type for longer than seen.
• Wages are high, labour markets are tight.

The Federal Reserve released the Minutes of its January Monetary Policy Meeting:

• Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent.
• Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent.
• Fed officials judged policy rate likely at its peak for this cycle.
• Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained.
• A couple of policymakers pointed to downside risks form maintaining overly restrictive policy for too long.
• Several emphasized communicating clearly about data-depending approach.
• Fed staff saw risks to economic forecast skewed to the downside.
• Staff placed 'some weight' on chance that further progress on inflation could take longer than expected.
• Staff economic outlook was slightly stronger than December projection.

Nvidia reported earnings for Q4 2023, and it beat expectations by a big margin:

Q4 2023 Nvidia (NVDA) earnings:

• EPS a solid beat at $5.16 vs. $4.54 expected.
• Revenue beat $22.1B vs. $20.3B expected.
• Guides Q1 Revenue $24.0B (plus or minus 2%) vs. $21.5B expected.

More:

• Data Centre revenue 18.4bn (exp. 17.21bn).
• Gaming revenue 58% Y/Y to 2.9bn (exp. 2.72bn).
• Professional Visualization revenue 463mn (exp. 435.5mn).
• Automotive revenue -4.4% Y/Y to 281mn (exp. 272.1mn).
• Data centre sales to China fell significantly.

"Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations." – Co-founder & CEO, Jensen Huang

Thursday

The Australian February PMIs showed Manufacturing falling into back into contraction while Services jumping back into expansion:

• Manufacturing PMI 47.7 vs. 50.1 prior.
• Services PMI 52.8 vs. 49.1 prior.

The Japanese February PMIs showed both Manufacturing and Services falling further:

• Manufacturing PMI 47.2 vs. 48.2 expected and 48.0 prior.
• Services PMI 52.5 vs. 53.1 prior.

BoJ’s Ueda continues to sound optimistic on reaching their inflation target sustainably:

• Japan's trend inflation heightening, will make appropriate monetary policy decision.
• Service prices continue to rise moderately.
• Expects positive cycle to strengthen in which tight labour market leads to higher wages, household income.
• Desirable for FX to move stably reflecting fundamentals.
• Won't comment on FX levels.
• FX rates move on various factors.
• A 1% rise in interest rates will lead to 40 trillion yen worth of valuation loss on BoJ’s JGB holdings.

The Eurozone February PMIs showed Manufacturing falling further and Services jumping back into expansion:

• Manufacturing PMI 46.1 vs. 47.0 expected and 46.6 prior.
• Services PMI 50.0 vs. 48.8 expected and 48.4 prior.

The UK February PMIs showed both Manufacturing and Services matching the prior readings:

• Manufacturing PMI 47.1 vs. 47.5 expected and 47.0 prior.
• Services PMI 53.3 vs. 53.1 expected and 53.3 prior.

The ECB released the Accounts of its January Monetary Policy Meeting:

• Risk of cutting rates too early was still seen as outweighing that of cutting too late.
• Measures of underlying inflation had passed their peak.
• Latest economic activity and inflation consistent with current monetary policy stance.
• But further progress needed to be made in the disinflationary process.
• Continuity, caution and patience were still needed.

The Canadian December Retail Sales beat expectations although the January advance reading was soft:

• Retail Sales M/M 0.9% vs. 0.8% expected.
• Retail Sales Y/Y 2.9% vs. 1.8% prior.
• Ex autos 0.6% vs. 0.7% expected and -0.5%.
• Ex auto and gas 0.5% vs. -0.6% prior.
• Q4 sales were up 1.0%.
• 2023 sales were up 2.2% Y/Y led by autos.
• January advance estimate -0.4%.
• Strength in general merchandise (+2.8%), food & beverage (+1.5%) and supermarkets (+1.8%).
• Weakness was in furniture and electronics retailers (-2.7%) along with e-commerce -(3.6%).

The US Jobless Claims beat expectations:

• Initial Claims 201K vs. 218K expected and 213K prior (revised from 212K).
• Continuing Claims 1862K vs. 1885K expected and 1889K prior (revised from 1895K).

The US February PMIs showed both Manufacturing and Services improving further:

• Manufacturing 51.5 vs. 50.5 expected and 50.7 prior.
• Services PMI 51.3 vs. 52.0 expected and 50.7 prior.
• Input prices rose at the weakest pace since October 2020.
• The rate of cost inflation slowed at both manufacturers and service providers.
• The overall rise in output charges was historically muted, and the second slowest since June 2020.

Fed’s Jefferson (neutral – voter) continues to support a patient approach before cutting rates given the uncertainty around inflation:

• CPI shows path down for inflation likely to be bumpy.
• Likely to be appropriate to begin cutting policy rate later this year.
• January CPI disappointing.
• Fed staff estimate PCE price index rose 2.4% over the 12 months ended in January.
• Three key risks are resilient consumer spending, employment weakening and geopolitical risks.
• Says he expects slower growth and output in 2024.
• He remains cautiously optimistic about progress on inflation, will review totality of data.
• Imbalance between labour supply/demand has narrowed.
• Fed needs to remain vigilant and nimble, should not be surprised by an unexpected shock.
• Most easing cycles start because of concern about slowing economic growth.
• Highlights the speed at which economic activity can weaken.
• Household balance sheets have weakened, over time they will normalize and be less of a factor in driving consumption.
• Labor market seems to be rebalancing in a way that is allowing lower inflation without unemployment.
• Recent rise in productivity suggests supply side healing form the pandemic.
• Perhaps potential GDP growth has risen.
• Will be looking at the totality of data in making rate cut call, wants to see evidence that inflation is 'sustainably' headed to target.

Fed’s Harker (neutral – non voter) echoed his colleague in cautioning against premature rate cuts:

• We may be near the point of cutting rates but unsure of when it will happen.
• Recent CPI data shows uneven progress.
• Greatest risk is that Fed cuts too early.
• Concerned by rising credit delinquencies.
• There are multiple signs labour market coming into better balance.
• US GDP continues to be strong.
• Still wants more confidence that inflation is moving back to 2%.
• The Fed is in the last mile of heading down to 2%.
• Rise in layoffs not a sign of recession arriving.
• Fed can hold here on rates for now. No rush to cut.
• Future Fed actions will be driven by data.
• May rate cut is not current forecast.
• A couple more month data could convince on inflation.
• Wants to avoid premature cut, data will drive Fed actions.
• Rate cut timing possible for the second half of the year.
• Does not know what ample reserve level is. Market will reveal.
• No simple answer to what is right level of liquidity reserves level.
• Is unsure when Fed will taper balance sheet drawdown.

Fed’s Cook (dove – voter) supports the current patient stance as she wants to see more data before considering rate cuts.

• I would like to have greater confidence that inflation is converging to 2% before beginning to cut the policy rate.
• Believe risks to achieving employment and inflation goals are moving into better balance after being weighted toward excessive inflation.
• I now see two-sided risks in considering appropriate monetary policy.
• I am now weighing the possibility of easing policy too soon and letting inflation stay persistently high versus easing policy too late and causing unnecessary harm to the economy.
• Believe our current monetary policy stance is restrictive.
• Sees an eventual rate cut as adjusting policy to reflect a shifting balance of risks.
• Risk of persistently high inflation appears to have diminished but has not disappeared.
• At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate.
• Restrictive monetary policy and favourable supply developments have put us in a good position to achieve both sides of FOMC's mandate.
• Should continue to move carefully, maintaining degree of policy restriction needed to sustainably restore price stability while keeping the economy on a good path.
• Disinflationary process has been, and may continue to be, bumpy and uneven, as highlighted by last week's CPI & PPI.
• Intend to monitor incoming data closely for signs disinflation process is continuing.
• Forecast of 12-month PCE inflation converging to 2% target over time still seems reasonable as baseline outlook.
• Housing services inflation should keep slowing this year as slower observed rent increases pass into official data.
• Core services ex-housing inflation should keep easing over time as consumers increasingly resist price increases & labour costs grow more slowly.
• Core goods inflation looks likely to converge to modestly negative pre-pandemic trend.
• Strong supply-side recovery has contributed importantly to the recent disinflation.
• Labor market demand and supply appear in better alignment.
• Consumer spending generally has continued to show strong momentum in recent months.
• Growth in total labour income has slowed to near pre-pandemic rate of about 5% year, which should contribute to moderating consumption.
• Consumer spending growth may face headwinds from deteriorating household balance sheets.
• Likely that the post pandemic world could be characterized by greater volatility of supply.
• There is potential for Red Sea shipping disruptions to affect supply more than they have so far.

Fed’s Waller (neutral – voter) stressed about being patient as the inflation progress could stall with premature rate cuts:

• The start of policy easing, and the number of rate cuts will depend on incoming data.
• The Committee can wait a little longer to ease monetary policy.
• Puzzled by the narrative that delaying cuts for a meeting or two risks causing a recession.
• Supposed asymmetry of lagged effects of rate hikes vs rate cuts not supported by any model I’m aware of.
• In the absence of a major economic shock, delaying cuts by a few months should not have a substantial impact on the economy near term.
• Cutting too soon could squander inflation progress and risk considerable harm to the economy.
• Data received since the last speech on Jan 16 has reinforced the view that we need to verify inflation progress from the last half of 2023 will continue.
• There is no rush to begin cutting interest rates.
• The strength of the economy and recent inflation data mean it is appropriate 'to be patient, careful, methodical, deliberative'... 'whatever word you pick, they all translate to one idea: what’s the rush?'
• The CPI report last week is a reminder that ongoing progress on inflation is not assured.
• It's not clear yet if the CPI was driven by odd seasonal factors & outsized housing cost increases or signals inflation is stickier than thought and will be harder to bring down to target.
• Need to see more data to know if January CPI was 'more noise than signal'.
• This means waiting longer before having enough confidence that starting rate cuts will keep us on the path for 2% inflation.
• The strength of output and employment growth means there 'is no great urgency' to ease policy.
• Still expect to ease policy this year.
• Recent hotter-than-expected data validates Chair Powell's 'careful risk management approach'.
• The risk of waiting a little longer to ease is lower than the risk of acting too soon.
• Several indicators suggest some slowing in growth.
• Latest data on job openings and quits may indicate labour market moderation may have stalled.
• Based on CPI and PPI, January core PCE may be 2.8% at a 12-month rate, 2.4% at a 3-month rate, and 2.5% at a 6-month rate.
• CPI revisions on Feb 9 did not change the picture of inflation improvement in 2023.
• It's comforting to know the progress we made was real and not a mirage.
• Still see wage growth 'somewhat elevated' to achieve a 2% inflation goal.
• Watching to see if housing costs continue to run higher than expected.
• One question is whether elevated labour costs are impeding progress on service inflation ex-housing.
• Considering all inflation aspects, 'I see predominantly upside risks' to the expectation inflation will keep moving to the 2% goal.
• Need to see a couple more months of inflation data to be sure if January was a 'fluke' and we are still on track to price stability.
• There are no indications of an imminent recession.
• Stock market gains are largely being driven by seven firms.
• We're not trying to kill the economy or crash the stock market.
• On CRE only worried if banks are going to get stuck with a lot of losses but it's not a shock, we knew this was going to happen.
• CRE (commercial real estate) is predictable, manageable, should not cause major crisis.
• Not sure if productivity uptake will continue.
• Politics just does not enter how we set policy.

Friday

The German IFO improved slightly in February:

• IFO 85.5 vs. 85.5 expected and 85.2 prior.
• Current conditions 86.9 vs. 86.7 expected and 86.9 prior (revised from 87.0).
• Expectations 84.1 vs. 84.0 expected and 83.5 prior.

ECB’s Holzmann (uber hawk – voter) continues to stress patience regarding rate cuts:

• The main risk to rate cuts is Red Sea tension.
• Some of the recent wage increases have been quite high.
• It is better to cut rates later than to do so too early.
• We are hoping for rate cuts but have been wrong before.

ECB’s Schnabel (neutral – voter) sounded optimistic about achieving a soft landing although a bit disappointed from weaker impact of monetary policy to the services sector:

• Monetary policy has had a weaker impact on dampening services demand.
• Confident that risks of de-anchoring of inflation expectations have come down.
• There is hope to achieve soft landing and taming inflation without causing a recession.

ECB’s Nagel (hawk – voter) stressed about patience on the rate cuts front and suggested to think about them only after Q2 data:

• It is too early to cut rates even if a move appears tempting to some.
• Will only get key price pressure data in Q2, then only we can "contemplate a cut in interest rates".
• Price outlook is not yet clear enough.
• Some setbacks on inflation may be possible.

ECB’s Lagarde (neutral – voter) welcomed the Q4 2023 wage data and hinted that if the Q1 2024 figures will be good, the central bank will likely have the confidence to deliver the first rate cut:

• Q4 2023 wage numbers are encouraging.
• If Q1 2024 numbers continue to be encouraging, that will be important.
• Need to be more confident that disinflation is sustainable.
• ECB is independent of moves by other central banks.

The highlights for next week will be:

• Tuesday: Japan CPI, US Durable Goods Orders, US Consumer Confidence.
• Wednesday: Australia Monthly CPI, RBNZ Policy Decision, US Q4 GDP 2^nd Estimate.
• Thursday: Japan Industrial Production and Retail Sales, Switzerland Q4 GDP, Canada GDP, US PCE, US Jobless Claims.
• Friday: Japan Unemployment Rate, Chinese PMIs, Switzerland Retail Sales, Eurozone CPI and Unemployment Rate, US ISM Manufacturing PMI.

That’s all folks. Have a nice weekend!