Weekly Market Recap (18-22 December)

<p>Monday</p><p>The New Zealand Services PMI for November jumped back
into expansion:</p><ul><li>Services
PMI 51.2 vs. 49.2 prior.</li></ul><p>BNZ Senior Economist Doug
Steel:</p><p>“Despite
November’s lift, the PSI remains below its long-term norm of 53.5. And the
combination of contracting activity/sales and rising inventories raises
questions about the sustainability of the nudge higher”.</p><p>The German IFO Business
Climate Index for December missed expectations across the board:</p><ul><li>German IFO 86.4 vs.
87.8 expected and 87.2 prior (revised from 87.3).</li><li>Current conditions
88.5 vs. 89.7 expected and 89.4 prior.</li><li>Expectations 84.3
vs. 85.9 expected and 85.1 prior (revised from 85.2).</li></ul><p>ECB’s Vasle (hawk – voter) pushed back against the
aggressive rate cuts expectations adding that he expects rates to be held
steady for 1H 2024:</p><ul><li>Market pricing for
both start of rate cuts and totality of cuts in 2024 is excessive.</li><li>Recent accommodation
priced into rates is inconsistent with policy stance to get inflation back
to target.</li><li>Inflation will
rebound in 1H 2024 and ECB should only reassess policy outlook after
this period.</li><li>Wage formation in Q1
2024 will be crucial for policy outlook.</li></ul><p>BoE’s Broadbent (dove – voter) emphasised the
uncertainty around the economic data and added that he’s focused on wage growth
to conclude if inflation is clearly on a downward trend:</p><ul><li>Policy
reaction to shocks likely to be delayed than in a perfect world.</li><li>In
the real world, there’s inevitably a degree of inaccuracy in economic
measurement.</li><li>Currently,
there’s a little more uncertainty than usual about the behaviour of
unemployment.</li><li>Official
estimates of wage growth have been volatile.</li><li>Other
indicators have exhibited slightly lower rates of growth through much of this
year.</li><li>It
takes time to understand the forces driving the economy, particularly services
inflation and wage growth.</li><li>It will probably require a more protracted and clearer decline in wage
growth data before we can safely conclude that things are on a firmly downward
trend.</li></ul><p>Fed’s Mester (hawk – voter in 2024) pushed back
against the aggressive rate cuts expectations but did not deny that they will
need to reduce rates if inflation keeps falling to avoid overtightening:</p><ul><li>Markets are 'a little bit ahead' of central banks on rate cuts.</li><li>The
next phase is not when to reduce rates, even though that’s where the markets
are at.</li><li>It
is about how long do we need monetary policy to remain restrictive in order to
get inflation back to 2% target.</li><li>They have jumped to the end part i.e. "we are going to normalise
quickly", and I don't see that.</li><li>Fed's
policy settings are now in a good place.</li><li>But
you don't want to inadvertently become more restrictive than what you think is
appropriate.</li></ul><p>ECB’s Kazimir (hawk – voter) is maintaining his
neutral stance as he wants to see more moderation in wage growth before easing
policy rates:</p><ul><li>Inflation optimism
not enough to declare victory and move on to next stage.</li><li>Drop in inflation
observed in past few months is positive.</li><li>Increasingly
confident that inflation will reach target in 2025, can achieve soft
landing.</li><li>Policy mistake of
easing too early would be more significant than tightening for too long.</li><li>Closely watching
economic indicators, not making any hasty moves.</li><li>Need to see clear
signs of wage moderation.</li></ul><p>Fed’s Goolsbee (dove – non voter in
2024) is further elaborating on the Fed’s view that since inflation is getting
closer to the Fed’ target, the central bank is more willing to ease the policy
rate to avoid overtightening as they don’t want to cause a big increase in
unemployment if that’s unneccesary to achieve their dual-mandate: </p><ul><li>We've seen
significant improvement on inflation.</li><li>Inflation is the key
spot we've missed on our mandate and that's where we should be focused.</li><li>If we get
improvement on inflation, back into the range of our dual mandate, then we
have more-symmetric concerns.</li><li>We don't debate on
specific policies for the future, that's not how the Fed works.</li><li>We vote on the
current meeting.</li><li>Far be it from me to
get into the head of what the market is thinking.</li><li>We don't choose our
actions based on how we think markets will react.</li><li>I don't know if
markets have gone too far.</li><li>The market-based
projection of rates is greater than the SEP.</li><li>I was surprised that
the market tried to say there was some difference between what Williams
said and what Powell said.</li><li>Our job as central
bankers is to be paranoid all the time.</li><li>Market has gotten
ahead of themselves on euphoria.</li><li>If inflation keeps
coming down, Fed can reconsider how restrictive it is.</li><li>Fed's decisions are
not political.</li><li>What determines
whether Fed can be less restrictive is inflation.</li><li>Fed should not be
bullied by what the market wants.</li></ul><p>The US NAHB Housing Market Index slightly beat
expectations:</p><ul><li>NAHB 37 vs. 36
expected and 40 prior.</li><li>Single family 40 vs. 40 prior.</li><li>Next six months 45
vs. 39 prior.</li><li>Traffic of
prospective buyers 24 vs. 21 prior.</li></ul><p>Tuesday</p><p>BoC Governor Macklem acknowledged that rate cuts are
expected sometime next year but he’s uncertain on the timing as he wants to see
some more months of weakness in the underlying inflation measures:</p><ul><li>If you look at our
projection, rate cuts are likely sometime next year, but I'm not going to
put it on a calendar.</li><li>We're very focused
on core inflation.</li><li>The BoC need to see
a number of months with sustained downward momentum in core inflation
before it cuts interest rates. </li><li>We are certainly
feeling more confident that monetary policy is working and increasingly,
the conditions are in place to get us back to two-per-cent inflation, but
that is not yet assured, we're not there yet.</li><li>There are a few more
things we need to see to be more confident that we're headed back to two
per cent and we're watching those closely.</li></ul><p>The RBA released the Minutes of its December Monetary
Policy Meeting: </p><ul><li>Board considered
whether to raise rates by 25bp or hold steady.</li><li>Decided case for
steady rates was the stronger one at this meeting.</li><li>Board saw
"encouraging signs" of progress on inflation, this needed to
continue.</li><li>Whether further
tightening required would be decided by data, assessment of risks.</li><li>Recent data had not
warranted a material change to the economic outlook.</li><li>Board saw value in
waiting for more data to assess balance of risks.</li><li>Risk inflation could
stay high too long balanced by risk of sharper slowdown in demand.</li><li>Liaison with firms
showed they expected price increases to moderate in year ahead.</li><li>Consumption growth
quite weak, many households facing painful squeeze on finances.</li><li>But domestic demand
still running ahead of supply, inflation above several other countries.</li><li>Board noted RBA
staff forecast had inflation returning to top of band by end 2025
rather than midpoint.</li><li>Board discussed RBA
plans for govt bond holdings, agreed for now to keep to maturity.</li><li>Board to continue
"active consideration" of whether to sell bonds before maturity.</li><li>Discussed whether
best to sell bonds to market or to government's AOFM.</li><li>Judged selling bonds
to AOFM would have several practical benefits.</li></ul><p>The BoJ left interest rates unchanged at -0.10% with
YCC to target the 10-year JGBs at 0% with 1% as a reference cap:</p><ul><li>YCC decision unanimous.</li><li>BOJ makes no change
to forward guidance.</li><li>Economy has recovered moderately.</li><li>Private consumption
continues to rise moderately.</li><li>Y/Y rate of rise in
CPI slower than a while ago mainly due to effects of pushing down
energy prices.</li><li>But CPI has been
around 3% recently due to pass-through of cost increases to consumer
prices.</li><li>Inflation
expectations have risen moderately.</li><li>Economy likely to
continue recovering moderately for time being.</li><li>Japan economy
projected to continue growing at pace above potential growth rate.</li><li>Rate of rise in CPI
likely to be above 2% through fiscal 2024.</li><li>Thereafter, rate of
rise projected to slow down.</li><li>Underlying CPI
inflation likely to increase gradually toward achieving price stability
target.</li></ul><ul><li>Japan's economy
likely to continue recovering moderately.</li><li>Inflation expectations heightening moderately.</li><li>Trend inflation
likely to gradually accelerate.</li><li>Inflation likely to
move above 2% then slow pace of increase thereafter.</li><li>Uncertainty
regarding Japan's economy, prices remain very high.</li><li>Must scrutinise FX,
market moves and their impact on economy, prices.</li></ul><p>Moving on to the Press Conference, BoJ Governor Ueda
emphasized once again the central bank’s focus on wage growth and added already
that they will keep everything unchanged at the next meeting as well:</p><ul><li>Will not hesitate to
take additional easing measures if necessary.</li><li>Japan economy is
gradually picking up.</li><li>Must carefully watch
financial, FX market moves and impact on economy, prices.</li><li>Still need to gauge
whether prices will rise moving ahead.</li><li>Need to keep
scrutinising wage-price virtuous cycle.</li><li>Will attach great
importance to data but also to companies' wage growth.</li><li>We are still not
foreseeing sustainable, stable inflation with enough confidence.</li><li>Likelihood of
achieving inflation target is slightly higher but we want to look at more data.</li><li>Food price inflation
is finally past the peak.</li><li>Want to look at wage
trends, future wage moves and impact on prices/inflation.</li><li>Little chance for us
to say 'we will change policy' next month.</li><li>There will be some
data between now and next policy meeting, but not many.</li><li>Not much new data
will be available before January policy meeting.</li></ul><p>ECB’s Villeroy (neutral – voter) reaffirmed that the
ECB has ended its tightening cycle and it’s preparing to cut interest rates
sometime in 2024:</p><ul><li>We will not raise
interest rates anymore.</li><li>Inflation will
continue to slow down.</li><li>We will be able to
lower interest rates.</li><li>Lowering interest
rates should happen "some time" in 2024.</li></ul><p>BoE’s Breeden (neutral – voter) reaffirmed the BoE’s
high for longer stance:</p><ul><li>Important for policy
to be restrictive for an extended period.</li><li>Inflation is falling
but still high.</li><li>I have no
pre-determined policy path in mind.</li><li>Labour market is
loosening but remains tight.</li></ul><p>The Canadian CPI for November beat expectations across
the board:</p><ul><li>CPI Y/Y 3.1% vs. 2.9%
expected and 3.1% prior.</li><li>CPI M/M 0.1% vs.
-0.1% expected and 0.1% prior.</li><li>Core CPI Y/Y 2.8% vs.
2.7% prior.</li><li>Core CPI M/M 0.1% vs. 0.3% prior.</li><li>Trimmed Mean Y/Y
3.5% vs. 3.3% expected and 3.5% prior.</li><li>Median Y/Y 3.4% vs. 3.3%
expected and 3.4% prior (revised from 3.6%).</li><li>Common Y/Y 3.9% vs.
4.0% expected and 4.2% prior.</li></ul><p>The US Housing Starts and Building Permits for
November beat expectations:</p><ul><li>Housing starts 1.560M
vs. 1.360M expected and 1.359M prior.</li><li>Building permits
1.460M vs. 1.465M expected.</li><li>Housing starts M/M
14.8% vs. 0.2% prior (revised from 1.9%).</li><li>Building permits M/M
-2.5% vs. 1.1% prior.</li></ul><p>Fed’s Barkin
(neutral – voter in 2024) basically repeated what Goolsbee said as the fall in
inflation closer to the central bank’s target is giving them more room to focus
on the dual mandate:</p><ul><li>Inflation remains a
focus for the Fed.</li><li>Says they are now
looking to balance this focus with other aspects of the Fed's mandate,
considering the progress made in reducing inflation.</li><li>Clarifies that the
Fed's forecasts are not meant to be taken as guidance but are simply
projections.</li><li>Downplays the
optimistic Q3 GDP data, noting that his ground-level contacts do not
reflect this level of growth.</li><li>Observations
indicate that demand, employment, and inflation are stabilizing and not as
excessively high as Q3 data suggested.</li><li>Remarks on the
significant decrease in inflation and anticipates further cooling.</li><li>Notes that demand is
normalizing but not dramatically declining.</li><li>The Fed is seeking
strong evidence that inflation is returning to its target and notes signs
of weakening in certain areas of the consumer economy.</li><li>Regarding potential
rate cuts, Barkin states that if inflation decreases as anticipated, the
Fed will respond appropriately.</li><li>Believes inflation
is proving to be more persistent than most Fed officials think.</li><li>Feels that the
Federal Reserve is well-positioned given the current economic outlook.</li><li>When asked about
financial market conditions, he comments that the markets will behave
independently.</li></ul><p>Fed’s Bostic
(neutral – voter in 2024) echoed his colleagues’ views as he emphasized that
the reduction in rates will be just a strategy to avoid overtightening given
that the fall in inflation will make the neutral rate to fall as well:</p><ul><li>Still a way to go on
inflation even though Fed has made "tremendous" progress.</li><li>Pandemic policies
left families and businesses in much stronger position able to absorb
restrictive policy.</li><li>Expect inflation to
continue to come down slowly and unevenly.</li><li>Expect tight labour
markets to continue moving forward.</li><li>Paying a lot of
attention to 3 and 6-month inflation figures, they are coming down.</li><li>Wages have been a
trailing indicator and a way to retain workers.</li><li>Have to keep an eye
out to ensure output does not become too weak.</li><li>Businesses and
employers still see the economy as strong, with robust demand.</li><li>Fed is in a good
play with a pathway to fixing inflation without much labour market pain.</li><li>Businesses
increasingly say they do not have the same price power as early in the
pandemic.</li><li>Fed is not going to
jump at the first data point.</li><li>Policy will need to
be resolute.</li><li>There "is not
going to be urgency" for Fed to back away from restrictive stance.</li><li>Continues to predict
two rates cuts in 2024.</li><li>Fed cannot wait to
get to 2% to reduce rates or it will 'overshoot', that is the strategy
behind rate cuts.</li><li>Now is not the time
to consider changing the inflation goal, but nothing should be etched in
stone.</li></ul><p>RBNZ Governor Orr acknowledged
the complex situation they are into with the latest GDP figures showing a
contraction in Q3:</p><ul><li>Inflation remains too high.</li><li>The committee
remains weary of ongoing inflationary surprises.</li><li>Internalizing
complex situation of subdued 3Q GDP, historic downgrades.</li><li>Neutral interest
rate is now at 2.55%.</li></ul><p>Wednesday</p><p>The PBoC left the
LPR rates unchanged as expected:</p><ul><li>LPR 1 year 3.45% vs. 3.45% prior.</li><li>LPR 5 years 4.20% vs. 4.20% prior.</li></ul><p>The UK CPI for
November missed expectations across the board by a big margin:</p><ul><li>CPI Y/Y 3.9% vs.
4.4% expected and 4.6% prior.</li><li>CPI M/M -0.2% vs.
0.1% expected and 0.0% prior.</li><li>Core CPI Y/Y 5.1%
vs. 5.6% expected and 5.7% prior.</li><li>Core CPI M/M -0.3%
vs. 0.2% expected and 0.3% prior.</li><li>Core CPI 6-month annualised 2.2%.</li></ul><p>ECB’s Nagel (hawk
– voter) warned traders on impending rate cuts:</p><p>"I
would say to everyone who is speculating on an imminent interest rate cut: Be
careful, some people have already miscalculated that. We must initially remain
at the current interest rate plateau so that monetary policy can fully develop
its inflation-dampening effect."</p><p>ECB’s Knot (hawk –
non voter in January) pushed back against imminent rate cuts expectations:</p><ul><li>A rate cut in the
first half of 2024 rather unlikely based on current info.</li><li>We have to see how
wages data develops, will see data around the middle of 2024.</li><li>Optimal path for
rates closer to market pricing at cut-off date than now.</li><li>Any structural bond
portfolio should be as small as possible.</li></ul><p>The US Consumer
Confidence for December beat expectations by a big margin:</p><ul><li>Consumer Confidence
110.7 vs. 104.0 expected and 101.0 prior (revised from 102.0).</li><li>Present situation
index 148.5 vs. 136.5 prior (revised from 138.2).</li><li>Expectations 85.6 vs.
77.4 prior (revised from 77.8).</li><li>1 year inflation
expectations 5.6% vs. 5.7% prior. </li><li>Jobs hard-to-get
13.2 vs. 15.4 prior.</li></ul><p>Fed’s Harker (neutral –
non voter in 2024) warned that things are softening faster than the data
suggests although he pushed back against imminent rate cuts expectations:</p><ul><li>The job of
controlling inflation is not done.</li><li>Things are looking
better for the inflation outlook.</li><li>Hearing things are
starting to soften faster than data suggests.</li><li>We don't need to
raise rates anymore.</li><li>Soft landing process
will likely be bumpy.</li><li>Expect unemployment
to take up not by a lot.</li><li>A lot of things
could thwart a soft landing.</li><li>US economy is
incredibly resilient.</li><li>Reasons for some
people's bad economic vibes are real.</li><li>High-priced level
over many parts of the economy weighing on many.</li><li>Firms are having
better luck finding new work.</li><li>Fed won't cut rates
right away.</li><li>Infrastructure
investment is very important.</li></ul><p>The BoC released the
Minutes of its December Monetary Policy Meeting:</p><ul><li>Agreed the
likelihood that monetary policy was sufficiently restrictive had
increased.</li><li>Agreed that risks to
the inflation outlook remained and it might still be necessary to hike.</li><li>Expressed concern
that shelter price inflation could remain elevated, which could make it
more difficult to return inflation to 2%.</li><li>Felt that
significant and sustained increase in new home construction would be
needed to resolve long-standing structural shortage in supply.</li><li>Agreed monetary policy
couldn't solve housing supply problems.</li><li>Considerable
uncertainty surrounding the outlook for inflation.</li></ul><p>ECB’s Kazaks (hawk –
voter) pushed back against the imminent rate cuts expectations:</p><ul><li>Rates to remain at
4.00% for some time before likely cut.</li><li>Says he's not as
optimistic as markets on the timing of the first cut.</li><li>First rate cut could
come around middle of 2024.</li></ul><p>Thursday</p><p>ECB’s de Guindos (neutral
– voter) pushed back against the aggressive rate cuts expectations:</p><ul><li>Interest
rates are doing what they are supposed to do, which is bring inflation down.</li><li>Once we see inflation converging to 2% target, then monetary policy
might start to ease.</li><li>But
it’s still too early for that to happen now.</li><li>The
ECB remains data dependent.</li><li>Recent data have been favourable but not enough to change policy.</li><li>It is too early to talk about rate cuts.</li></ul><p>Angola
announced its withdrawal from OPEC. Angola has been part of OPEC since 2007 and
they alongside Congo and Nigeria, have failed to meet their respective output
targets for years now. This resulted in pressure from Saudi Arabia to force
them to accept lower output targets for next year. According to Reuters (citing
independent sources from OPEC), Angola has been pumping less than its quota for
2024 as of October this year. For some context, Angola had last month rejected
the new output quota handed to it by OPEC and said it planned to breach it.
That played a part in the spat among OPEC members that delayed the meeting in
late November. </p><p>The Canadian Retail Sales
for October beat expectations:</p><ul><li>Retail Sales October
0.7% vs. 0.8% expected and 0.6% prior.</li><li>Retail Sales Y/Y
2.2% vs. 2.7% prior (revised from 2.2%).</li><li>Ex auto 0.6% vs.
0.5% expected and 0.1% prior (revised from 0.2%).</li><li>Ex auto and gas 1.2%
vs. -0.3% prior.</li><li>November Advance estimate 0.0%.</li></ul><p>The Final reading for US Q3
GDP was revised lower:</p><ul><li>GDP Q3 4.9% vs. 5.2% expected.</li><li>Consumer spending 3.1% vs. 3.6% prelim.</li><li>Consumer spending on
durables 6.7% vs. -0.3% prior.</li><li>GDP final sales 3.6%
vs. 3.7% prelim.</li><li>GDP deflator 3.3% vs. 3.5% prelim.</li><li>Core PCE 2.0% vs. 2.3% prelim.</li><li>Corporate profits 3.7% vs. 4.1% prelim.</li><li>Business investment 5.2% vs. 3.9% prelim.</li></ul><p>The US Jobless Claims
beat expectations once again. The Initial Claims data comprises the NFP survey
week.</p><ul><li>Initial Claims 205K
vs. 215K expected and 203K prior (revised from 202K).</li><li>Continuing Claims
1865K vs. 1888K expected and 1866K prior (revised from 1876K).</li></ul><p>Friday</p><p>The Japanese CPI for
November eased further across all measures:</p><ul><li>CPI Y/Y 2.8% vs. 3.3%
prior.</li><li>CPI M/M -0.1% vs. 0.7% prior.</li><li>Core CPI Y/Y 2.5% vs.
2.5% expected and 2.9% prior.</li><li>Core-Core CPI Y/Y 3.8% vs. 4.0% prior.</li></ul><p>The UK Retail Sales for
November beat expectations across the board with positive revisions to the
prior figures:</p><ul><li>Retail sales M/M
1.3% vs. 0.4% expected and 0.0% prior (revised from -0.3%).</li><li>Retail sales Y/Y 0.1%
vs. -1.3% expected and -2.5% prior (revised from -2.7%).</li><li>Retail sales ex
autos, fuel M/M 1.3% vs. 0.4% expected and 0.2% prior (revised from -0.1%).</li><li>Retail sales ex
autos, fuel Y/Y 0.3% vs. -1.5% expected and -2.1% prior (revised from
-2.4%).</li></ul><p>The UK Final GDP for Q3
was revised lower:</p><ul><li>Q3 GDP Q/Q -0.1% vs. 0.0%
expected and 0.0% prior (revised from -0.1%).</li></ul><p>The US Durable Goods
Orders beat expectations:</p><ul><li>Durable Goods Orders M/M 5.4%
vs. 2.2% expected and -5.1% prior (revised from -5.4%).</li><li>Durable Goods Orders ex
Transportation M/M 0.5% vs. 0.1% expected and -0.3% prior (revised from 0.0%).</li><li>Durable Goods Orders ex
Defence M/M 6.5% vs. -6.4% prior (revised from -6.7%).</li><li>Non-defence Goods Orders
Ex Air M/M 0.8% vs. 0.2% expected and -0.6% prior (revised from -0.1%).</li></ul><p>The Canadian GDP for
October missed expectations:</p><ul><li>Canada GDP October 0.0%
versus 0.2% expected and 0.0% prior (revised from 0.1%).</li><li>Service producing industries rose 0.1%.</li><li>Goods producing industries unchanged.</li><li>The advanced GDP for
November is a gain of 0.1%.</li></ul><p>The US Core PCE for November missed
expectations with negative revisions to the prior figures:</p><ul><li>PCE Y/Y 2.6% vs.
2.8% expected and 2.9% prior (revised from 3.0%).</li><li>PCE M/M -0.1% vs.
0.0% and 0.0% prior.</li><li>Core PCE Y/Y 3.2%
vs. 3.3% expected and 3.4% prior (revised from 3.5%).</li><li>Core PCE M/M 0.1% vs.
0.2% expected and 0.1% prior (revised from 0.2%).</li></ul><p>Consumer spending and
income for November:</p><ul><li>Personal income 0.4%
vs. 0.4% expected and 0.3% prior (revised from 0.2%).</li><li>Personal spending 0.2%
vs. 0.3% expected and 0.2% prior.</li><li>Real personal
spending 0.3% vs. 0.2% prior.</li></ul><p>The
6-month annualised rate fell to 1.9%. Fed’s Bostic recently said “Paying a
lot of attention to 3 and 6-month inflation figures, they are coming down”.</p><p>The
highlights for next week will be:</p><ul><li>Tuesday: Japan Jobs data. </li><li>Wednesday: BoJ Summary of
Opinions.</li><li>Thursday: Japan Industrial
Production and Retail Sales, US Jobless Claims.</li></ul><p>That’s all folks. Wish
you a Merry Christmas and a Happy New Year!</p>

This article was written by Giuseppe Dellamotta at www.forexlive.com.