Fed’s Cook: Can afford to proceed more cautiously with further cuts

    Fed Governor Lisa Cook highlighted in a speech today that Fed can “afford to proceed more cautiously with further cuts”. She noted that risks to the dual mandate of price stability and maximum employment are now “roughly in balance”. But since September, “The labor market has been somewhat more resilient, while inflation has been stickier than I assumed”. Also, with the 100bps of rate cuts last year, Fed has already “notably reduced the restrictiveness of monetary policy. ”

    Elaborating on the outlook, Cook highlighted progress in core goods pricing, which has eased due to better supply-demand balance. She expects housing services inflation, a significant contributor to elevated prices, to cool further in 2025 as slower rent growth filters through the system. However, she remains watchful of uneven progress, maintaining confidence that inflation will “gradually—if unevenly—return over time to our goal of 2 percent.”

    Turning to the labor market, Cook described it as solid but moderating. High turnover and elevated job-switching seen earlier in the post-pandemic recovery have subsided, creating better balance between supply and demand for labor. “I do not see the labor market as a source of significant inflationary pressure,” she added, noting that wage growth disparities between job switchers and stayers have largely diminished.

    Full speech of Fed’s Cook here.

    Eurozone Sentix investor confidence hits 14-month low, room for ECB support rapid diminishing

      Eurozone Sentix Investor Confidence edged down from -17.5 to -17.7 in January, meeting expectations while marking the lowest level since November 2023. Current Situation Index fell from -28.5 to -29.5, its weakest reading since October 2022. Meanwhile, Expectations Index improved marginally from -5.8 to -5.0 but remained in negative territory.

      Sentix highlighted Germany’s economic struggles as a major drag on the Eurozone, with its overall index at -33.3. German Current Situation Index held steady at -50.8, underscoring a deep recessionary environment, while expectations fell to -13.8. Political uncertainty in Germany, exacerbated by electoral challenges, compounds the economic woes, adding to the region’s fragility.

      Sentix also warned that the broader Eurozone economy is at risk of falling “even deeper into crisis.” Inflation concerns persist, with the thematic inflation index dropping from -12 to -15.25. This trend further constrains ECB, which limited room for additional rate cuts is “rapidly diminishing”. Governments are also contending with high deficits as they attempt to stimulate growth.

      Full Eurozone Sentix release here.

      UK PMI services finalized at 51.1, optimism hits multi-year low

        UK PMI Services for December was finalized at 51.1, slightly up from November’s 50.8, marking the fourteenth consecutive month of expansion. However, growth was marginal, with the index’s quarterly average at its lowest in a year. PMI Composite slipped to 50.4, down from 50.5, its weakest reading since October 2023.

        Tim Moore, Economics Director at S&P Global Market Intelligence, noted a “near-stalling” of new business inflows due to falling business and consumer confidence. Respondents cited concerns over “domestic economic prospects” for 2025 and lingering post-Budget uncertainty as major factors curbing growth momentum.

        Cost pressures intensified, with input price inflation hitting an eight-month high. Service providers responded by raising prices at a rate well above pre-pandemic levels, further straining demand.

        Nearly one in four firms reported payroll reductions, marking the steepest non-pandemic-related job shedding in over 15 years as subdued demand and rising employment costs forced businesses to delay hiring or reduce staff.

        Full UK PMI services final release here.

        Eurozone PMI services finalized at 51.6, resilient sector with persistent inflation pressures

          Eurozone PMI Services for December was finalized at 51.6, an improvement from November’s 49.5, signaling a return to growth after a brief contraction.

          Meanwhile, PMI Composite edged higher to 49.6, up from November’s 48.3, though still indicating a slight contraction in overall activity. Among individual countries, Spain stood out with a 21-month high at 56.8, while Germany and France posted modest improvements to 48.0 and 47.5, respectively.

          Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that “services inflation remains elevated,” driven by rising wages and higher costs being passed on to customers. These dynamics reinforce the expectation that ECB will take a cautious approach to monetary policy.

          “Small interest rate cuts in the first quarter of 2025” appear likely as the central bank balances inflation concerns with sluggish economic growth.

          Encouragingly, the services sector displayed resilience, with incoming business stabilizing and the decline in order backlogs slowing. Service providers, less exposed to the potential impacts of US tariffs than manufacturers, remain a crucial buffer against the region’s industrial slowdown.

          However, the foundation for a robust services-led recovery in 2025 remains tenuous, with structural challenges such as high costs and fragile demand persisting.

          Full Eurozone PMI services final release here.

          BoJ Ueda stresses caution on policy adjustments

            BoJ Governor Kazuo Ueda reiterated the cautious stance on monetary policy adjustments at a Japanese Bankers Association event today. He emphasized that any interest rate hikes would depend on sustained improvements in economic and price conditions.

            “Our stance is that we will raise the policy interest rate to adjust the degree of monetary easing if economic and price conditions keep improving,” Ueda stated.

            However, he highlighted the need for vigilance regarding various risks, signaling that the timing of such adjustments would be carefully assessed. The governor also expressed his hopes for balanced growth in wages and prices in the coming year.

            China’s services sector gains momentum, but Composite PMI signals broader economic strain

              China’s services sector gained pace in December, with Caixin PMI Services rising to 52.2 from 51.5 in November, marking its highest level since May. However, the overall economic picture remains mixed as PMI Composite slipped to 51.4, its lowest since September. This divergence highlights that faster services growth was insufficient to offset the slowdown in manufacturing output expansion.

              Wang Zhe, Senior Economist at Caixin Insight Group, remarked, “Prominent downward pressures remain, with tepid domestic demand and mounting unfavorable external factors.”

              He added that sluggish employment and squeezed profit margins are weighing on market optimism. Declines in some gauges from the manufacturing PMI survey indicate that more time is needed to evaluate the consistency and effectiveness of recent policy stimulus.

              Full China Caixin PMI services release here.

              Japan’s PMI services finalized at 50.9, optimism eases

                Japan’s service sector showed slight improvement in December, with final PMI Services index rising to 50.9 from 50.5 in November, indicating marginal growth. PMI Composite also increased to 50.5 from 50.1, reflecting modest stabilization in the broader economy.

                Usamah Bhatti, Economist at S&P Global Market Intelligence, noted, “December data revealed sustained rises in both business activity and new business,” with new orders growing at the fastest pace in four months. Employment in the service sector rose for the fifteenth consecutive month, signaling steady labor market gains. Despite these improvements, business optimism softened slightly.

                The overall economic expansion was underpinned by softer contraction in manufacturing output and ongoing growth in the service sector. New orders across sectors expanded at their fastest rate since August, supported by the completion of outstanding work, particularly in manufacturing. However, optimism regarding future output declined, falling below the 2024 average.

                Full Japan PMI services final release here.

                Fed Barkin sees upside growth potential

                  Richmond Fed President Thomas Barkin expressed a cautiously optimistic outlook during remarks today, highlighting economic growth upside while noting inflation risks tied to labor market strength.

                  “How economic policy uncertainty resolves will matter. But, with what we know today, I expect more upside than downside in terms of growth,” he stated.

                  Barkin also flagged that hiring trends could add upward pressure on inflation if the job market strengthens further.

                  Barkin noted that financial markets appear more aligned with Fed’s projected slower pace of interest rate cuts this year, adding that there seems to be broader acceptance of persistently higher long-term interest rates.

                   

                  US ISM manufacturing improves to 49.3, but remains in contraction territory

                    US ISM Manufacturing PMI edged up from 48.4 to 49.3 in December, exceeding market expectations of 48.3. Despite the improvement, the index remained below the 50.0 threshold, signaling contraction for the ninth consecutive month and for the 25th time in the past 26 months.

                    The ISM highlighted that the December reading corresponds to an annualized 1.9% growth in real GDP, indicating a modest contribution to the broader economy.

                    Delving into the subcomponents, new orders climbed from 50.4 to 52.5, while production improved notably, rising from 46.8 to 50.3. However, employment fell sharply from 48.1 to 45.3. Additionally, prices accelerated, increasing from 50.3 to 52.5, pointing to renewed input cost pressures.

                    Full US ISM manufacturing release here.

                    Yuan Pressure Against Dollar, But Rises Against CFETS Basket

                      The Chinese Yuan presented an interesting paradox in today’s market action. Onshore Yuan sank below 7.3 mark against US Dollar, registering a 14-month low. This decline has intensified speculation that the People’s Bank of China might be adopting a more lenient stance toward currency depreciation. Such a move could be part of broader efforts to bolster economic growth amid mounting headwinds. The downward bias has been further fueled by the possibility of a renewed “Trade War 2.0” under the incoming US administration.

                      Conversely, the CFETS RMB Index—a measure of the Yuan’s trade-weighted performance against a basket of currencies—surged to its highest level since October 2022. Although primarily driven by the relative weakness of major currencies versus the Dollar, this uptick hints at potential challenges for China’s export competitiveness to other key markets.

                      These moves also coincide with CFETS basket weighting adjustments for 2025, including reductions in the weightings of Dollar (from 19.46% to 18.903%), Euro (from 18.08% to 17.902%), and Yen (from 8.963% to 8.584%).

                      The larger question remains: How far is China willing to let Yuan depreciate? This is a mounting question given the uncertainty surrounding any trade measures the US might impose after Donald Trump’s January 20 inauguration. Beijing’s true intentions would become clearer after that.

                      Technically, it does look like that USD/CNH (Dollar vs offshore Yuan) is ready to resume it’s long term up trend from 6.3057 (2022 low). Decisive break of 7.3745 (2022 high) will pave the way to 100% projection of 6.6971 to 7.3673 from 6.9709 at 7.6411.

                      US PMI manufacturing finalized at 49.4, optimism wanes on inflation worries

                        US PMI Manufacturing Index was finalized at 49.4 in December, a slight dip from November’s 49.7, marking the sixth consecutive month of contraction in the sector. Although the decline in manufacturing health remains modest overall, the pace of deterioration has quickened slightly compared to the prior month.

                        Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, highlighted the challenges: “US factories reported a tough end to 2024, and have scaled back their optimism for growth in the year ahead.”

                        He pointed to rising production cuts in December as inflows of new orders disappointed. The fleeting boost in customer demand seen after the election in November has faded, leaving factories to contend with subdued sales, particularly in export markets.

                        Despite the downturn, many manufacturers are cautiously optimistic about the New Year, hoping that the incoming administration’s policies might spur growth. Expectations of reduced regulations, lower taxes, and increased demand for US goods via potential tariffs are contributing to this sentiment. Confidence, which hit a low in June, received a notable boost following the election result in November.

                        However, firms are increasingly wary of rising input costs and the resurgence of inflation, which could limit the scale of Fed rate cuts in the coming year.

                        Full US PMI manufacturing final release here.

                        US initial jobless claims falls to 211k, vs exp 223k

                          US initial jobless claims fell -9k to 211k in the week ending December 28, below expectation of 223k. Four-week moving average of initial claims fell -3.5k to 223k.

                          Continuing claims fell -52k to 1844k in the week ending December 21. Four-week moving average of continuing claims fell -7k to 1871k.

                          Full US jobless claims release here.

                          UK PMI manufacturing finalized at 47, sentiment at two-year low

                            UK PMI Manufacturing was finalized at 47.0 in December, down from 48.0 in November, marking the third consecutive month of contraction. Persistent challenges, both domestic and international, weighed heavily on the sector, resulting in the sharpest production decline in nearly a year.

                            Rob Dobson, Director at S&P Global Market Intelligence, highlighted a “stalling domestic economy, weak export sales, and future cost concerns” as key drivers of the downturn. Business confidence fell to its lowest point in two years.

                            Small and medium-sized enterprises have been hit hardest during the downturn, while labor market pressures intensify. December saw the steepest job cuts since February, as firms moved to restructure in anticipation of 2025 National Insurance and minimum wage increases. Export sales also suffered due to weaker demand from Europe, Asia, and the US.

                            Input costs continued to rise, fueled by higher transportation, labor, and material expenses, with some increases linked to ongoing supply chain challenges. Looking ahead, the impact of Budget 2025 measures is expected to drive costs higher, potentially complicating BoE’s decision on further rate cuts despite mounting signs of economic stress.

                            Full UK PMI manufacturing final release here.

                            Eurozone PMI manufacturing finalized at 45.1, Spain outshines peers with low China exposure

                              Eurozone PMI Manufacturing was finalized at 45.1 in December, down from November’s 45.2, marking the sector’s 30th consecutive month of contraction. Key indicators, including new orders and inventory levels, signaled ongoing struggles across the bloc.

                              Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, emphasized the continued downturn: “New orders have dropped even more than in the previous two months, crushing any hopes for a quick recovery.” Inventories of intermediate and finished goods declined sharply, reflecting weak demand expectations.

                              Job cuts persisted across Eurozone, with the pace of reductions remaining significant, despite a slight deceleration. This trend is expected to continue as companies restructure operations amid weak industrial activity.

                              Spain remained a bright spot, with its PMI rising to 53.3, indicating robust expansion. Greece also posted growth at 53.2, a five-month high. However, the largest economies continued to struggle: Germany (42.5) reached a three-month low, France (41.9) fell to a 55-month low, and Italy (46.2) managed only a slight improvement.

                              Spain’s relative resilience stems from its low export exposure to China (2%) and benefits from lower energy costs, which have helped it weather the industrial crisis better than its peers. However, with Spain accounting for only 12% of Eurozone GDP, its strength alone cannot offset the widespread industrial recession.

                              Full Eurozone PMI manufacturing final release here.

                              China’s Caixin PMI manufacturing falls back to 50.5 as downward pressures persist

                                China’s Caixin Manufacturing PMI dropped to 50.5 in December, down from 51.5 and below market expectations of 51.6, signaling a moderation in the sector’s growth.

                                While supply and demand expanded modestly, external demand remained a significant drag, according to Wang Zhe, Senior Economist at Caixin Insight Group.

                                Zhe highlighted several challenges, noting that external demand was “sluggish”, while job market suffered a “notable contraction.” Additionally, sales prices were weak, and market optimism continued to decline.

                                The survey pointed to “prominent downward pressures”, stemming from subdued domestic demand and challenging external conditions, which have squeezed profit margins and dented confidence.

                                The report also suggested that the impact of previous policy stimulus measures has yet to yield consistent results, with more time needed to gauge their effectiveness.

                                Full China Caixin PMI manufacturing release here.

                                Swiss KOF falls below average, signals dampened outlook

                                  Swiss KOF Economic Barometer fell to 99.5 in December, down from 102.9 in November and below market expectations of 101.1. This decline brings the indicator slightly below its medium-term average, signaling a “dampened” outlook for the Swiss economy .

                                  KOF Economic Institute attributed the drop to weaker performance across multiple sectors. In particular, indicators for manufacturing, other services, the hospitality industry, foreign demand, and private consumption showed significant declines, collectively driving the overall decrease.

                                  Full Swiss KOF release here.

                                  Japan’s PMI manufacturing finalized at 49.6, nears stabilization and cost pressures persist

                                    Japan’s Manufacturing PMI for December was finalized at 49.6, an improvement from November’s 49.0, indicating a gradual move toward stabilization in the sector.

                                    According to Usamah Bhatti of S&P Global Market Intelligence, the data “painted a picture of a near-stabilization” in manufacturing conditions as declines in both production and new orders softened.

                                    Encouraged by these improvements, firms increased hiring, partly to address existing labor shortages and in anticipation of future demand recovery.

                                    However, price pressures remained elevated, with input costs rising at their fastest pace since August due to higher raw material and labor costs, compounded by Yen’s weakness. To manage these cost burdens, manufacturers passed on higher prices to clients, resulting in the strongest output charge increases in five months.

                                    Full Japan PMI manufacturing final release here.

                                    US goods exports rise 6.1% yoy in Nov, imports surge 9.6% yoy

                                      US goods exports rose 6.1% yoy to USD 176.4B in November. Goods imports rose 9.6% yoy to USD 279.2B. Trade deficit widened from October’s USD -98.3B to USD 102.9B. larger than expectation of USD -100.9B.

                                      Wholesale inventories fell -0.2% mom to USD 901.6B. Retail inventories rose 0.3% mom to USD 827.5B.

                                      Full US good trade balance release here.

                                      BoJ summary highlights division on timing of rate hikes

                                        BoJ Summary of Opinions from its December 18–19 meeting revealed a divided board on the timing of monetary policy normalization. While some members advocated for action soon, citing upside risks to prices, others expressed caution due to slow wage growth, soft overseas demand, and heightened uncertainties.

                                        One member emphasized that with economic activity and prices aligning with BoJ’s outlook, risks to inflation were becoming “skewed to the upside.” The member argued for a “forward-looking, timely, and gradual” adjustment of monetary policy. Similarly, another member noted that the sustained increase in prices over the past three years, partly driven by Yen’s depreciation, would likely contribute to higher underlying inflation, warranting “preemptive” rate hikes.

                                        Conversely, more dovish members maintained that the current risks to prices “do not suggest a pressing need” for rate hike. One member cited uncertainties surrounding tax and fiscal policies in Japan and the stance of the incoming US administration as reasons to maintain the current policy stance, emphasizing a risk management approach.

                                        Overall, the BoJ board appears focused on assessing the outcomes of next year’s spring wage negotiations and the impact of US policy shifts before making further moves toward policy normalization.

                                        Full BoJ Summary of Opinions here.

                                        Japan’s industrial output slips -2.3% mom in Nov, indecisive fluctuation continues

                                          Japan’s industrial production declined -2.3% mom in November, outperforming expectations of a -3.4% mom drop, but marking the first contraction in three months.

                                          The decrease was driven by weaker exports of semiconductor manufacturing devices and cars, highlighting challenges in external demand. Out of 15 industrial sectors, 11 recorded declines, while 3 sectors reported gains.

                                          Production machinery saw a significant -9.1% drop, largely due to falling exports of chip-making equipment to China and Taiwan, while motor vehicle output fell -4.3%, and fabricated metal products dropped -5.7%.

                                          Despite the slump, the Ministry of Economy, Trade, and Industry maintained its view that industrial production “fluctuates indecisively,” while warning of risks tied to the economic outlooks of the US and China.

                                          Looking ahead, METI’s poll of manufacturers predicts a rebound, with output expected to rise 2.1% in December and an additional 1.3% in January.

                                          Separately, retail sales posted a robust 2.8% yoy gain, exceeding expectations of 1.5%, signaling resilience in domestic demand.