UK CPI rose 0.4% mom in December, well above expectation of 0.2% mom. For the 12- month period, CPI accelerated from 3.9% yoy to 4.0% yoy, above expectation of 3.8% yoy. That’s the first time the rate has increased since February 2023.
CPI core (excluding energy, food, alcohol and tobacco) was unchanged at 5.1% yoy, above expectation of 4.9% yoy. CPI goods slowed from 2.0% yoy to 1.9% yoy. CPI services rose from 6.3% yoy to 6.4% yoy.
China’s GDP grew 5.2% yoy in Q4, an uptick from Q3’s 4.9% yoy. For the full year of 2023, the economy also recorded a growth rate of 5.2%. On a quarter-by-quarter basis, GDP growth rate was 1.0% qoq, matched expectation, though this marked a slowdown from the previous quarter’s revised 1.5% qoq gain.
In the industrial sector, production rose by 6.8% yoy in December, slightly higher than the previous month’s 6.6%, meeting market forecasts. However, retail sales growth decelerated to 7.4% yoy, a drop from November’s 10.1% yoy and below the expected 8.1% yoy.
Investment patterns showed a mixed trend. Overall fixed asset investment in 2023 grew by 3.0%, slightly exceeding the 2.9% expectation. Within this category, real estate investment saw a significant drop of -9.6%. Conversely, investment in infrastructure and manufacturing rose by 5.9% and 6.5%, respectively, signaling growth in these areas.
Amidst these economic developments, China faces a demographic challenge as its population fell for the second consecutive year in 2023. Total population decreased by -2.75m to 1.409B, a more rapid decline than in 2022.
ECB Governing Council Gediminas Simkus expressed a conditional optimism about rate reductions within the year, stating, “If we don’t see any surprises that would change the data and the thinking, I’m positive about rate cuts this year.”
However, Simkus tempered his outlook with a dose of realism regarding the timing of these cuts. He clarified, “I’m far less optimistic than markets about rate cuts in March or April.”
Separately, another Governing Council member Madis Müller commented on the aggressiveness of market expectations for ECB rate cuts in 2024. He observed that these expectations do not align with the current data available to the central bank.
Müller further emphasized that wage growth in Eurozone remains out of sync with the ECB’s current inflation targets. He noted that ECB cannot proceed with cutting rates until data reflects the desired price growth conditions.
Fed Governor Christopher Waller expressed growing confidence bring inflation down to target. He noted in a speech overnight that Fed is “within striking distance of achieving a sustainable level of 2 percent PCE inflation”. However, he also emphasized the need for more data in the coming months to confirm or challenge the notion that inflation is moving sustainably toward Fed’s goal.
Waller also mentioned that he perceives the risks to employment and inflation mandates as “more closely balanced” now. His focus is on watching for sustained progress on inflation and a modest cooling in the labor market.
Regarding interest rate cuts, Waller expressed that “as long as inflation doesn’t rebound and stay elevated”, he believes Fed will be able to lower the target range for the federal funds rate “this year”. But he also clarified, “Clearly, the timing of cuts and the actual number of cuts in 2024 will depend on the incoming data.”
Waller also highlighted the importance of the upcoming revisions to CPI inflation scheduled for next month. He recalled that last year’s annual update to the seasonal factors reversed what initially appeared to be a decline in inflation. The January CPI report and revisions for 2023, due in mid-February, are anticipated to potentially alter the current understanding of inflation. Waller expressed hope that these revisions would confirm the progress observed so far but emphasized that good policy must be based on data rather than hope.
US Empire State Manufacturing general business conditions index fell sharply from -14.5 to -43.7 in January, hitting the lowest level since May 2020. Looking at some details, new orders fell from -11.3 to -49.4. Shipments fell from -6.4 to -31.3. Prices paid rose from 16.7 to 23.2. Prices received fell from 11.5 to 9.5.
Richard Deitz, Economic Research Advisor at the New York Fed said, “this outsized drop suggests January was a difficult month for New York manufacturers, with employment and hours worked also contracting.”
Canada’s CPI accelerated from 3.1% yoy to 3.4% yoy in November, above expectation of 3.3% yoy. The acceleration was largely due to base-year effect on gasoline prices. Excluding gasoline, CPI slowed slightly from 3.6% yoy to 3.5% yoy. On a monthly basis, CPI was down -0.3% mom, matched expected.
CPI median, which represents the middle point of price changes, remained steady at 3.6% yoy, exceeding the forecast of 3.4%. CPI trimmed, which excludes certain extreme price movements, rose from 3.5% yoy to 3.7%, also surpassing the expected 3.5%. Meanwhile, CPI Common, which is often viewed as the BoC’s preferred measure of core inflation due to its stability, remained unchanged at 3.9% yoy, again higher than the anticipated 3.8%.
Germany’s ZEW Economic Sentiment rose from 12.8 to 15.2 in January, above expectation of 12.7. Current Situation index fell slightly from -77.1 to -77.3, below expectation of -77.0.
Eurozone ZEW Economic Sentiment fell from 23.0 to 22.7, above expectation of 21.9. Current Situation index rose 3.4 points to -59.3.
ZEW President Achim Wambach noted that “Economic expectations for Germany have improved again,” attributing this positivity partly to expectations that ECB will cut interest rate in the first half of the year. This expectation is shared by “more than half of the respondents ”
Furthermore, Wambach highlighted that there are even more pronounced shifts in US interest rate expectations. He stated, “More than two-thirds of the respondents predict interest rate cuts by the US Federal Reserve in the next six months.”
Wambach also pointed out that the recent rise in inflation in Germany and Eurozone in December does not seem to have influenced the monetary policy expectations of the respondents.
In a Reuters interview, ECB Governing Council Member Tuomas Valimaki addressed the disparity between market pricing, which suggests a 150 basis points rate cut this year, and the views of economists.
He pointed out that the expectations reflected in money markets do not always align with economists’ projections, indicating a significant level of uncertainty among market participants. The wide distribution around market prices, as mentioned by Valimaki, underscores the existing ambiguity and varied interpretations of future monetary policy directions.
Valimaki further elaborated on the implications of market expectations versus the ECB’s baseline forecasts. He pointed out that if market rates were to fall more rapidly than projected, and the ECB’s forecasts prove more accurate, it could lead to higher inflation. This scenario, he explained, “could delay monetary easing.”
At the World Economic Forum in Davos, ECB Governing Council member Mario Centeno highlighted the positive direction of medium-term inflation, noting that its “trajectory is very positive right now.” He further told CNBC that “we don’t need to do more than is needed”
On the topic of rate cuts, Centeno noted “once inflation starts going down sustainably, with an economy … that is not growing, where the challenges are huge, we need to be open to get all data on board and decide upon that.”
Meanwhile, another ECB Governing Council member, Francois Villeroy de Galhau, speaking at a panel in Davos, cautioned against premature declarations of victory over inflation. However, he admitted that “our next move will be a cut, probably this year” evenh though he refrained from commenting on the timing.
UK payrolled employment fell -0.1% mom, or -24k in December. Annual growth in employees fell from 1.3% yoy to 1.0% yoy. Median monthly pay increased by 6.6% yoy, up from prior month’s 6.5% yoy. Claimant count rose 11.7k, below expectation of 18.1k.
In three months to November, unemployment rate rose to 4.2%, up 0.5% from the previous three month period. Employment rate fell to 75.5%, down -0.5%. Total weekly hours also fell -18.5 to 1040. Average earnings excluding bonus slowed from 7.3% 3moy to 6.6%, matched expectations. Average earnings including bonus fell from 7.2% 3moy to 6.5%, below expectation of 6.8%.
The latest quarterly survey of business opinion by New Zealand Institute of Economic Research revealed notable improvement in business sentiment. Only a net 2% of firms now expect general business conditions to deteriorate, compared to the 52% pessimism recorded in the previous quarter.
Christina Leung, principal economist at NZIER, expressed confidence that inflation in New Zealand is on track to return to RBNZ’s target range of 1% to 3% by the second half of 2024, with a projection of reaching 2% in the first half of 2025.
“It’s a pretty encouraging picture for the Reserve Bank and it reinforces our expectations that there won’t be further increases,” in interest rate, Leung stated.
However, Leung also mentioned that NZIER does not anticipate a reduction in the cash rate until the middle of the next year, advocating for a “wait and see approach.” This cautious stance reflects a recognition of the need to monitor economic trends before making significant policy changes.
Australia’s Westpac Consumer Sentiment index dropped by -1.3% mom to 81 in January. This figure is especially significant as it ranks in the bottom 7% of all observations since the inception of the survey in the mid-1970s. The only other instances of more pessimistic starts to the year were observed during the severe recession of the early 1990s.
Westpac attributed this “intense pressure” on consumers to surging cost of living, significantly higher interest rates, and increased tax burden, all of which are collectively impacting consumer incomes.
Despite the subdued consumer sentiment, Westpac highlighted that high inflation remains the primary concern for RBA. This focus on inflation suggests that the upcoming quarterly CPI release at the end of January will be a crucial determinant of RBA’s policy decision in February.
“On balance, we expect the RBA to leave rates unchanged in February, and to be unlikely to raise rates further from here,” Westpac noted. However, it also cautioned that an unexpected surge in inflation could complicate the decision, making it “a more finely balanced decision”.
Japan’s PPI records a slowdown from 0.3% yoy to 0.0% yoy in December, above expectation of -0.3% yoy. Nevertheless, this figure represents the lowest PPI reading since -0.9% yoy decline in February 2021.
The deceleration in Japan’s wholesale prices can be attributed partially to the government’s intervention in the form of subsidies aimed at curbing petrol and utility bills. According to a BoJ official, these subsidies reduced wholesale inflation rate by approximately 0.9 percentage points.
In terms of trade-related price indices, there was a slight increase in export price index from 1.0% yoy to 1.1% yoy. Import price index improved from -10.1% yoy to -9.5% yoy.
On a month-over-month basis, the PPI rose by 0.3% mom, Meanwhile, export price index saw a marginal decline of -0.1% mom, and import price index was flat.
During the World Economic Forum in Davos, ECB Governing Council member Robert Holzmann expressed skepticism about the possibility of rate cuts in the near term. He told CNBC, “I cannot imagine that we’ll talk about cuts yet, because we should not talk about it.”
His asserted, “Everything we have seen in recent weeks points in the opposite direction, so I may even foresee no cut at all this year.”
“Unless we see a clear decline towards 2%, we won’t be able to make any announcement at all when we’re going to cut,” he explained.
Holzmann also highlighted the potential for structural changes in the economy, which could have longer-term implications for pricing. He mentioned, “Prices on a day-to-day basis may increase, but it may also risk to change the way we do business.” This comment points to the possibility of enduring economic shifts that could affect pricing dynamics and, consequently, ECB’s monetary policy decisions.
In an interview with Bloomberg TV, ECB Governing Council member and Bundesbank President Joachim Nagel hinted at the possibility of delaying interest rate cuts until after the summer, stating, “Maybe we can wait for the summer break.” However, he was cautious not to delve into speculation, emphasizing, “I don’t want to speculate.” He also empahsized, “it’s too early to talk about cuts.”
Further elaborating on the current market expectations, Nagel addressed the speculations of six 25 basis points rate cuts by ECB this year. He noted, “The markets from time to time are optimistic. Sometimes they are overly optimistic.” This acknowledgment highlights a divergence between market expectations and the ECB’s internal assessments. Nagel’s observation, “I have a different view,” underscores a more cautious and less aggressive approach towards monetary easing.
Eurozone goods exports to the rest of the world fell -4.7% yoy to EUR 252.5B in November. Goods imports fell -16.7% yoy. A EUR 20.3B goods trade surplus was recorded. Intra-Eurozone trade fell -9.4% yoy to EUR 227.2B.
In seasonally adjusted term, goods exports rose 1.0% mom to EUR 236.8B. Imports fell -0.6% mom to EUR 222.1B. Trade surplus widened from prior month’s EUR 11.1B to EUR 14.8B, above expectation of EUR 11.2B.
Eurozone industrial production fell -0.3% mom in November, match expectations. Industrial production fell by -2.0% mom for durable consumer goods, by -0.8% mom for capital goods and by -0.6% mom for intermediate goods, while production grew by 0.9% mom for energy and by 1.2% mom for non-durable consumer goods.
EU industrial production fell -0.2% mom. Among Member States for which data are available, the largest monthly decreases were registered in Greece (-4.1%), Slovakia (-4.0%) and Belgium (-3.8%). The highest increases were observed in Denmark (+9.1%), Slovenia (+3.7%) and Portugal (+3.4%).
Despite the anticipation of a rate cut to bolster the weakening economy, currently grappling with deflation for the past three months, PBoC held firm, keeping the rate on CNY 995B worth of one-year medium-term lending facility loans steady at 2.50%. This decision defied the general expectation of a 0.1% cut to 2.40%.
Opting not to alter the policy rate, the central bank instead chose to enhance liquidity in the banking system. This is seen from the net injection of CNY 216B of fresh funds, following the expiration of CNY 779B worth of MLF loans this month. Moreover, PBoC also infused CNY 89B yuan through seven-day reverse repos, maintaining a stable borrowing cost at 1.80%.
There is little reaction from USD/CNH to PBoC’s announcement. Technically, USD/CNH is now at a critical juncture, pressing 55 D EMA, just ahead of 7.199 near term resistance. Near term outlook is staying bearish. Another decline and break of 7.0870 short term bottoming will resume the whole fall from 7.3679 to 61.8% retracement of 6.6971 to 7.3679 at 6.9533.
However, firm break of 7.1990 will argue that the fall from 7.3679 has completed and turn near term outlook bullish for retesting this high.
In an interview with Corriere della Sera, ECB Chief Economist Philip Lane acknowledged that the December inflation data was “broadly in line with our projections”. He highlighted a “continued progress” in easing of core inflation, yet pointed out existing “headwinds to services inflation.”
A critical point raised by Lane concerns wage growth, which he notes is still rising well above any kind of long-run equilibrium rate”. ECB is expecting “high wage increases” to continue in 2024. “the scale of that will determine the timing and the scale of rate adjustment this year,” he added.
Lane also touched upon ECB’s reliance on data. He mentioned that while new wage data is received weekly, the “most complete dataset” from Eurostat’s national accounts will only be available at the end of April.
This timeline suggests that key policy decisions, especially those pertaining to rate cuts, are likely to be heavily influenced by data available by June meeting.
Finally, Lane’s projection of a “significant recovery” in the European economy this year is tempered with caution, as he acknowledges downside risks to their forecasts. The question of whether 2024 will see a recovery or a continuation of the stagnation experienced in 2023 remains a “big data question” for ECB.
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ECB’s Lagarde suggests potential summer rate cut, but maintains reserved stance
In an interview at Bloomberg House in Davos, ECB President Christine Lagarde said “it’s likely” for a rate cut in the summer, but added that she has to be “reserved”. She emphasized ECB’s data-dependent approach and acknowledged the prevailing uncertainty and certain indicators that are yet to reach desired levels.
Lagarde expressed concern regarding market expectations for aggressive rate cuts, labeling them as a “distraction” from the ECB’s primary goal of combating inflation. She expressed concern that if market anticipations are misaligned with reality, they could hinder ECB’s inflation control efforts.
Reiterating the ECB’s commitment to achieving sustainable inflation of 2% over the medium term, Lagarde asserted, “We are on the right path, we are directionally towards the 2%, but unless and until we are confident that it is sustainably at 2% — medium term — and we have the data to support it, I’m not going to shout victory.”