Macroeconomics: The Day Ahead for 14 December

It’s ‘central bank’ Thursday, with no less than nine rate decisions scheduled, even if the ECB and BoE meetings will be very much ‘primus inter pares’, as markets digest yesterday’s FOMC policy signal shift. Statistically there are New Zealand’s Q3 GDP (much weaker thn expected), Japan Machinery Orders, UK RICS House Price Balance and Swedish CPI (all better then forecast) to digest, while Retail Sales headlines in the US, where Weekly Jobless Claims, NY Fed Manufacturing, Import Prices and Business Inventories are also scheduled for release. As with the ECB and BoE, Switzerland’s SNB is seen holding rates again at 1.75%, and accompanying forecasts for CPI and GDP are likely to be revised downward. Given the CPI undershoot for November, the SNB will likely signal steady rates ahead. Norges Bank is also expected to hold rates at 4.25%, with Monday’s still very high, but lower than forecast CPI reinforcing the consensus view, nevertheless it will likely warn that with core CPI so high, albeit falling, and the NOK still very weak, there will not be any scope to respond to a continued loss of momentum in the economy with a rate cut until the final quarter of 2024 at the earliest. Elsewhere Philippines’ BSP held rates unchanged as expected, Taiwan’s CBC and Banco De de Mexico are expected to follow suit, but the latter will open the door to a rate cut in Q1, while Ukraine’s NBU is seen cutting a further 100 bps to 15.0%, and Peru’s BCP cutting 25 bps to 7.0%. Costco, Jabil and homebuilder Lennar headline the day’s run of US corporate earnings, while govt bond sales feature the overnight Japan 20-yr and this after noon’s Canadian 30-yr.

** U.K. – BoE rate decision **

– The BoE is expected to hold rates at 5.25% again, but the consensus still looks for a 6-3 vote as Greene, Haskel and Mann reprise their vote for a hike. While the slightly larger than expected fall in CPI will be welcomed, the stickiness of Core (5.7% y/y) and Services (6.6%) will be highlighted as being far too high, with a likely long and protracted path to bring it back down. It will also be noted that wage growth remains elevated, despite a larger than consensus fall in Tuesday’s Average Hourly Earnings. Yesterday’s monthly GDP was indeed worse than expected, and not attributable to one-off factors, but given that this series has zigzagged its way either side of flat since July 2021 (see chart), it would be hasty to suggest recession is inevitable, even if risks are very much skewed to the downside, and the October data will not have come as a surprise to the BoE. The MPC will likely stress that rate cuts are very simply not a topic for discussion at the currrent juncture, and protest markets discounting a first rate cut in June vociferously, given that the latest employment data suggest little further loosening in labour demand (though other surveys have suggest otherwise). A rate cut prior to H2 2024 still looks very unlikely, unless activity data suggests a more protracted downturn is crystallizing.

** Eurozone – ECB rate decision **

– After the sharp fall in November CPI, and arch hawk Schnabel’s comment that the outturn was as a game changer in terms of effectively precluding a further rate hike, and with incoming data & surveys remaining weak, it is little wonder that markets have now priced in a 50% chance of a first ECB rate cut in March, and 125 bps in total in 2024, though no changes are expected this week or in January. There will be a fresh set of staff forecasts, with the focus on the downward revisions to CPI forecasts for 2024 and 2025, and a first forecast for 2026. In September staff expected core to fall to 2.1% in Q4 2025, and should be revised down to or even below 2.0%, and definitely below in 2026, but the 2024 forecasts may be held, by way of an implicit protest against current market rate expectations, which will likely be vocalized more robustly by Lagarde. Downward revisions to GDP forecasts which already looked optimistic in September are also likely, and also upward to Unemployment. Many top ECB officials have called for the current timing of starting to end PEPP reinvestments to be brought forward from end 2024, with more hawkish members suggest the start of Q2. In all likelihood, the message will probably be that this was discussed, but a final decision and timetable will be announced at the January meeting.

** U.S.A. – Retail Sales, NY Fed Manufacturing & Fed ‘post morterm’

– Lower gasoline prices and weaker Auto Sales are seen dragging headline Retail Sales down -0.1% m/m, while core measures are expected to eke out growth of 0.2% m/m, with little or no boost seen from Black Friday or Cyber Monday, according to anecdotal evidence on spending from Mastercard, and footfalll from palce.ai The NY Fed Manufacturing survey has been extremely volatile over the past year, frequently missing forecasts by up to 20 points, per se the consensus for a setback to 2.6 from 9.1 is no more than a guesstimate. The Fed dot plot, statement and Powell’s press conference were a lot less hawkish than had been anticipated, and effectively endorsed market rate expectations, and unsurprisingly with the Fed giving an inch, markets took a mile. The Fed now anticipates 75 bps of rate cuts in 2024 to 4.50%-4.75% (vs. 25 bps previously) and a further 100 bps in 2025. Perhaps more importantly the core PCE deflator is seen at 2.4% in 2024 (vs. prior 2.6%), and Powell stressed that waiting to cut rates until inflation hits 2.0% would be ‘too late’, above all under an average inflation targeting regime. The question is whether the somewhat self-congratulatory tone of Powell’s comments in respect of achieving a ‘soft landing’ may prove to be a case of hubris, above all given the array of economic and fiscal uncertainties, even if understandable after the considerable criticism about the 2021 ‘transitory’ narrative.  Markets will now focus on where the end point for a rate cut cycle, but with 10-yr yields already edging below 4.0%, and the S&P 500 on a forward EPS of around 22.0, all the good news looks to be fully priced in. The FOMC may have dropped references to the ‘lagged effects’ of monetary policy, but they will continue to be an economic reality, which impacts during 2024, even if the Fed cut rates to the extent that it currently anticipates.