Technical Analysis

Newsquawk Week Ahead: Highlights include FOMC, ECB, BoE, PMI data, US Jobs, EZ CPI

Australian Retail Sales (Tue): The December Retail
Sales data is seen printing at -1.0% vs the prior of +1.4%. Desks highlight
that November’s Black Friday and Cyber Monday events were successful, as
indicated in the November data, although analysts will now assess the impact of
higher rates over the Christmas period. Westpac, citing the Westpac Card
Tracker, suggests that conditions in December were buoyant, although “retail
components were softer with gains in card activity centering on non-retail
segments like travel and recreational services. The high weighting of food
(accounting for just over half of all retail) also looks to have been a drag,
some of which may be price-related.”, the desk says, as it forecasts a
shallower contraction of 0.3%.

Chinese NBS PMI (Tue): January’s official PMIs are expected to signal
improved sentiment following the abandonment of China’s zero-COVID policy.
Markets expect the Manufacturing metric to rise to 49.7 from 47.0 in December –
remaining in contraction territory, while there are currently no forecasts for
the Non-Manufacturing (prev. 41.6) and Composite (prev. 42.6) metrics. Analysts
at ING also expect the Manufacturing PMI to remain in contraction while
forecasting that the Non-Manufacturing PMI should recover slightly, with a
similar pattern expected in the Caixin reports. As usual, the PMI releases will
likely be dissected for anecdotal commentary on growth, inflation, and firms’

EZ Prelim. GDP (Tue): Expectations are for prelim Q/Q GDP for Q4 to
contract 0.1% vs. the 0.3% expansion in Q3, with the Y/Y rate forecast at 1.7%
vs. prev. 2.3%. Ahead of the release, analysts at Investec highlight that the
upcoming release will likely see a break in the trend seen through Q1-Q3 of the
Eurozone economy expanding despite headwinds from the surge in energy prices.
Investec anticipates just a modest contraction for Q4, but notes that it does
not expect the Eurozone to “escape a shallow recession this winter”, adding
that despite the recent declines in spot gas prices, consumers in Europe are
still being squeezed by higher energy prices and higher inflation more
generally. Investec also cautions that H2 2023 could bring a renewed set of
headwinds for the region amid the potential for renewed energy price pressures and
the impact of prior rate increases being felt. For the upcoming ECB policy
announcement, ING (who hold an above consensus call) notes that Q4 “GDP is
likely to see growth stalling, though avoiding outright shrinkage, which should
also give the ECB more confidence to stay the course”.

US Employment Costs (Tue): In remarks on January 19th, Federal Reserve
Vice Chair Brainard said that there were tentative signs that US wage growth
was moderating, noting that the growth in average hourly earnings has softened
recently, stepping down to a pace of 4.1% annualised on a 3-month basis in
December, which is down from roughly 4.5% on a 6- and 12-month basis. The
influential Fed policymaker said that she would be closely watching to see
whether the employment cost index data for Q4 continues to show the
deceleration from Q3. Brainard said that price trends and the deceleration in
wages provides some reassurance that we are not currently experiencing a 1970s‑style
wage–price spiral, and therefore, it remains possible that a continued
moderation in aggregate demand could facilitate continued easing in the labour
market and a reduction in inflation without a significant loss of employment.
This could give the Fed enough confidence to potentially hike rates further as
it assesses what impact the 425bps of tightening implemented so far has had on
bringing down price pressures. According to Refinitiv, analysts expect the data
to print 1.2% in Q4, matching the rate seen in Q3. Money markets are currently
pricing that the Fed will be cutting rates towards the end of this year, and
while officials have leaned back on this narrative, cooling in the employment
cost index, combined with a continued softening in other inflation and wage
measures, will at least give the central bank scope to slow down monetary
tightening as the economy slows, if it needs to.

EZ Flash CPI (Wed): Expectations are for Y/Y HICP for January to decline
to 9.0% from 9.2%, with the core reading (ex-food and energy) seen remaining at
6.9% and the super-core print set to decline to 5.1% from 5.2%. The prior
report was characterised by a return of headline inflation to single-digits,
driven by declines in energy prices, however, the super-core metric actually
rose from 5.0% to 5.2% amid increases in goods and services inflation. At the
time, ING cautioned “the next two months will be critical as many businesses
traditionally change prices at the start of the year. It could therefore be
that core inflation rises further from now”. Ahead of the upcoming release, Moody’s
looks for more of the same for headline inflation with energy prices on the
decline. However, there are forces slowing the extent of the decline with
analysts highlighting “the rebound in German energy inflation following the
one-off policy effect in December, and the lifting by 15% of France’s price cap
on electricity and gas”. Moody’s adds that it expects food inflation to remain
strong and anticipates an increase in the core reading given “that PMI surveys
from January reported a tangible increase in selling prices by manufacturers
and service-providers”. From a policy perspective, the release will likely have
little sway on Thursday’s ECB policy announcement with markets assigning a
circa 87% chance of a 50bps move. However, beyond February, a strong print for
core inflation could convince some market participants that another 50bps in
March is on the cards despite recent source reporting suggesting that 25bps may
be on the table for that meeting.

JMMC Meeting (Wed): The Joint Ministerial Monitoring Committee (JMMC)
will meet on Wednesday to take stock of energy market fundamentals. This will
not be a decision-making meeting – with the next OPEC+ Ministerial Meeting
currently slated for 4th June 2023. Sources via Bloomberg and Reuters suggest
the JMMC is to recommend keeping oil production levels unchanged, citing a
tentative recovery in global demand. The recovery optimism arises from a
combination of mounting calls for less-severe-than-expected recessions/GDP
slowdowns, coupled with China abandoning its zero-COVID policy and reopening
its markets. Despite OPEC+ dropping its format of monthly decision-making
meetings, the Saudi Energy Minister emphasises that OPEC+ will remain
“proactive and pre-emptive” to keep oil markets balanced. “Prices have firmed,
supply remains tight, and significant levels of uncertainty prevail for both
supply and demand.”, according to Eurasia Group, “OPEC+ looks increasingly
likely to keep output levels unchanged even after the scheduled meeting.”

Quarterly Refunding (Wed): The US Treasury is expected to leave all its
coupon auction sizes unchanged at the February refunding announcement on
Wednesday, February 1st. For November, the Treasury estimated USD 578bln in net
marketable debt for Q1, but it’s possible this could rise when the latest
estimates are released on January 30th on account of the likely lower Treasury
General Account (TGA) balance at quarter-end. There is great uncertainty as to
how the month-to-month T-Bill issuance will pan out given the ongoing debt limit
saga, but in general, it is expected that issuance will ramp up later in the
year after a resolution on the debt limit is reached, which is expected to take
place at some point in the summer. Meanwhile, an area of discussion is likely
to be around adjustments to the auction calendar, which follows the Primary
Dealer Questionnaire asking about the liquidity benefits of reducing the number
of CUSIPs for Treasuries. Finally, after saying in November that research into
a Treasury buyback programme would continue, alongside positive feedback from
dealers, any progress on the issue will be eyed.

US ISM Manufacturing PMI (Wed): The headline is expected to slip a
little further below the 50-level, which divides expansion and contraction,
with the consensus view expecting 48.2 in January from 48.4 in December.
Although the data sets don’t always behave in the same way, S&P Global’s
flash PMI data for January reported a small increase from 46.2 to 46.8,
signalling a solid decline in operating conditions at the start of 2023 as
manufacturing demand conditions remained subdued, the survey compiler said. The
report also noted that input prices increased at a faster pace in January,
ending a sequence of moderation in cost inflation that began in mid-2022. There
will be attention on the forward-looking new orders sub-index, which has not
been above the 50-mark since August. “The worry is that, not only has the
survey indicated a downturn in economic activity at the start of the year, but
the rate of input cost inflation has accelerated into the new year, linked in
part to upward wage pressures, which could encourage a further aggressive
tightening of Fed policy despite rising recession risks,” S&P Global said.

FOMC Policy Announcement (Wed): The consensus expects the FOMC will lift
its Federal Funds Rate target by 25bps to 4.50-4.75%, although some still
expect the central bank to hike rates by a larger 50bps increment. Money
markets are pricing the smaller move with almost certainty. Money market
pricing and commentary from Fed officials has been diverging; policymakers have
been reticent to get into discussions about when the central bank will cut
rates, instead focussing on the still-high inflation levels. For historical
context, the Fed has tended to hold rates at neutral for between 3-15 months,
with the average being about 6.5 months. Money markets, however, are pricing
rate cuts at the end of this year as the economy slows. While the Fed will
likely to continue its course until its inflation goals are more clearly in sight,
investors are debating the level that rates will peak, and how long they will
be held at terminal; money markets imply the terminal rate between 4.75-5.00%,
more dovish than the 5.00-5.25% pencilled in by officials in their December
economic projections. Accordingly, Chair Powell is again expected to lean back
on the market’s dovishness, as well as the looser financial conditions that
have been seen recently. On an operational note: Chair Powell tested positive
for COVID, it was announced on January 18th; in the event that Powell is unable
to attend the February FOMC, guidance suggests that the FOMC’s Vice Chair
Williams will assume Powell’s duties.

BCB Announcement (Wed): The COPOM in December held the Selic rate at
13.75%, as the market was expecting. Credit Suisse said its accompanying
statement appeared neutral, with the central bank not giving any further
information about the prospective scenario. The statement did allude to
concerns about fiscal dynamics, noting that “the Committee will closely monitor
future developments in fiscal policy and, in particular, its effects on asset
prices and inflation expectations, with potential impacts on the dynamics of
future inflation.” Political pressure seems to be ramping up on the central
bank. Additionally, a former Deputy Governor who played a crucial role in
developing the BCB’s inflation-targeting regime, said that officials had set
excessively restrictive goals, and that the current targets failed to account
for the country’s unusually large fixed fiscal outlays, adding that officials
were putting themselves in a corner, noting that Brazil, unlike other EM
economies, spends more on pensions and public services. Credit Suisse said that
“the uncertainty surrounding the waiver amounts and conditions to be approved
in the Bill for Constitutional Amendment for the Transition and the absence of
a credible fiscal anchor in the short term lead us to believe that interest
rates will not be sufficiently restrictive, given neutral interest rates have
risen and inflation expectations should remain high.” The bank recently revised
its expectations for the Selic rate, and now sees 11.50% by year-end (vs 13.75%
previously), and for the end of the 2024 year, sees the Selic at 8.50% (cut
from its prior view of 11.50%).

New Zealand Jobs (Wed): The Q4 Unemployment rate is forecast to dip to
3.2% from 3.3% with the Participation Rate seen at 71.00% against 71.70% in Q3,
whilst the Q/Q Employment Change was previously at 1.3%. Analysts at Westpac
expect a 0.3% rise in the employment change, partially aided by the return of
migrant workers. “We expect that unemployment will rise in the coming years as
the economy cools off. But with labour typically being a laggard in the
economic cycle, we are not likely to see signs of that just yet.”, the Aussie
bank cautions. From a central bank standpoint, the RBNZ is seemingly more
focused on inflation after Q4 CPI eased from the prior quarter, but printed
hotter-than-expected, whilst the newly-appointed New Zealand PM Hipkins also
suggested more must be done to combat high inflation.

BoE Announcement (Thu): 29/42 surveyed analysts by Reuters look for a
50bps hike in the Bank Rate to 4%, with the remaining 13 looking for a more
modest 25bps adjustment. Market pricing agrees with consensus as a 50bps move
is priced at around 76%. A consensus on the vote split is yet to be published,
however, the decision will likely be subject to dissent given that Tenreyro and
Mann voted unchanged at the December decision. HSBC looks for similar dissent this
time around with none of the other members of the MPC expected to switch to the
unchanged camp yet. Within those remaining seven, there is likely to be a split
of views, the extent to which is hard to judge given the lack of comms from the
MPC since December. HSBC has attempted to form a base case scenario with an
out-of-consensus call for a 25bps hike in which Bailey, Cunliffe, Broadbent and
Pill go for 25bps whilst Mann, Haskell and Ramsden back a 50bps move. However,
such a step down in the cadence of rate hikes would likely need to be
accompanied by guidance that rates will still have further to run given
developments in the labour market. Looking beyond February, a 25bps hike in
March is priced at around 80% with markets split on whether a further 25bps
would follow in Q2 to take the terminal rate to 4.5%. In terms of the
accompanying forecasts, HSBC expects that the impact of the stronger GBP and
softer energy prices will likely outweigh the impact from stronger growth and
lower rates, which should therefore lead to a downward revision to the MPC’s Q4
2023 inflation forecast to 6.9% from 7.9%.

ECB Announcement (Thu): 55/59 surveyed analysts look for a 50bps hike in
the deposit rate to 2.5% with market pricing assigning a circa 90% chance of
such an outcome; this would take the deposit rate into slightly restrictive
territory. The December meeting saw President Lagarde state “based on the
information that we have available today, that predicates another
50-basis-point rate hike at our next meeting, and possibly at the one after
that, and possibly thereafter”. This statement saw consensus coalesce
around the idea of a 50bps hike for the upcoming meeting and comms from ECB
officials have done nothing to lead markets away from this view. That said, some
confusion around the rate hiking cycle was observed after a Bloomberg report
suggested that policymakers are reportedly beginning to consider just a 25bp
hike in March. Nonetheless, commentary from policymakers has done little to
suggest that the GC is considering such a step down at this stage and has
leaned against such reporting. In terms of market pricing, a 50bps increase in
March is priced at around 80% with another 25bps expected to come thereafter in
May; what happens beyond May is subject to divided opinion. With regards to the
balance sheet, the prior meeting saw the GC announce that from the beginning of
March 2023 onwards, the APP portfolio will decline at an average pace of EUR
15bln per month until the end of Q2 with its subsequent pace to be determined
over time. For the upcoming meeting, further details on the programme are set
to be announced, on which, Morgan Stanley expects “more details on how the
decline in reinvestments will be distributed between the different APP
programmes, as well as jurisdictions (most likely to be done proportionally in
line with the capital key)”. MS adds that a detailed announcement of the
entire expected QT path is less likely with guidance to be kept

US Jobs Report (Fri): The rate of payroll additions to the US economy is
expected to moderate to 175k in January (vs 223k prior, three-month average
247k, six-month average 307k, 12-month average 375k). The unemployment rate is
forecast to tick-up by 0.1ppts to 3.6%. With monetary policymakers firmly fixated
on reducing inflationary pressures, there will again be outsized attention on
average hourly earnings, which are expected to rise 0.3% M/M, matching the rate
seen in December. Labour market proxies continue to allude to tight conditions;
the weekly initial and continuing jobless claims data for the week that
coincides with the establishment survey window declined vs the comparable week
for the December data. That said, Capital Economics points out that while
layoffs remain low, demand for labour has eased in recent months, as evidenced
by the employment sub-indices in the S&P Global PMI data, and along with
other measures, the consultancy says it implies a slowdown in overall
employment growth soon. Elsewhere, it is worth noting that annual benchmark revisions
are also due to be made to the data series, and some believe that this could
see a downward revision to many of the payrolls numbers we saw in the second
half of 2022, as hinted at by the Quarterly Census of Employment and Wages.

US ISM Services PMI (Fri): Analysts expect the Services ISM headline
will return above the 50-mark, which separates expansion and contraction, with
the consensus looking for 50.5 in January from 49.6 in December. As a
comparison, S&P Global’s flash US services business activity index posted
46.6 in January from 44.7 in December, signalling a solid fall in service
sector output, but one that was the softest since last October. “The slower
fall in business activity was in part linked to a less marked contraction in
new orders at service providers,” S&P Global said, adding that “the
decrease in new business was only marginal overall.” However, the report noted
that “customer hesitancy and the impact of inflation on spending remained a key
drag on new domestic and external sales.”

This article originally appeared on Newsquawk

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