Macroeconomic Outlook In The Near Term
The coming week, when Chinese markets are closed for the Lunar New Year festival, has several macro headlines. Headline risk is presented by the preliminary January purchasing managers surveys. The first look at US GDP for Q4 22 will undoubtedly reveal that the survey data, for instance, which had the US composite below the 50 boom/bust mark every month in H2 22, overstated the situation. Composite PMI numbers are anticipated to have stayed below 50 despite modest improvement. However, the market sentiment pendulum has shifted, and it is now starting to see the glass as half full rather than half empty. By that, we mean that traders have been toying with the idea of a soft (kind of) landing. A less negative attitude is being encouraged by the reduction in supply chain disruptions, the anticipated reopening of China after it abandoned its zero-Covid policy, the easing of pricing pressures in the US and Europe, as well as the durability of labour markets. This has contributed to the rise in risk assets and equities to start the year, as well as the decline in benchmark 10-year yields. However, a number of corporate warnings and the bad US data, which included a significant decrease in manufacturing output and retail sales in November and December, warn against complacency and dependence on hope.
The only G10 central bank to meet this week is the Bank of Canada (January 25). A 25 bp rate increase is anticipated due to the economy appearing to have grown more quickly in Q4 22 than the central bank had anticipated and the solid labour market and persistent core price pressures. The overnight target rate will rise to 4.50% as a result. The fact that this hike is regarded as the final in the cycle makes it unique. Considering that it seems appropriate given the impact of policy with a lag, the central bank is unlikely to confirm it and may portray it as a halt to maintain its credibility. The Bank of Canada predicts that growth will decrease to 0.9% from about 3.3% this year. In its evaluation of central bank communications from the previous year, the IMF made this suggestion. Making more educated judgements can benefit firms, investors, and households with knowledge of the discussions held by this sizable consensus organisation. In turn, this might increase the monetary policy’s efficacy. The minutes/record are also a communication medium, as we can frequently see from other central banks, and not just a passive window into the world. It could assist in adjusting the central bank’s message. With a two-week delay, the Bank of Canada’s meeting’s minutes will be made available to the public.
The US releases its personal income and consumption data, which includes the December PCE deflator that the Fed targets, toward the conclusion of the upcoming week (January 27). Given the sensitivity to inflation, one would anticipate this to be the focus. The CPI, which gives analysts a solid understanding of the PCE deflator, and the preliminary Q4 22 GDP estimate have nonetheless stolen some of its thunder. While Bloomberg’s survey’s median projection has moved up to 2.9%, the Atlanta Fed’s GDP Now tracker projects fourth-quarter growth at 3.5%. According to the Federal Reserve’s median prediction, the economy can develop no faster than 1.8% without experiencing inflation. However, the quarter came to an unquestionably disappointing conclusion.
Following last week’s decision to preserve the current policy settings, including the 0.50% cap on the 10-year bond, the conflict between the market and the Bank of Japan will probably continue. Before the BOJ meeting ended on January 18, the central bank purchased around $100 billion (JPY13 trillion) in government bonds over the course of four sessions. The BOJ also modified its programme for funding commercial banks’ purchases of government bonds. Future loan provision operations will allow the central bank to fine-tune the interest rate (previously zero) for maturities. A negative rate could be considered, according to Governor Kuroda. With the preliminary January PMI, the new week officially begins. In November, the composite fell below the 50 boom/bust mark. In December, the headline and core (which excludes fresh food) both hit new cyclical highs of 4%. The BOJ revised its inflation projection for the current fiscal year, moving it from 2.9% to 3.0%, but retained its forecast for the upcoming fiscal year (beginning April 1) at 1.6%, reiterating its point that the current pricing pressures are unlikely to last. Energy and wheat government subsidies could drive down prices, and the 13% trade-weighted yen appreciation since late October should help restrain imported inflation.
Market players have revised their bearish perspective toward the eurozone because of a winter that has been warmer than anticipated and better-than-expected economic statistics. Chancellor Scholz expressed confidence that a recession would be avoided despite the German economy appearing to have stagnated in Q4 rather than shrunk. In H2 22, the German composite PMI continually fell below 50, although in November and December, the rate of decline moderated. Investors have subsequently rushed back to the eurozone as a result. After losing about 13% of its value last year, the Stoxx 600 has increased its gains and is now up more than 6% this year. This year, European bonds have soared. The margin between the Italian 10-year yield and the German Bund has shrunk by about 70 basis points. The two-year tip (25 bp) is the lowest since October 2021, while Italy’s 10-year premium (170 bp) is at its lowest level since last April. The Director of the Treasury, who oversees managing the state-owned corporations, is one of numerous administrative positions that Italian Prime Minister Meloni is anticipated to fill. In the spring, the government will pick management for these SOEs. The euro is up about 1% in January after ending a five-quarter decline in Q4 of 2018, when it appreciated by 9.2%.
Last week, it was revealed that core inflation and the average weekly wage were firmer than anticipated. These reports, coupled with the recently announced unexpected expansion in November and the Bank of England’s hawkish rhetoric, support market expectations for a 50 bp increase at the next meeting of the central bank (February 2). With the base rate now at 4.0%, the swaps market seeks a terminal rate in the range of 4.25% and 4.50%. However, the terrible retail sales data for December show how much of a toll the cost-of-living pressure is having. Since last July, the composite PMI for the UK has not risen beyond 50. Since it hasn’t dropped since October, there is reason for some economic confidence, which doesn’t seem to have been dashed by the strike activity that looks like it will last into the following month. The FTSE 350, which accounts for almost 90% of the value of the UK equities market, is up roughly 4.3% this year after dropping 2.7% in 2022. Since the end of the previous year, the yield on the 10-year Gilt has decreased by approximately 30 basis points.
The market has driven the Australian dollar up to five-month highs (about $0.7065) on the back of investor confidence regarding China’s reopening, rising iron ore and copper prices, and the possibility of improved trade relations. With a gain of over 2.4%, it is the second strongest G10 currency this year, trailing only sterling (up 2.6%). In Q4 of 22 the Aussie increased by around 6.5%. This month, the ASX 200 equities benchmark has increased by roughly 6%. The 10-year bond’s yield is down roughly 65 basis points, the second-largest decline in the G10 behind Italy (-78 bp). Australia releases the initial PMI for January. The composite fell below 50 in Q4 by 22. On January 25, the fourth quarter’s (Q4) inflation report is due. According to the most recent monthly CPI report, headline price pressures were stable in November at 7.3%, matching Q3 levels. The overnight index swaps have a price for a 15 bp tightening before the RBA meeting on February 7. The question is whether the central bank would return to quarterly steps now or wait for what it anticipates will be the cycle’s final move, which is what many observers assume. We believe the latter is true and lean toward thinking that the market is pricing a 60% possibility of a 25 bp increase. The market anticipates a high near 3.75% while the cash target rate is now at 3.10%.