The Week Ahead

A choppy week across markets, amid heightened geopolitics, an upward US inflation surprise, miss on US PPI, and a global growth downgrade from the World Bank, saw the yield on the 10-year UST bob around the 4% level, eventually closing the week 11bps lower at 3.94%. Meanwhile, the S&P Index gained 1.84%. Oil traded higher mid-week as regional conflict in the Red Sea escalated, and the UK and US moved to strike. The global growth outlook, however, took precedence and Brent closed 0.60% lower at $78.29pb. The dollar was marginally unchanged. 

US CPI came in above expectations, core crept up 0.3%mom in December (exp. 0.2%, prev. 0.1%). On an annual basis, CPI ended the year marginally higher at 3.4% (exp. 3.2%, prev. 3.1%). Core fell below 4%yoy at 3.9%yoy, again slightly higher than expectations at 3.8%yoy. Shelter and healthcare costs were the largest drivers of consumer prices in December. We have often discussed the difficulty in getting sticky inflation through the final stretch down to target, and believe the upside inflation risks remain, particularly amid the current heightened geopolitical climate. 

During the week we heard from a number of Fed speakers. Ahead of the CPI print, Williams said rates are high enough to bring inflation to goal, however, added that rates may need to remain restrictive “for some time”. Meanwhile, dove Bostic said inflation has eased further than expected and it is on trajectory to reach the 2% target. Bostic went on to comment that he does not expect a rate cut until Q3 this year. Bowman said she would back rate cuts “eventually” if inflation falls further, however, remains cautious on upside inflation risks. Following the inflation print, Mester stated that March “is probably too early” for a rate cut. Markets largely ignored the Fed, closing the week pricing in a 78.5% chance of a cut in March.  

In China, deflationary concerns mounted as CPI fell 0.3%mom in December, although higher than expectations. PPI fell 2.7%yoy (from -3%yoy in November). The fall marked the longest run of declines since 2009. Markets are therefore expecting policymakers to act assertively to avoid a deflationary spiral. Other key data showed exports rising 2.3%yoy (exp. 1.5%, prev. 0.5%), while imports increased 0.2%, against expectations for a 0.5% fall. Earlier in the week, Xi Jinping singled out the finance, energy, pharma and infrastructure sectors among targets of his ongoing anti-corruption campaign. The PBoC began the week holding key benchmark rates. 

The euro-area economy may have experienced a downturn at the end of last year and will probably continue to struggle, according to ECB Vice President Luis de Guindos. “Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023,” Guindos said. “Incoming data indicate that the future remains uncertain, and the prospects are tilted to the downside.” Despite softer economic expansion and the first signs of a correction in the labour market, the substantial easing in inflation seen last year is likely to be less pronounced in 2024, he said. 

Over the weekend, Taiwan elected William Lai president in a historic election. Highlights this week include the World Economic Forum in Davos (Monday-Friday), the Fed’s regional economic survey and further quarterly earnings from the banking sector. US markets are shut today for the Martin Luther King Jr. holiday. We do, however, have eurozone industrial production (IP), and the World Economic Forum kicks-off; the theme this year is “Rebuilding Trust”. Germany’s 2023 growth figures will also be of interest as the country may have slipped into technical recession in the fourth quarter. US empire manufacturing will be watched on Tuesday, and we’ll hear from the ECB’s Villeroy de Galhau at Davos, and the Fed’s Waller on economic outlook and monetary policy. China’s GDP, property prices, retail sales and IP hit the screens on Wednesday, and will be watched closely for clues on the health of the economy. Later we have US retail sales, IP and business inventories, the Fed’s Beige Book, and we will hear from the Fed’s Williams. The ECB’s Lagarde (Wednesday and Thursday), Knot and Vujcic speak to Davos. The ECB publishes its December policy minutes on Thursday, and we will hear from the Fed’s Bostic on the economy. US existing home sales and the Uni. of Michigan consumer sentiment prints on Friday will be of interest, and markets watch as the US Congress nears a spending agreement deadline. Davos chatter will garner market attention, Lagarde and the IMF’s Georgieva speak, and we will hear from the Fed’s Daly on the economy during a “fireside chat”.