Macroeconomics: The Day Ahead for 3 February

The BoE and ECB policy meetings take centre stage today, while Services PMIs/ISM, US weekly jobless claims, Challenger Job Cuts and Q4 Non-farm Productivity topping the data schedule, with Australian Trade and sky high Turkish inflation data to digest. Also on tap are US Senate hearings for Biden’s Fed nominees, Czechia’s CNB policy meeting, the UN FAO Food Price Index and the annual OECD/FAO Agricultural Outlook. Another busy day for corporate earnings has Amazon, Cigna, ConocoPhillips, Ford, Infineon, Merck & Co, Shell, Snap and Softbank, while a busier day for govt bond auctions has multi-tranche sales in France and Spain, and Canadian 10-yr. The January UN FAO Food Price Index is likely to move back up after a brief respite in December, and serving as a further reminder of cost of living challenges across the globe, with the annual OECD / FAO Agricultural Outlook also due, and the focus above all on long-term supply prospects, above all in the context of climate and water supply challenges. 

** World – Jan Services PMIs/ISM **

– Flash readings for the G7 were decidedly mixed, showing varying degrees of Omicron disruption, with Germany rebounding after a sharp hit in December, the UK holding steady, France and the US falling quite sharply, and Italy and Spain expected to follow the latter two; in contrast to the US Services PMI, the Services ISM is expected to drop, but to a still very solid 59.6 from December’s robust 62.0, though risks would appear to be to the downside. But as was seen with the modest reaction to the very sharp fall in yesterday’s US ADP Employment markets, markets have already looked through this expected setback, and anticipate a rebound in February and March, though Prices and Supplier Deliveries will still attract plenty of attention, and doubtless some over extrapolation about trends.

** U.K. – BoE rate decision **

– The BoE is seen following up on December’s 15 bps hike with a 25 bps hike to 0.50%, but the questions are: a) will they push back on market rate expectations that see Base Rate close to 1.50% by year end? b) What will they signal on the BoE’s balance sheet, given that previous ‘guidance’ opened the door to QT once Base Rate reached 0.50%, and obviously how the two are balanced against each other (with a large Gilt redemption in March £38.77 Bln of 4,0% 2022 complicating the picture). A fresh set of forecasts is likely to raise the near term inflation outlook (previously seeing CPI at 3.50% in 2022, and 2.25% in 2023), above all due to higher energy prices (with the Ofgem Energy price cap decision due just one hour before the MPC announcement), but with a more aggressive market rate trajectory, and larger base effects for energy bearing down on inflation in 2023, the medium-term CPI forecast may well anticipate CPI falling below target. How this plays out in terms of Unemployment and GDP forecasts will also be of interest, with a very tight labour market likely to see Unemployment projections revised lower. Per se the forecasts may prove to be confusing for markets, and result in a good deal of volatility for both the GBP and rates markets. It can only be hoped that the BoE does a much better job of communicating its view on the economy and the rate outlook than the shambles evident in November and December, though that does not appear likely. To be sure, the Fed has pulled back on much of its guidance, but still manages to command a great deal more credibility.

** Eurozone – ECB policy meeting **

– Despite the much higher than expected CPI (headline at a new record high 5.1% y/y, while core only dropped to 2.3% y/y frm Dec 2.6%) the ECB is expected to stick to its guns on rates (i.e. a rate hike remains “unlikely in 2022”) and the inflation outlook, though still conceding that risks are skewed to the upside, though primarily due to energy prices, but adding that growth risks are to the downside. But as the December minutes revealed, the rift between hawks and doves is getting ever larger, though Mme Lagarde may at least at this meeting be able to opt for a deferral on any decisions to change the its policy message to the March meeting, when a fresh set of staff forecasts will be available. It is very likely that Lagarde will be pressed quite hard on the point that the Fed and BoE also saw inflation as transitory up until late last year, but were forced to back pedal, and why should that not be the case for the ECB. To which the response is likely to point to the lack of second round effects, given Lane’s recent observation that this is above all visible in the sharp contrast to the US and UK in respect of Wages (Q3 1.3% y/y), adding that that only once this reaches 3.0% would it be consistent with meeting the ECB’s 2.0% inflation target.

** Czechia – CNB rate decision **

The CNB is expected to hike rates aggressively again, by 75 bps to 4.50%, with the focus on how far it revises up its inflation forecasts, and per se offering a signal on how close it may be to pausing the current rate hike cycle. Comments from CNB officials have been a mixed bag: Governor Rusnok has stated that he does think that will rates go above 5.0%, but will definitely be above 4.0%; Mora has said that the CZK is in line with fundamentals, and that he does not see evidence of a wage price spiral, though it is a risk and sees rates ending up around 4.50-4.75%; while Dedek & Michl have said they are opposed to further rate hikes. Per se the risk of a smaller than expected hike look to be quite large. A broader point to bear in mind is that while there are CEE (above all Poland) and EM countries that have some way to go on tightening policy, there are a goodly number who are close to a near term peak, or at the very least a pause, and assuming G10 central banks make good on their rate hike plans, this will eventually narrow rate differentials and chip away at carry attractions, though currencies that have taken a huge battering (most obviously the TRY) may have some scope to outperform.