Macroeconomics: The Day Ahead for 1 February

Today is all about the FOMC meeting, though there is a busy calendar of data and corporate earnings, along with India’s FY2023 Budget and an expected no change rate decision in Brazil. Statistically, there are South Korea’s January Trade data and UK Nationwide House Prices to digest, with Eurozone CPI, more Manufacturing PMIs/ISM, a gaggle of US labour market indicators and US Auto Sales ahead. While Meta Platforms headlines the US run of earnings along with Peloton, there are a good many key reports in Asia and Europe: Nomura, SK Hynix, S-Oil and Tokyo Electric Power, along with BBVA, GSKK, Novartis, Orsted Grupo Mexico & Southern Copper, as well as Glencore’s Q4 production report.

** Eurozone – January CPI **

As previously noted the risks look to be on the upside of a forecast of 0.1% m/m that would see headline y/y drop to 8.9%, and core edge down 0.1 ppt to 5.1% still very sticky, though markets will have to wait for the final data to get sight of the “core core” measure that rose to 7.0% y/y in December. As noted the headline y/y fall will be all down to Italy, with a strong benign base effect from last year’s 21% increase in electricity prices, and the additional downward pull from a 19.5% reduction this month accounting for the drop, even if there is some offset from the termination of its car fuel subsidies, with HICP seen down 1.5% m/m, to push the y/y rate down to 10.7% from December’s 12.3%. One quick post hoc observation on yesterday’s Eurozone GDP, please do take note that while the headline reading was 0.12% q/q, this becomes -0.02% q/q if Ireland is excluded; Ireland Q4 GDP up 13.0% y/y thanks to overseas ‘investment’ (i.e. tax haven) flows.

** U.S.A. – January ADP, Challenger Layoffs, Auto Sales & Dec JOLTS Job Openings **

The ADP Employment estimate may be of less consequence than the Challenger and JOLTS readings, and is expected to rise post a smaller gain of 180K vs. December’s 235K. Challenger Layoffs are likely to escalate sharply higher (above all given tech sector announcements), while JOLTS Job Openings are seen falling modestly to a still very high 10.3 Mln. Those that rather perversely hope for a fairly rapid deterioration in the labour market, to fulfil hopes for a Fed pivot, are ignoring the point that while tech sector layoffs are large, other parts of the economy are still struggling to fill positions. Auto Sales are expected to jump very sharply to 15.5 Mln though largely due to seasonal adjustment.

** U.S.A. – FOMC rate decision **

The Fed is expected to dial down its rate hike pace for a second meeting, with a 25 bps hike to 4.50%-4.75% expected, and markets pricing in just one further 25 bps hike at the March meeting. While there has been the usual rotation of regional Fed president voters, which at the margin can be seen as a potentially dovish shift, the fact is that Kashkari has swung from being arch dove to arch hawk, Boston Fed’s Logan has been vocal in opposing markets easing of financial conditions, as has Harker. While voting was unanimous for most of last year, there is a good chance that one or other members may dissent and vote for 50 bps, above all to signal discontent with market rate pricing, and Powell will probably be happy about this in signal terms. While the Q4 ECI Wages & Salaries sub-index slowed to 1.0% q/q vs Q3 1.3% and Q2 1.4%, the fact remains that the labour market remains tight, as underlined by the Unemployment Rate, while Friday’s unchanged Core Services ex-Housing PCE deflator (5.0% y/y) was clearly sticky. Bear in mind also the recent comments from the influential Waller (largely echoed by Brainard), who noted “The argument is just whether you should pause after three months of data or pause after six months of data….. From the risk management side — I need six months of data, not just three.” Per se that combination of needing more compelling evidence on inflation, and a clear desire to push back hard against the market rate trajectory for 2023 suggests that they will be keen not to show any signs of relenting in their inflation fight at the current juncture. Particular attention will be paid to any tweaks to the statement outlook on rates, which in December said: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” It will also be interesting to see if Powell echoes Brainard, Waller and Bullard in suggesting prospects for engineering a ‘soft landing’ for the economy have improved, as well as any comments on the impact of China’s re-opening on the inflation outlook. Powell will also be wary of not fuelling market hopes for a Fed pivot, though as rates get closer to a peak, the path in signalling terms becomes ever narrower, and therefore more challenging.