Macroeconomics: The Day Ahead for 18 January

As the much anticipated BoJ policy meeting with its no change decision and subtle operational adjustments are digested, along with Japan Machinery Orders, UK & South Africa CPI and Taiwan GDP, a busy day for US statistics awaits: Retail Sales, PPI, Industrial Production, NAHB Housing Index and Fed Beige Book. There is a raft of ECB and Fed speakers, and the IEA’s monthly Oil Market Report that followed OPEC’s ‘cautiously optimistic’ outlook yesterday, premised above all on an improvement in Chinese demand. A close eye should be kept on the
Global Forum for Food and Agriculture, which kicks off today in Berlin. Alcoa, Discover Financial Services and Prologis top the run of US corporate earnings, while Germany (27 & 30-yr) and the US (20-yr) action debt.

** Japan – BoJ policy meeting **
While the changes to its CPI and GDP forecasts, and perhaps most importantly the move to add variable rate operations to its repo operations were hardly a case of the BoJ ‘coming out swinging’, they were more than enough to trigger a wave of short covering in longer dated JGBs, and thus reassert a good deal more control over its 10-yr Yield curve control policy. The forecast changes were also clearly part of the ‘don’t fight the BoJ’ messaging, with the downward revisions to GDP (Current FY 1.9% down 0.1 ppt, FY 2023 1.7% down 0.2 ppt and FY 2024 1.1% down 0.4 ppt), as significant as holding the FY 2023 CPI forecast at 1.6%, and an upward revision of 0.2 ppt for FY 2024 to 1.8%, but still below the BoJ’s 2.0% target. It remains to be seen how effective the move to add floating rate operations will be in terms of YCC implementation, and after the ructions of the past month, it will be more than well aware that reviving the frozen domestic money markets will be a monumental challenge, as and when it does try and fashion an exit from ultra easy policy.

** U.K. – December CPI **
There were no real surprises in this month’s CPI data (0.4% m/m 10.5% y/y), with petrol and clothing prices restraining the ongoing upward pressure from Food Prices, which increased at the fastest pace since 1977. Core CPI remains stubbornly high at an unchanged 6.3% y/y, with Restaurants & Hotels (i.e. food & services) a big contributor (0.1 ppt in y/y terms), and it will be this that will likely prompt the MPC to err on the side of doing more rather than less than on rates, despite the lacklustre growth outlook.

** U.S.A. – Retail Sales, PPI, Industrial Production, NAHB & Beige Book **
Today’s barrage of US data combined with the Fed Beige Book will effectively set the economic activity scene for the first FOMC meeting of the year. Retail Sales are seen down 0.9% m/m, weighed down by auto sales and a steep fall in gasoline and used car prices, while the core ‘Control Group’ measure is expected at -0.4%, with retailer discounts to clear inventories seen as a drag as demand ebbs (Redbook retail sales continued to fall), with Restaurants perhaps the only bright spot (though the Services ISM fall implies downside risks). Both Industrial Production and Manufacturing Output are seen dipping (-0.1% and -0.2% m/m respectively), echoing the broad array of weak manufacturing surveys. Meanwhile, PPI is seen down 0.1% m/m headline and up 0.1% m/m core, with continued easing in energy and core goods prices offset by a likely slower, though still elevated rise in Services prices, per se, confirming ebbing pipeline pressures. Last but not least the NAHB survey is seen unchanged, with the forecast of no change at 31 presumably premised on the idea that after a record run of 12 consecutive m/m falls in 2022, it must eventually some form of trough (even if it were to fall back again later). That said it remains just above the April 2020 pandemic low of 30, and still some way above June 2007 to June 2012 range of 8 to 29, via way of perspective. The Fed’s Beige Book will likely echo the November 30 edition in suggesting that US “economic activity was about flat or up slightly since the previous report, down from the modest average pace of growth in the prior Beige Book period”, with the relatively sharp drop in the December NFIB survey and Services ISM suggesting a downgrade to outlooks, echoing yesterday’s NY Fed Manufacturing plunge, paced by New Orders (-31.1 down 27.5) and No. of Employees (2.8 down 11.2).