Macroeconomics: The Day Ahead for 29 January

  • Fed and Bank of Canada lead busy day for central bank policy meetings; Spain & Sweden GDP, German Consumer Confidence, US Goods Trade accompany first batch of ‘Magnificent 7’ earnings from Meta, Microsoft & Tesla along with ASML

  • USA: Heavily flagged Fed rate cut pause expected; Powell & Co to cite growth and employment strength, disinflation stall as rationale, may try to avoid citing inflation risks from Trump 2.0 policies; markets hoping for updated QT guidance

  • Canada: BoC set to slow rate cut pace, retain modest easing bias, but cite need to focus on tariff impact risks

  • Repost: The Jevons Paradox and the Energy Transition (Q1 2024 GITM)

  • Brazil: new BCB governor to stick with aggressive rate hikes, as inflation expectations accelerate rapidly and doubts grow about fiscal / economic policies

EVENTS PREVIEW

Today will be one of those days on which the question is where to look? Fed, Bank of Canada, Riksbank and Brazil COPOM policy meetings? Earnings from ASML, Meta Platforms, Microsoft and Tesla (amongst others)? Statistics: Australia Q4 CPI, Spain and Sweden Q4 GDP, US Goods Trade Balance? Throw in the likelihood of further pronouncements from Trump, and the Senate confirmation hearings for Commerce Secretary Lutnick and Health Secretary Kennedy, and there is plenty to keep markets on their toes. The post mortem on the DeepSeek sell-off in tech stocks will continue, but perhaps two immediate points stand out: a) the sheer hubris of the assumption that the US will be the dominant AI player, and difficult to challenge given restrictions on the sale of high spec semiconductors, particularly given the fact of high overall costs, above all up front investment, and simply unsustainable levels of energy consumption (see also repost of last year’s Q1 Ghost in the Machine article ‘The Jevons Paradox & The Energy Transition‘. b) The idea that restricting China’s access to western hardware, and blocking the use and sale of Made in China hardware or software, would prevent it from competing. Why? Look at Huawei, look at the dominant position of China up and down the renewable energy supply chain…. wake up and smell the coffee. Also bear in mind the way that commodity, resource and finished good traders have always found a way to overcome supply chain disruptions and/or circumvent restrictions and sanctions. Any claims to the contrary are just so much ideological machismo that simply ignores reality.

** Canada – BoC rate decision **

The BoC is expected to revert to a 25 bps cut to take its target rate down to 3.0%, which would also fit with its December guidance and the recent strength of labour indicators, and also getting real rates close to around neutral, and it is also expected to confirm that it will end QT in Q1. The question for the accompanying monetary policy report with updated forecasts is how it formulates its guidance for 2025, with markets essentially pricing in on further 25 bps cut in June or July. It can certainly confirm that all things being equal inflation is now well contained, but eminently the imposition of US tariffs could change the outlook dramatically, not only for inflation, but also growth and employment, and there is the additional uncertainty of the domestic general election (due to be held by October), and how the new government reacts to US policies. It will probably also highlight that the brief sales tax holiday which ends in February will contribute to some CPI volatility in coming months, having already weighed on December’s better than expected headline CPI.

** U.S.A. – FOMC rate decision **

The Fed is expected to pause its rate cutting and keep the Fed Funds target at 4.25/4.50%, markets are priced 100% for no change at this meeting, little chance in March, ambivalent on May and fully priced for a cut in June. As a justification, the FOMC and Powell (at the press conference) can cite the strength of the latest labour data, the slow pace of further disinflation and the strength of the expansion (they will have sight of tomorrow’s Q4 GDP). They may also cite uncertainty about government policy formation, but will eschew characterizing the risk as being inflationary, instead citing the need to monitor the impact. Of interest will be how they assess the impact of the 100+ bps rise in 10-yr Treasury yields since the first rate cut in September, perhaps noting that this will restrict the economy, and obviates the need to discuss the possibility of having to hike rates, and indeed help to bring down inflation further. While there are no forecast updates, it will be interesting to see if there is any dissent, though Fed speak since December does not suggest that any FOMC member will be voting for a cut, and any vote for a hike would raise too many questions about why it cut rates at all. The other talking point for the press conference will be the Fed’s plans for its QT programme, with many expecting an end to be in prospect, or the risk that bank reserves become very scarce, and precipitate a repeat of the 2019 repo ‘crisis’ dislocations. This will also be of interest to the Treasury as it looks to how it will shape its issuance going forward, and evidenced by its January 17 survey of primary dealers, in which it was looking to gauge market expectations both about the timing of the end of QT, and how the Fed might alter the maturity of its purchases of Treasuries to maintain the remaining level of QE.

US Trade deficit with major countries

Source: Bank of Montreal

** Brazil – BCB COPOM Rate Decision **

There may be a new BCB governor (Galifolo) taking the helm of its COPOM policy board, but expectations are that rates will rise a further 100 bps to 13.25%, which would be the highest level in 8 years, and take real rates above 7.0%, well above the 5.0% level that the BCB sees as neutral. The latest weekly consumer inflation expectations survey showed a further surge in IPCA Inflation expectations for 5.08% to 5.50% (way above the central bank’s 3.0% target), and anticipates a year end Selic rate target of 15.0%. The BCB faces a thankless task, with doubts about government fiscal policy a further factor in driving the BRL to 6.0 vs the USD, where it has steadied after the run of rate hikes. But with concerns that Brazil will be caught in the crosshairs of Trump’s trade tariffs only adding to the list above, there is little to cheer near term.

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