US CPI remains the most key data point to watch, Fed Chair Powell speaks as well
There is enough reason to believe that we can get some further disinflationary pressures in the coming weeks. Economic momentum has been weakening, as highlighted by the plunge in ISM services last week into contraction territory, particularly with the forward-looking new orders subcomponent. An unusually warm winter has also helped to provide some reprieve from inflation pains. Bloomberg consensus forecasts are pointing to a softening in headline inflation to 6.5% YoY, 0.0% MoM (from 7.1% YoY, 0.1% MoM prev) while core inflation remains firmer at 5.7% YoY, 0.3% MoM (from 6.0% YoY, 0.2% MoM). Still, these inflation prints remain more than three times faster than the Federal Reserve’s 2% target. Fed officials have made it clear they expect goods price inflation to continue to ease, expecting another big drop in used car prices. But officials are seemingly focused on services ex-housing which remains high. So even a softer inflation print is unlikely to provide enough ammunition for the Fed to further slow down its pace of rate hikes. Fed Chair Jerome Powell this week as well, and his tone will be key to watch.
Volatility on watch if US CPI sees a big surprise
The last two months have shown that big swings in US CPI can spark significant volatility in the equity markets, given the large amounts of hedging flows and short-term options covering. With a big focus on CPI numbers again this week, similar volatility cannot be ruled out. Volume might be thin still this week as many are still on holidays, so moves in equities could be amplified in either direction. Meanwhile, FX reaction to CPI has been far more muted, but some key levels remain on watch this week. A higher-than-expected CPI print could keep expectations tilted towards a 50bps rate hike again in February, while a miss could mean expectations of further slowdown in Fed’s tightening pace to 25bps in February could pick up which can be yield and dollar negative. EURUSD looks stretched above 1.0650 and key levels to watch will be 1.0500, while USDJPY needs to close below 130.38 to extend the downturn further. USDCNH remains key to watch as well as it gets closer to test 6.8000 amid China reopening and easing in property sector. AUDUSD is also flashing a bullish signal after breaking above the key 0.69 this morning with China reopening momentum underpinning.
The Aussie dollar flags a bullish signal, crossing a key level. Could inflation add to the rally?
After the US dollar suffered its longest streak of weekly falls in two months, the commodity currency - the Aussie dollar broke above its 200-day moving average, which is seen by some as a bullish sign with the Aussie dollar (AUDUSD) trading at two-month high of 0.69 US cents. What's also supporting the currency is that China’s reopening is expected to add considerably to Australia’s GDP. There’s a potential 0.5% addition to GDP in a year once Chinese students and tourists return. Plus there is likely to be an extra boost to GDP from the anticipated pick up in commodity buying from China. Extra hot sauce could even come from China potentially buying Australian coal again. JPMorgan thinks over the next two years, Aussie GDP will grow 1% alone thanks to inbound Chinese students and holiday makers likely returning. The next catalyst for the currency is inflation, CPI data out on Wednesday Jan 11. Core or trimmed CPI is expected to have risen from 5.3% YoY to 5.5% YoY. If CPI come in line with expectations, or above 5.3% YoY, you might also think the AUD rally could be supported.
China’s CPI expected modestly higher, PPI less negative
Economists surveyed by Bloomberg had a median forecast of China’s December CPI at an increase of 1.8% Y/Y, edging up from 1.6% in November, mainly due to base effects, as food prices are likely to be stable and higher outprices in the manufacturing sector might be offset by a fall in services prices. PPI in December is expected to be -0.1% Y/Y, a smaller decline from -1.3% Y/Y in November, benefiting from base effects. The decline in coal prices was likely to be offset by an increase in steel prices.
Growth in new RMB loan and aggregate financing expected to slow in China
The Bloomberg survey consensus is forecasting a modest decline in new RMB loans to RMB1,200 billion in December from RMB1,210 billion in November despite the Chinese authorities have been urging banks to lend to the real estate sector. New aggregate financing is expected to slow to RMB1,850 billion from RMB1,990 billion, primarily dragged by a decline in bond issuance from local governments.
UK November GDP to signal an incoming recession
UK’s monthly GDP numbers are due this week, and consensus expects a contraction of 0.3% MoM in November from +0.5% MoM previously which was boosted by the favourable M/M comparison vs. September, which was impacted by the extra bank holiday for the Queen’s funeral. The economy is clearly weakening, and another quarter of negative GDP print remains likely which will mark the official start of a recession in the UK.
Start of the US earnings season
The Q4 earnings season starts next week with major US banking earnings most notably from Bank of America, JPMorgan Chase, and Citigroup. Analysts remain muted on US banks with earnings expected to show another quarter of negative earnings growth compared to a year ago. For the overall Q4 earnings season we expect to see more industries experiencing margin compression than industries experiencing expanding margins. This will continue to be a headwind for earnings growth. Analysts did not see the margin compression coming in Q3 and judging from current estimates they have not materially revised down their expectations. That means that the Q4 earnings season and beyond could be paved with more disappointments. The list below shows the most important earnings releases next week.
- Tuesday: Albertsons
- Thursday: Fast Retailing, Seven & I
- Friday: DiDi Global, Aeon, Bank of New York Mellon, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, UnitedHealth, BlackRock, Delta Air Lines, First Republic
Read next: The U.K. Economy Is In Trouble, Fall Of GDP Is Expected!| FXMAG.COM
Key economic releases & central bank meetings this week
Monday 9 January
- U.S. Manheim used vehicle index (Dec)
- Germany Industrial production (Nov)
- Eurozone Sentix Investor Confidence (Jan)
- Eurozone Unemployment rate (Nov)
- Japan: market closed for holiday
Tuesday 10 January
- France Industrial production (Nov)
- Japan Tokyo-area CPI (Dec)
- Fed's Bostic speaks in a moderated discussion
- Fed's Daly interviewed in WSJ Live event
- Fed Chair Powell speaks at Riksbank event
Wednesday 11 January
- Australia retail sales (Nov)
- Australia CPI (Nov)
- U.S. MBA mortgage applications (Jan 6)
Thursday 12 January
- Australia trade (Nov)
- U.S. CPI (Dec)
- China CPI & PPI (Dec)
- Fed's Harker discusses the economic outlook
Friday 13 January
- U.S. U of Michigan Consumer Sentiment (Jan, preliminary)
- Eurozone: Industrial production (Nov)
- UK: Monthly GDP (Nov)
- Japan: Money supply (Dec)
- China: Imports, exports and trade balance
During the week:
- China: Aggregate financing, new RMB loans, money supply (Dec)
