CPI data was the highlight from last week as inflation continues to slow in the US. That should continue to be the case this week when Canada, the UK, and Japan all release December CPI of their own. The US will also release more inflation data in the form of PPI. In addition, the Bank of Japan meets on Wednesday. Speculation is that the BoJ will do some form of Quantitative Tightening after raising the cap on the 10 Year JGB from 0.25% to 0.50% at the December meeting. Although Bank of Japan Governor Kuroda insisted that Monetary Policy is still accommodative, traders aren’t seeing it that way as the Yen has moved aggressively higher all week. And it’s earning season! Highlights this week include Goldman Sachs, Morgan Stanley, and Netflix.
Last week, US CPI for December was in-line with expectations. Headline CPI decreased from 7.1% YoY in November to 6.5% YoY in December. This is the sixth consecutive month that inflation has decreased since peaking at 9.1% YoY in July and the lowest level reported since October 2021. In addition, the Core CPI, which excludes food and energy, fell from 6% YoY to 5.7% YoY. Although both these readings have been falling, inflation is still well above the Fed’s target rate of 2%. However, the markets choose to focus on the December MoM CPI print, which was -0.1% vs and expectation of 0% and a prior reading of 0.1%. This was the first negative print in the MoM series since May 2020. According to the CME FedWatch Tool, markets are pricing in a 94% chance of a 25bps rate hike when the FOMC meets on February 1st vs only a 75% chance of a 25bps increase earlier in the week. In addition, some analysts are noting that the “shelter” component for CPI is much too high and is delayed by a few more months than the rest of the components. Therefore, the CPI print could fall even further in the coming months.
Bank of Japan
The Bank of Japan meets on Wednesday this week. Although expectations are for interest rates to remain unchanged, traders are speculating that there will be some form of Quantitative Tightening, as the BoJ is reportedly doing a complete review of its Monetary Policy at the meeting. Last month, the BoJ surprised markets by adjusting its Yield Curve Control (YCC). The Central Bank widened the band for the 10-year JGB from -/+0.25% to -/+0.50%. And although Bank of Japan Governor Kuroda insists that this is not QE and the Monetary Policy will remain accommodative, traders aren’t biting. Some have speculated that the BoJ may drop its YCC all together! As a result, traders have been buying Yen since Thursday to stay ahead of any surprises. USD/JPY has sold off nearly 440 pips this week to near 127.70 while GBP/JPY is down nearly 380 pips to 155.89. EUR/JPY is also down 230 pips on the week near 138.25. Recall that after the BoJ surprised markets at the December meeting, USD/JPY was down 520 pips on the day!
The beginning of earnings season continues to roll along this week. For the most part, the large Wall Street Banks beat estimates on Friday. However, they are concerned about economic uncertainties due to the high interest rates that lie ahead and the possibility of a recession. Big banks will finish releasing this week with Goldman Sachs and Morgan Stanley reporting on Tuesday. In addition, the first of the FAANGs will report earnings this week with Netflix releasing results on Thursday.Other important companies releasing earnings this week are as follows: KBH, UAL, SI, GS, MS, AA, SCHW, PNC, PG, NFLX, STT, SLB
Last week, the focus was on the US CPI. This week, the inflation data continues to roll out. Canada, the UK, and Japan will release December CPI this week, along with US PPI. In addition, China will have a data dump on Tuesday. Keep in mind that this will be the first look at economic data since the zero-Covid policy was lifted. Other economic data releases due out this week include UK and Australian jobs data, US, Canadian, and UK Retail Sales, and Germany’s ZEW. Additional economic prints this week are as follows:
- Australia: Building Permits Final (NOV)
- China: Hour Price Index (DEC)
- Japan: Machine Tool Orders (DEC)
- NZIER Business Confidence (Q4)
- Australia: Westpac Consumer Confidence (JAN)
- China: Industrial Production (DEC)
- China: Retail Sales (DEC)
- China: Unemployment Rate (DEC)
- China: GDP Growth Rate (Q4)
- Germany: CPI Final (DEC)