by Marc Chandler
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The week ahead is chock full of data, including Japan, the UK, and Australia's CPI. The UK and Australia report on the labor market. The US, UK, and Canada also report retail sales. The early Fed surveys from New York and Philadelphia for January will be released. China's December data are due, and it is also expected to report its estimate of Q4 GDP, where some economists forecast a contraction. While headline risk is associated with these economic reports, we suspect they will have little bearing on expectations of central bank policy. It seems that the adjustment of interest rate expectations for the Federal Reserve has gone as far as it can ahead of the FOMC meeting on February 1, perhaps providing a more consolidative tone for the dollar after its recent slump.
The highlight of the week is the Bank of Japan meeting. After being taken by surprise last month, many market participants are cautious amid talk of follow-up action. Barring new moves away from its extraordinary monetary policy, the focus may be on the updated BOJ growth and inflation forecasts. The People's Bank of China will set the one-year loan prime rate. It has been at 2.75% since last August. Most do not expect a cut quite yet, but it may increase the volume. The central bank of Norway. It hiked by 25 bp in December to 2.75%. Underlying inflation that adjusts for tax changes, while excluding energy, was 5.7% last month. Norges Bank indicated scope for another quarter-point hike in Q1 23 and then could be done.
Japan: The BOJ meeting concludes on January 18. After the surprising move last month, the BOJ will likely be content monitoring the impact. However, the Yomiuri newspaper reported that the Japanese central bank would consider fresh measures, including adjusting its bond purchases to address the volatility sparked by last month's action. The BOJ has bought a stunning ~$75 billion of government bonds in the previous two sessions. The market bought yen in response to the report, and some banks adjusted their policy outlooks. Previously speculation around the meeting focused on the new economic forecasts, particularly a revision higher for inflation. The median forecast among BOJ officials in October was for core CPI (excludes fresh food) to be 2.9% this fiscal year. It has averaged 2.7%, but on January 19, the December CPI figures will be reported, and the Tokyo report warns that the core rate may rise to 4.0% from 3.7%. Excluding fresh food and energy, the median forecast among BOJ members was 1.8%. So far in this fiscal year, it has averaged 1.6%. Translated to the national figures, the core-core measure may rise to 3.0%. The adjustment of the BOJ's 10-year bond yield band may be changing expectations for who replaces BOJ Governor Kuroda when his second term expires in April. In our January monthly, we suggested that it appeared Deputy Governor Masayoshi Amamiya had the advantage over former Deputy Governor Nakaso Hiroshi. However, Nakaso has written about the sequencing of exiting the extraordinary policy, beginning with yield-curve control, and he appears to be favored now.
The dollar tested retracement support near JPY127.50 ahead of the weekend. A key chart point below there is near JPY126.60, the 50% retracement of the greenback's rally from the March 2020 low (~JPY101.20). Furthermore, we suspect that the BOJ meeting may disappoint and suspect the dollar would react positively. The JPY129.70-JPY130 are may be the first important hurdle.
US: The fourth quarter appears to have ended on a soft tone. The employment report showed that aggregate hours worked fell in December for the second month in a row. The US will report December retail sales and industrial production figures in the coming days. The median forecast in Bloomberg's survey sees a 0.8% decline in retail sales, which would be the largest in 2022 and the third decline in four months. Even excluding autos and gasoline, where we already know auto sales disappointed and average unleaded retail gasoline prices fell by 7.5% (sixth consecutive monthly decline), retail sales are expected to have fallen by 0.2%, the first back-to-back decline since April/May 2021. Industrial output likely contracted for the third consecutive month in December. Housing starts are seen falling for the fourth month in a row, and the slump in existing home sales probably extended the decline that began in February. Still, the early Fed surveys are expected to show the slowdown at the end of the year moderated at the start of the new year. It also seems likely that producer prices pressures continued the decline that began at the start of H2 22. The Beige Book (January 18), prepared for the next FOMC meeting, makes for nice headlines but infrequently moves the market.
The Dollar Index traded slightly through 102.00 before the weekend. This is the (50%) retracement of its rally from the low (89.20) set on January 6, 2021. The next retracement (61.8%) is near 99.00. Technically, it looks stretched, and the short-term interest rate adjustment ahead of the FOMC meeting has gone nearly as far as it can. Nevertheless, a bounce can carry the Dollar Index back toward 103.00-103.40 without causing the bears much pain.
China: Market participants understand abandoning the zero-Covid policy hit the Chinese economy, which was already fragile. The zero-Covid approach did not seem to work well and disrupted the economy. In the face of large-scale protests, Beijing did not repress with overt force, but the protests showed the straining of the social contract, as it were. China reports December economic data, which the market will look past. The same is true for its estimate of Q4 GDP. The median forecast is for a 1.0% contraction quarter-over-quarter after a 3.9% expansion in Q3. Perhaps, the most interesting development will be whether the benchmark one-year loan prime rate is reduced from 2.75%. A reduction, even a small one, could spur more foreign buying of Chinese equities, which have begun the year with strong demand. Meanwhile, support for the property sector, prospects of new stimulative measures, and post-Covid shock recovery have helped drive some industrial prices, like iron ore, copper, and steel rebar, to their highest in 6-7 months.
Foreign investors looking past the Covid surge, despite the lack of transparency from Beijing, have been significant Chinese equities buyers. This, coupled with the broad dollar setback, has seen the yuan rise to its best level in nearly six months. Judging by the PBOC's daily fixing, officials are taking it in stride. Still, the move seems large, and some consolidation should not be surprising. The CNY6.80-CNY6.82 may now offer nearby resistance.
Eurozone: It is a light week for eurozone economic reports. The highlight may be the German ZEW investor survey. The DAX is off to a great start to the year, rising about 8.5%, and the 10-year German Bund yield has already tumbled more than 40 bp. More broadly, the Stoxx 600 is up about 6% this year after falling almost 13% last year. Italy's 10-year yield is off 70 bp, and its premium over Germany has fallen to nearly 180 bp. It has not been below there since last April. The mild winter (thus far), coupled with conservation and non-Russian supplies, have pushed Europe's benchmark for natural gas prices sharply lower. It is nearly 20% below levels that prevailed in the middle of last January. Among other things, it makes the subsidies and tax breaks less costly, which is favorable for fiscal considerations.
The euro approached $1.0870 last week, its best level since last April. The next upside target is around $1.0940, the halfway mark of the losses since the peak on January 6, 2021, near $1.2350. Even though the momentum indicators are stretched, buying on pullbacks seems stronger than selling into rallies. Again, ahead of the weekend, the dip to nearly $1.0780 was greeted with new buying. That said, the next support area is around $1.0700-20. It probably takes a break of the $1.0630-50 band to be significant.
UK: In broad strokes, the UK labor market remains strong even though the economy has been contracting on a rolling three-month basis since August. Average weekly earnings (with and without bonus payments) rose slightly faster than 6% in the three months through October from a year ago. Another firm employment report is expected on January 17. Meanwhile, unlike the US and the eurozone, UK headline CPI made a new cyclical high in November of 10.7%, and the pullback in December is expected to be minor. The core rate has bounced between 6.3% and 6.5% since August. The cost-of-living squeeze has cut into consumption and dragged retail sales lower. On the other hand, the drop in energy prices and the holidays may have helped lift retail sales in December. Since the BOE met in mid-December, the swaps market has favored another 50 bp hike at the Feb 2 meeting, gyrating between around 60% and 90% chance. It finished last week after reporting a 0.2% contraction in November at about a 70% chance. A half-point move would lift the base rate to 4.0%. The market sees the peak between 4.25% and 4.50%.
Sterling advanced for the third consecutive week, but it has been a laggard, rising less than 1% over the run, which followed a three-week decline. It stalled last week around $1.2250 after meeting the (61.8%) retracement objective of the decline since last month's peak near $1.2450. The lower end of last week's range was about $1.2080. A break of it could signal a return to $1.1980-$1.2000.
Canada: Ahead of the Bank of Canada meeting on January 25, StatsCan reports December CPI and November retail sales next week. The base effect works against a continued decline in the year-over-year inflation rate. CPI slipped 0.1% last December. The year-over-year rate peaked at 8.1% last June and 68% in November. Yet, the average of the underlying core rates is virtually flat at 5.7%. Following the strong employment December employment data (which included an 84.5k rise in full-time positions, a small decline in the unemployment rate to 5.0% from 5.1% despite a 0.2% increase in the participation rate to 65.0%, and 5.2% year-over-year increase in the hourly wage of permanent employees), a quarter-point rate hike is the most likely outcome of the January 25 Bank of Canada meeting. Many thought the central bank may have finished the cycle with the 50 bp move in December (to 4.25%). However, a soft November retail sales report after the heady 1.4% rise in October is unlikely to discourage the market, which is now discounting around a 75% chance of a 25 bp hike, up from about 30% initially after the last meeting. That hike would bring the overnight rate to 4.50%, which could prove to be the terminal rate.
The US dollar may have put in a near-term low near CAD1.3320 at the end of last week, culminating a four-week slide. The CAD1.3460 area is the upper end of last week's range. A move above there could signal a recovery back to the CAD1.3500-CAD1.3540 area and possibly CAD1.36.
Australia: The employment data on January 19 may tip the scales of expectations about the February 7 central bank meeting. With inflation still firm, the newly minted monthly report showed new cyclical highs (bolstered by an increase in the fuel-excise tax) and solid foreign demand, with reports suggesting China's embargo is lifting, especially for coal. Industrial metals prices have also risen in recent weeks. The market has a 15 bp hike fully discounted (which looks the same as a 60% chance of a 25 bp move). Many observers think the central bank prefers to get back to quarter-point increments. That such a move would bring the cash target rate to 3.25%. The futures market does not have the next quarter-point hike fully discounted until May, three meetings after the February one. The peak is seen near 3.75%. Melbourne's Institute Survey of inflation expectations will be reported the day before the employment report. In December, it fell to 5.2%, an eight-month low. Still, the RBA will see the traditional quarterly inflation report before it meets. In Q3, it stood at 7.3% after 6.1% in Q2 22 and 5.1% in Q1 22.
Fueled by the China re-opening meme, which has lifted industrial commodities, like iron ore, copper, and coal prices, and the broad US dollar setback, the Australian dollar has been on quite a run. It has advanced for the past four consecutive weeks and 11 of the past 13 weeks. It is suffered only two weekly losses since the middle of last October. The rally stalled in front of $0.7000 at the end of last week. It frayed the upper Bollinger Band on a closing basis on January 13, and the momentum indicators are stretched, with much good news discounted. A test on last week's lows near $0.6860 would not inflict much technical damage. A push back below the $0.6830-40 area, especially a break of $0.6800, would be a different story.
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