Markets have come out of the blocks strongly in 2023 boosted by an improving backdrop in Europe, China's reopening and more convincing signs of slowing inflation in the US. That momentum was checked somewhat during the week as central banks stuck to hawkish messaging while US economic data saw a broad-based deterioration. The Bank of Japan remained the outlier in that sense, resisting expectations in some quarters for further tweaks to yield curve control. Domestically, Q4's inflation report is the highlight on the calendar in the week ahead.
Fed hawkishness still previls
Going into the blackout period ahead of the next FOMC meeting, Fed officials speaking during the week were determined to leave the markets unwavering from their resolve to continue hiking rates. The hiking pace does, however, look set to downshift to 25bps increments, with speeches from the Fed Vice Chair Brainard and Governor Waller highlighting moderating wage-price dynamics. The data flow also supports that course of action. US Retail sales posted their weakest outturns in a year, with falls of 1.1% for headline sales and 0.7% for the control group. Industrial production fell more than expected in December (-0.7% vs -0.1%), consistent with weakness in manufacturing surveys. Meanwhile, pipeline price pressures saw a 0.5% fall on the headline PPI in December, its sharepest month-month decline since the onset of the pandemic, with the annual pace stepping down from 7.3% to 6.2%.
Australian labour market activity slowed in December...
A soft Labour Force Survey reported declines in employment (-14.6k vs 22.5k expected) and in the participation rate (66.6% from 66.8%) in December (reviewed here). Although disruptions associated with another wave of Covid cases could have been a factor - hours worked fell by 0.5% as illness-related absences picked up - the report may help bring a pause from the RBA into closer view. The unemployment rate held at 3.5% (revised up from 3.4% previously) but is potentially around the lows for the cycle. Employment on a 3-month annualised basis is still rising at a solid pace (2.6%), but the work force is now expanding at a similar rate (2.4%) with overseas migration ramping up on reopened borders. Next week's inflation report for Q4 is expected to result in a rise in inflation to 7.5%; however, that is lower than the RBA's forecast for 8%.
... but consumer sentiment is improving
Although the Westpac-Melbourne Institute Index remains in deeply pessimistic territory, consumer sentiment looks to be on the improve. A 5% rise in January sees the index up by 8.1% from its recent low point. Consumers sense the coming year will be difficult as rate rises bite. Despite improving in this latest report, the year-ahead outlooks for personal finances and the economy remain below their long-run average levels. However, sentiment towards the labour market remains very robust and even improved in January.
China shows resilience ahead of Covid zero exit
Better-than-expected data ahead of the exit from Covid zero were found in the latest Chinese activity data. GDP growth in Q4 came in flat quarter-on-quarter against a more pessimistic consensus (-0.8%) that anticipated a deeper pullback from Q3 (3.9%) due to the return of pandemic restrictions. Consumer spending proved to be more resilient than anticipated, with retail sales down 1.8%Y/Y but significantly better than feared by markets (-8.6%). Added to this was an upside result for industrial production at 1.3%Y/Y (vs 0.2%). All in all, China's economy looks to have been on a firmer footing than anticipated and the earlier and wider easing of Covid restrictions is fuelling market optimism for an acceleration in activity there in 2023.
Bank of Japan holds steady
The BoJ resisted making further policy tweaks this week following its decision late last month to widen the range for yield curve control. Although the 10-year bond rate had been pressing against the 0.5% upper limit (raised from 0.25% in December, the BoJ is opting to lean on bond-buying rather than altering yield curve control, at least for now. Markets sense steps towards normalising monetary policy will ramp up once the successor (yet to be announced) to Governor Kuroda steps in. Inflation lifted from 3.8% to 4%Y/Y in December, a 41-year high; however, the BoJ's latest outlook is for price pressures to fall back below the 2% target in 2023 (1.6%) and 2024 (1.8%). Meanwhile, forecast growth has been trimmed to 1.9% for 2022 (down from 2%) and is seen softer over 2023 (1.7% from 1.9%) and 2024 (1.1% from 1.5%).
UK inflation past the peak
December's data confirmed the unwind in UK inflation is underway but the progress is minimal so far. Surging household energy prices caused headline inflation to spike above 11% in October before easing to 10.7% in November and then to 10.5% in December. The core rate was unchanged at 6.3%, down from 6.5% in October. There is a chance inflation could temporarily rise in January, but sizeable base effects come into play thereafter and this should slow the pace substantially; the Bank of England forecasts inflation to be just above 5% by the end of the year.
Governor Bailey, however, cautioned against complacency at this week's Treasury Committee hearing. That came as data on the labour market reported a stronger-than-expected rise in employment of 27k in November kept the unemployment rate around historic lows at 3.7%, supporting an uptick in wages growth to 6.4%yr. On the other hand, a very weak retail sales report for December (-1%m/m) indicates weakening demand could slow inflation pressures more quickly.
ECB to keep pressing rates higher
A milder winter leading to rapid declines in energy prices into China's Covid zero exit has sparked an upbeat start to the year in Europe. A Bloomberg report speculating on the ECB soon pivoting to a slower pace of rate hikes added to the optimism. However, key ECB officials pushed back against that notion at the Davos forum. ECB President Lagarde reiterated the main message from the account of the Governing Council's December meeting that rates were not yet at levels sufficiently restrictive to see inflation falling back to 2%. Meanwhile, Governing Council members Villeroy and Knot said the guidance coming out of the December meeting for rate hikes in 50bps increments remained appropriate.
