Data confirming the US economy is on track for a soft landing remains the dominant theme in markets and sets the scene going into next week's Fed meeting. GDP growth in Q4 was a solid 0.8%q/q, driven by a 0.5ppt contribution from household spending. Growth through the year was 3.1%, accelerating from a 0.7% pace 12 months ago. This has been achieved alongside a substantial slowing in inflation. The Fed's preferred core PCE deflator printed at 2.9%Y/Y in December, a low back to March 2021 and well down from its 5.6% peak in early 2022. In both 3-month (1.5%) and 6-month annualised terms (1.9%), core inflation looks increasingly likely to be coming in below the Fed's 2% target by mid year.
The PBOC announcing a forthcoming cut to banks' reserve requirements to free up liquidity and news the authorities are considering measures to bolster its equity markets drove Chinese and HK equities to their first weekly gains this year. Elsewhere in the region, the Bank of Japan continued to maintain its existing settings (key rate -0.1%, 10-year yield target 0%), but markets sense policy normalisation is close, potentially starting in April. This was informed by the BoJ's Outlook statement that noted the likelihood of sustainability meeting its 2% inflation mandate had "continued to gradually rise".
The ECB's policy meeting was uneventual; its key rates (MLF 4.75%, MRO 4.5% and DF 4%) and guidance around data dependency dictating upcoming decisions were all left unchanged. Overall, the ECB is in the position of managing its way to the point where it starts cutting rates. In the post-meeting press conference, ECB President Christine set about managing those expectations, highlighting the importance of waiting for information from wage negotiations taking place through Q1, a key factor that will shape its inflation outlook. President Lagarde said discussing policy easing now was premature but did not resile from her comments at Davos last week that rate cuts by the (northern hemisphere) summer were a likely scenario. But market pricing following Thursday's meeting has seen April firm as the expected timing for the start of the cutting cycle. The difference in timing reflects that the ECB is more cautious about the inflation outlook than the markets, with President Lagarde citing the Middle East tensions as a potential source of reigniting price pressures.
Domestically, much of the focus was on the Government's amendments to the previously legislated Stage 3 tax cuts. According to Treasury modelling, the revamp broadens the scope of tax relief from 10.8 million to 13.6 million people at the same budgetary impact. In effect, the revamp redistributes around half of the tax relief that was to flow to income earners in the highest tax bracket to low- and middle-income earners. Treasury's analysis also concludes that the amendments do not add to inflationary pressures and support labour supply, but these elements continue to be strongly debated in local dispatches.
