Pushback from the Federal Reserve to early rate cuts was vindicated by a very strong employment report for January, but this (and other headwinds) did not unsettle high-flying US equities, closing the week at or near record highs. These factors saw the US dollar strengthen across the board. The Fed's FOMC left rates unchanged in the 5-25-5.5% range this week, though the statement removed the reference to "additional policy firming" as the Committee judged that the risks to its "employment and inflation goals are moving into better balance". In the post-meeting press conference, Chair Powell said that a rate cut by the next meeting in March was unlikely, with more data needed to shore up confidence in the outlook for a return to sustainable 2% inflation.
This, arguably, could take longer for the FOMC to come to this assessment after nonfarm payrolls surged by 353k in January, nearly double the expected increase. Strength in employment and an unchanged participation rate (62.5%) saw the unemployment rate hold at 3.7% (vs 3.8% exp). A lift in average hourly earnings growth from 4.2% to 4.5%yr suggests inflationary risks remain. However, the FOMC will likely be giving greater weight to an easing in the Employment Cost Index in Q4 (4.4% to 4.1%Y/Y). Meanwhile, rising productivity (2.7%Y/Y) sees unit labour costs (2.3%Y/Y) at a pace nearly consistent with FOMC's inflation target.
A shift in tone from the Bank of England's MPC has effectively signalled the peak for rates and given the nod to rate cuts as the next move. In a vote that was split 3 ways - seen at the margin as a more hawkish element of the meeting (2 members voted to hike) - a clear majority of 6 members sided with holding rates at 5.25%, a level that will now be maintained after the MPC threw in the towel on its guidance to deliver "further tightening". In the post-meeting press conference, Governor Bailey said that the incoming data would determine how long it would be before rates can start to be lowered. New forecasts published in the February Monetary Policy Report took into account the cooling in recent wage and inflation readings, with the MPC inclined to assess that the risk of inflation overshooting its estimates at a policy-relevant horizon of 2-3 years had abated. In the euro area, January's inflation figures slowed less than expected: headline 2.8%yr (vs 2.7% exp) from 2.9% previously and core 3.3% (vs 3.2%) from 3.4%; however, this did not shift markets from pricing 5-6 ECB rate cuts this year.
Australia's December quarter CPI outcomes printed below market and RBA forecasts. Ahead of its first meeting of the year next week, the RBA - still with a hiking bias in place - is looking at markets that are now pricing earlier rate cuts; something will have to give. Slowing inflation overseas is filtering through to Australia while other factors such as cost-of-living support measures and Black Friday sales saw headline CPI falling from 1.2%q/q in Q3 to 0.6%q/q in Q4, driving the annual pace down from 5.4% to 4.1%, a 2-year low. Importantly, the core rate (0.8%q/q) also softened from 5.1% to 4.2% year-on-year, accompanied by signs that sticky price pressures emanating domestically are easing, reflected in declining non-tradables (6.2% to 5.4%Y/Y) and services inflation (5.8% to 4.6%Y/Y). My full review of the CPI report can be accessed here. For those interested, I also have reports for the other key Australian data points released through the week, including a post-Black Friday unwind in retail sales (see here); building approvals retracing to their lowest annual total in 11 years (see here); and housing finance rising strongly in Q4 despite seeing a 4.1% fall in December (see here).
