Macroeconomics: The Day Ahead for 31 January

The US FOMC policy meeting will be front and centre of today’s proceedings, but it will also be a very busy day for statistics and expected rate cut decisions in South America (Brazil -50 bps, Chile -100 bps & Colombia -50 bps), with more corporate earnings, headlined in the US by ADP, Boeing, Mastercard, MetLife and Qualcomm, as ‘disappointing’ results from Alphabet and Microsoft are digested. Statistically, there are the overnight China NBS PMIs, UK Lloyds Business Barometer & Nationwide House Prices, Australia CPI, Philippines and Taiwan Q4 GDP, French CPI and German Retail Sales to digest, with German Unemployment and CPI, Canada monthly GDP, and US Employment Cost Index, ADP Employment and Chicago PMI. Perhaps most significantly there is the hawkish shift in the BoJ’s ‘Summary of Opinions’ at its January meeting to digest, with one member saying conditions to exit negative rates and ultra-loose policy have already been met, and others suggesting conditions were falling into place, as per one member’s comment “Since achievement of our price goal has become more likely, it’s necessary to start full-fledged discussions on an exit”. A shift at the April meeting rather than the next meeting in March seems the more likely scenario, but policymaker comments will need to be very closely monitored.

** U.S.A. – Q4 Employment Cost Index, FOMC meeting **

Ahead of the FOMC meeting, the Q4 Employment Cost Index may jar market expectations about the rate cut trajectory, with the consensus looking for a 0.1 ppt uptick to 1.1%, and the focus on the Wages & Salaries component (last 1.2% q/q), which will likely be unchanged given that it generally mirrors the Atlanta Fed’s Wage Tracker index. The Fed is expected to hold rates at 5.25/5.50%, with all eyes on how it tweaks the statement, particularly how it balances a likely slightly more optimistic note on inflation trends, against labour market trends, which it will likely continue to describe as ‘Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low.’ The question then is how it opens the door to rate cuts, and just as importantly to tapering its balance sheet reduction (QT) programme. In terms of rates, it could talk of increasing uncertainty about the economic outlook, and that it stands ready to act, possibly also mentioning that as inflation falls, it will need to adjust rates to ensure that they are not ‘overly restrictive. In respect of QT, it may use the 2019 template, where it initially noted that it was “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments”, with Powell signalling that details will be provided in March. The focus for Powell’s press conference will be on what conditions need to be met to start a rate cut cycle, particularly how it is weighting lower inflation against a still robust labour market and still resilient GDP growth. It will also be interesting to see if there is any emphasis placed on the weak growth prospects for China and the Eurozone. As an aside, it is worth thinking about the fact that since the GFC, rate cuts and other policy easing cycles have been triggered by financial instability threats, rather than ‘normal’ economic cycle elements, as is currently the case. This is important as the Fed (and other central banks) are not under pressure to take action in response to immediate threats to the financial system.