Written Commentary
Focus on BoE policy meeting & Monetary Policy Report, as Fed rate cut timeline pushback and India interim budget are digested; Eurozone CPI, Manufacturing PMIs/ISM, US weekly jobless claims and Auto Sales top statistical run; Apple and Amazon headline US corporate earnings reports; smattering of ECB speakers
Asia Manufacturing PMIs still very mixed, but recoveries in India, South Korea, Taiwan and Vietnam offer positive signals
Eurozone CPI: lower than expected German and French prints imply better than expected outturn, wage trends likely to become a bigger focal point
U.K.: MPC set to push back on market rate expectations, vote may split three ways, rate hike threat to be dropped, but not ‘higher for longer’, forecasts for CPI and GDP set to improve
EVENTS PREVIEW
The new month gets underway with the BoE and Riksbank (the latter having gently opened the door to rate cuts) policy meetings, Eurozone CPI, Manufacturing PMIs/ISM and earnings from Apple and Amazon topping the day’s agenda. The US also looks to weekly jobless claims, Q4 Non-farm productivity, Construction Spending and Auto Sales, as yesterday’s FOMC meeting and the overnight Indian interim Budget are digested. The run of PMIs out of Asia remained mixed and generally quite sluggish, but the recoveries seen in South Korea, Taiwan and Vietnam along with the rebound in India offer some genuinely positive signals about growth prospects in the region. Powell was very clear that the Fed is going to err on the side of caution before entering a rate cut cycle, above all because the current economic situation does not put them under any pressure to act. As Powell said “The executive summary would be growth is solid to strong … 3.7% unemployment indicates the labor market is strong …We’ve got six good months of inflation data and an expectation that there’s more to come. Let’s be honest, this is a good economy.”
** Eurozone – January CPI **
Given that French and German HICP modestly undershot expectations, it is likely that today’s Eurozone CPI will come in below forecasts of -0.4% m/m 2.7% y/y for headline (vs. Dec 2.9% y/y), and a further dip in Core CPI to 3.2% y/y from 3.4%. This has already been discounted by markets after the national data, and per se confirms that CPI is falling faster than the ECB was expecting, and bolsters market expectations of a rate cut in April, perhaps even March. But it should be borne in mind that the ECB is also watching wage developments closely, with yesterday’s Italian Hourly Wages posting a record 7.9% y/y, paced by a 22.2% increase for state administration employees, and heavily distorted by a compensation payment following the delay in the renewal of their national contract. Nevertheless, wage settlements have been running in the region of 5.0% according to Indeed data.
** U.K. – MPC rate decision **
The BoE is expected to hold rates at 5.25%, but there will likely be a shift in the vote from 6-3, with the possibility that there is a 3 way split, as Mann sticks with voting for a rate hike, and by contrast Dhingra may vote for a rate cut. The statement seems likely to drop the suggestion that rates may need to rise again, but it may stop short of dropping the reference to rates remaining ‘sufficiently restrictive’ for an extended period (in no small part because even if rates were reduced by 50-75 bps, they would still be restrictive). The focus then shifts to the updated forecasts, which given the shift in market rate expectations will be based on an average Base rate of 3.75% over the 3-year policy time frame, as against the assumption of 4.75% at the time of the November Monetary Policy Report. CPI and GDP forecasts will likely see some quite sharp revisions, with CPI likely seen at target by the Q3 of this year as against Q4 2024 in November’s report, which in turn should also GDP forecasts revised higher, but still implying sub 1.0% growth for 2024 and 2025, and only just above 1.0% in 2026. Overall the message from the BoE is likely to be that there is likely to be some room for rates to be reduced later in the year, but for the time being inflation (above all core and Services) remains much too high for there to be any consideration of cutting rates in the near term.
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