Markets to Watch: CPI to Support a 50bp Fed Cut in March?

Summary

• We introduce a new format for 2024, with a more forward-looking focus on the week’s key events.
• In the US, we expect CPI to show continued disinflation and the small business survey to show resilient growth trends. Dominique now thinks a 50bp cut at the March FOMC is more likely than 25bp.
• In Europe, we watch ECB speakers for signs they still favour pausing. Key data includes EZ industrial production, final December CPI in France and Spain, and UK monthly GDP.
• In EM, we expect the Bank of Korea to stay on hold on 10 January, falling consumer and producer prices in China, and India’s core disinflation to extend as headline CPI remains noisy.

US: Fed Worried by Return to Lowflation

The December FOMC marked a deep policy shift: as Dominique argues, the Fed is now out to cut in 2024. It seeks to ease policy to support growth and asset prices while reducing the risk of the US economy returning to the pre-pandemic low inflation regime. Dominique now considers a 50bp cut as more likely than 25bp at the March FOMC, based on core PCE remaining around 20bp a month until then.

The week’s key data by order of importance includes:

• December CPI (Thursday): the consensus on MoM core is 0.2%, and Dominique agrees based on energy prices driving core inflation and on the decline in energy prices in December.
• December PPI (Friday): Dominique agrees with the consensus that sees core PPI accelerate to 0.2% from 0% in November.
• December NFIB Small Business Optimism (Tuesday): Dominique will be looking for a recovery in the hard data of the survey.

We also expect a small increase in November’s consumer credit data (Monday), little change from October in November’s trade balance (Tuesday), and continued low jobless claims (Thursday).

Markets We Are Watching

• Following Friday’s better-than-expected jobs data, we watch US 2-year yields this week. While we now think the Fed could cut as much as 50bps, the market’s post-CPI reaction will be a big tell. We think last week’s reversal was just market participants taking profits following the big decline since November.
• In equities, we watch the big banks as both Bank of American and JP Morgan report later this week. We watch for additional insights on the US consumer, which we think remains robust.

Europe & UK: ECB Speakers to Signal Holding Pattern

The main releases for next week will be Eurozone industrial production data (throughout the week), final December CPI data in France and Spain (Friday), and UK monthly GDP (Friday). Central bank speakers will also be important, especially the ECB’s Lane on Friday and BoE’s Bailey on Wednesday.

• ECB speakers include Villeroy, de Guindos, Vujcic and Lane – it will be the first time we hear from them after December CPI came in below the ECB’s unreasonably hawkish near-term expectations. Henry expects the central bank can wait until June for the first cut given they will lack a good view of inflation and wages until then – this week’s speakers may indicate as much.
• The main BoE speaker this week is Bailey. Market pricing recently turned more dovish and now agrees with our base case of a May cut. Inflation recently surprised to the downside, and official wage growth numbers have (finally) dropped. This gives room for dovishness from Bailey.
• Eurozone industrial production is expected to have risen modestly in November after repeat misses. The near-term picture in goods demand remains relatively subdued, although declining goods prices and loosened financial conditions could provide support.

Elsewhere, final French and Spanish inflation is expected to show no change from the preliminary release. We watch services inflation, which saw strength in the aggregate number. Meanwhile, UK November monthly GDP is expected to rebound slightly after the October miss (which may have been weather-related). Broadly, the UK consumer remains under heavy pressure from prices and rates, and the economy is widely expected to stagnate.

Markets We Are Watching

• Watch Dutch TTF prices as weather models now forecast lower temperatures for the first time since late November. While gas in storage remains near record highs, we watch for market reactions to an increase in withdrawals.
• In the UK, we watch Asos who will report earnings later this week. Competitor Next PLC warned last week of supply delays due to Red Sea shipping attacks.

Emerging Markets

The week ahead includes a rate decision from the Bank of Korea; Chinese data on TSF, CPI, and trade; and CPI data in India.

• Bank of Korea will stay on hold at 3.5% on 10 January. It will refrain from cutting before the Fed on concerns about private sector borrowing, which risks financial stability.
• China sees TSF, trade and CPI data. TSF data is no longer market-moving – the market has understood authorities do not intend ‘floodgate’ easing. China’s price data for December will likely show consumer and producer prices falling together for a third straight month.
• India’s headline inflation may rise on 12 January on volatile food prices and base effects. However, Caroline and Mirza expect lower core goods and transport costs to lower core from 4.1% in November to 3.9%. They expect a shallow rate cut cycle to begin around midyear.

Elsewhere, we expect Poland to keep rates firmly on hold at 5.75% despite recent downside surprise on CPI.  In Czechia, core and adjusted inflation will continue to matter more for the CNB than the headline print.  Favourable base effects will mean a sharp drop in Hungary YoY CPI.  And in Mexico, an upside surprise in the CPI on Tuesday could be market-moving and reduce the odds of a March cut.

Markets We Are Watching

• In EM, we watch USDKRW, currently trading around 1315. We find it slightly surprising that KRW has not rallied further given the rebound in semiconductor exports over the last six months.
• Chinese equity markets also remain front of mind. Shadow bank Zhongzhi filed for bankruptcy late on Friday, which impacted market sentiment. A strong credit report will help to sustain Chinese stocks in the near term, which have been among the worst performing in EM for a while.

Key Market Movers From Last Week

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)