Monday

ECB President Lagarde (neutral – voter) over the weekend spoke with a Greek newspaper and reaffirmed their commitment to bring inflation down to target by 2025:

• We are determined to bring inflation down to 2%.
• According to our projections we will get there in 2025.
• Our mandate is to ensure price stability, and this is the best contribution we can make to social peace and to society, to the most vulnerable of its members in particular.

BoJ Governor Ueda repeated once again his previous remarks highlighting the need to see sustained wage growth in order to hit the 2% inflation target and exit the easy monetary policy:

• Japan's economy recovering moderately.
• Japan's economy likely to continue recovering.
• Long-term rates may rise somewhat but what's important is to look at real interest rate that takes into account inflation expectations.
• Even if long-term rates rise, real interest rate will move in negative territory so monetary conditions will be sufficiently accommodative.
• There is uncertainty on whether Japan will see positive cycle of wage and inflation, as we predict.
• We will patiently maintain monetary easing to support economic activity.
• We will continue massive bond buying even under new operation we decided last week.
• We will conduct nimble market operations when interest rate rise, depending on level and speed of moves of long-term rates.
• Even if long-term rates come under upward pressure, don't expect 10-year JGB yield to sharply exceed 1%.
• Under YCC, we need to carefully weigh the effect of the policy in stimulating economy, and the side-effects.

• Uncertainty surrounding our baseline scenario on economy is extremely high, one of which is overseas economic outlook.

• Must keep close eye on impact of rapid Fed rate hike on markets, FX moves.
• Need to be vigilant to whether China's recovery momentum could be hampered by property market adjustment.
• Cost-push pressure on inflation likely to gradually dissipate, although it may take more time given recent rises in oil prices.
• Don't expect inflation to move back to around zero like during pre-Covid periods.
• Medium, long-term inflation expectations heightening moderately, likely affecting firms' corporate wage, price-setting behaviour.
• Likelihood of Japan achieving 2% inflation target gradually increasing but not in a stage where we can say so with enough certainty.
• Key is whether wages will keep rising and such practice become embedded in society.
• Next year's spring wage negotiation is particularly important, watching development carefully.

• There is uncertainty on whether wage hikes will continue next year.
• Another key factor is whether firms will set prices based on assumption wages will rising.
• YCC, negative short-term rates will be kept until 2% CPI sustained.
• We need to have more conviction that wages will keep rising, rising wages lead to service prices and economy remains strong, to ponder exit from easy policy.
• If 2024, 2025 inflation forecasts are strong enough, we may be able to judge that sustained achievement of 2% target is in sight even if 2026 forecast is not available.
• Hard to say chance of ending zero interest rates this year is zero.
• We don't necessarily need to wait until real wages actually turn positive in exiting YCC, negative rates.
• If we think there is strong chance real wages will turn positive in the future, that may be sufficient in making decision on whether to continue with YCC, negative rate.
• We need to confirm whether pass-through of import prices dissipate, and whether wage-inflation cycle kicks off as we expect, when asked on what conditions need to be met to end YCC, negative rates.

Japan's largest industrial union UA Zensen will seek a 6% total wage increase, of which 4% will be base pay hikes, at next spring's negotiations, a union official said on Monday. Annual wage negotiations effectively kicked off on Monday and will be concluded on January 23, before Japanese blue-chip companies offer next year's wage hike plan in March.

Saudi Arabia and Russia reaffirmed their commitment to extra voluntary oil supply cuts until the end of the year.

Fed’s Cook (dove – voter) touched on the rise of long-term yields and the risks around real estate:

• Expectations of near-term policy rates do not appear to be driving long end.
• Residential and commercial property prices remain above levels historically associated with fundamentals.
• If commercial mortgage delinquency rates force sales, committal real estate prices 'could decline sharply'.
• Business borrowing is at high levels, but measures of debt servicing capacity remain strong overall due to profits and limited impact of high rates so far.
• In terms of debt, household sector looks quite resilient, though there are emerging signs of stress for those with weak credit.
• Vulnerabilities among non-banks could amplify stress of tightened financial conditions and slowing economy.
• Fed cannot anticipate all risks but can build resilience to shocks; particularly important to enhance resilience of large banks.
• We are determined to reach 2% inflation objective.
• Hope current policy enough to return inflation to 2%.

ECB’s Holzmann (hawk – voter) reaffirmed his commitment to hike rates further if needed as he remains cautious on the inflation outlook:

• I definitely belong to those that think we should be very careful, that we should stand ready to hike again if needed.
• Not really worried about the growth outlook because despite rate hikes, we still have stagflation.
• It could be much, much worse and we are in pretty good shape there.
• Don't expect any reduction in rates soon, eventually it will happen but for the time being I don't see it.
• We need to stay vigilant.

BoE’s Pill (neutral – voter) expressed his concern about keeping restrictive policy for too long:

• UK inflation remains too high.
• UK rate policy does remain restrictive.
• Sees more signs of slowing activity.
• Higher UK rates are hitting the supply side.
• BOE is still working to bring inflation down to 2%.
• We are going to see UK inflation for 2 more comparable levels with the rest of the world in pretty short order.
• We can't make promises about monetary policy outlook.
• We need to retain agility on monetary policy.
• We still do not know economic implications of conflict in Middle East.
• Causing demand constraint can be painful, but it is crucial to we get inflation back to target.
• MPC feels it needs to keep rates restrictive at least for a while.
• It is premature to talk about cutting rates.
• Middle of next year does not seem totally unreasonable for considering rate stands.
• As things change over those 9 months, we might need to reconsider monetary policy stance.
• If we have restrictive policy for too long, we risk creating recession and pushing inflation below target.
• Equilibrium interest rate is still probably positive.
• Interest rates in the future will probably be higher than in the pre-Covid era.

The Fed released the Senior Loan Officer Opinion Survey (SLOOS) for Q3

• Banks reported tighter lending standards and weaker demand for commercial and industrial loans across all firm sizes in the third quarter of 2023.
• Commercial real estate loans also saw tightened standards and reduced demand.
• Residential real estate loans and home equity lines of credit experienced stricter standards, except for government-backed residential mortgages, which remained unchanged.
• Demand for all categories of residential real estate loans weakened, with significant net shares of banks reporting a decline.
• Credit card, auto, and other consumer loans saw tightened lending standards and a weakening demand.
• Special questions revealed banks were less likely to approve credit card and auto loans for borrowers with lower FICO scores compared to the beginning of the year.
• Economic outlook, risk tolerance, credit quality, and funding costs were the primary reasons banks cited for tightening lending standards.

Tuesday

Fed’s Kashkari (hawk – voter) expressed his concern about undertightening:

• Undertightening will not get us back to 2% in a reasonable time.
• Have concerns about inflation ticking up again. That’s what I’m worried about.
• Some prices and wages data indicate that inflation could be settling somewhere north of 2%, and that would be very concerning to me.
• I need more information to come to a firm decision on interest-rate steps moving forward. I am not ready to say we are in a good place.
• Economy has proved to be very resilient, inflation has come down.
• Making progress on inflation, job market is strong.
• Fed has more work to do to get inflation under control.
• American consumers continue to spend.
• Need to finish the job on lowering inflation.
• 'Nervous' over declaring premature victory over inflation.
• US economy is so far ahead of foreign economies.
• Have to let inflation and labour data guide us.

Japanese September wage data beat expectations:

• Average Cash Earning YoY 1.2% vs. 1.0% expected and 1.1% prior.
• Real wages (inflation adjusted) YoY -2.4%.
• Overtime pay YoY 0.7% vs. 0.2%.

The RBA raised the cash rate by 25 bps as expected:

• Board remains resolute in its determination to return inflation to target.
• CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.
• Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.
• Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks.
• Still significant uncertainties around the outlook.
• Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.
• To date, medium-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.
• High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.
• Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.
• Weight of information suggests that the risk of inflation remaining higher for longer has increased.

The Eurozone PPI for September fell further into contraction:

• PPI Y/Y -12.4% vs. -12.5% expected and -11.5% prior.

Fed’s Goolsbee (dove – voter) reaffirmed his “wait and see” stance as he sees progress on inflation:

• If the rise in long term yields is coming from term premia, we have to take that into account.
• You cannot answer what number on long-term yield equals enough tightening.
• We are also getting positive supply-side developments in the economy.
• The economy is weakening.
• Job market is getting into better balance.
• So far, the slowdown is what you would want, toward a more balanced growth and sustainable level.
• Inflation has come down a lot.
• We might equal the fastest drop in inflation in the last century.
• As long as we are making progress on inflation, the topic is then only how long we keep rates at this level.
• Inflation is more important part of the mandate right now.
• I don't like pre-committing what rates will be at the next meeting.
• Still a lot of data to parse before then.
• My conditions for Fed being done with rates are that we are clearly back on path to get inflation back to 2%.
• So far, we are on a good path on inflation, but not done yet.
• Priority for changing rates stances inflation rate.
• Financial conditions clearly matter, but market doesn't get to tell the Fed what to do.
• There is possibility of the "golden path" that allows us to get inflation down without recession.

Fed’s Waller (neutral – voter) clearly sees the labour market cooling down:

• Labor market is cooling and getting close to average from before the pandemic; it's 'clearly calming down'.
• Labor supply also appears to be normalizing back to pre-pandemic levels.
• 'Everything was booming' in Q3 GDP, Fed is watching that closely.
• In central banking terms, move up in 10-year yields was an 'earthquake'.
• Policymakers are mulling what drove long-term yields higher.
• What people have in mind now is for prices to return to earlier levels, and that is not going to happen.

Fed’s Logan (hawk – voter) is watching carefully the long term rates:

• All of us have been surprised by resilience of US economy.
• Inflation remains too high.
• The core question is if financial conditions today are sufficiently restrictive.
• Labor market is still too tight.
• Still looks like trending towards 3% inflation.
• We'll need to see tight financial conditions to bring inflation to 2%.
• My expectation is we'll see growth slow, but we've been wrong before.
• Key question on long-term rates is what was driving it.
• If it was on the back of strong economic growth, FOMC would have to deliver on expectations.
• If rise in long end driving by term premium, it could do some of the Fed's work.
• Will watch to see if retracement of long rates continues.

Fed’s Bowman (hawk – voter) remains willing to hike rates further:

• Fed funds rate currently appears restrictive, financial conditions have tightened since September.
• Some tightening is due to long end, which can be volatile.
• Don't yet know effects of tightened financial conditions on economic activity.
• I remain willing to support raising policy rate at future meeting.
• Inflation remains high.
• Labor market supply and demand may be coming into better balance.

ECB’s Nagel (hawk – voter) remains wary of inflation risks:

• Wage growth and decreasing labour supply will keep up pressure on inflation.
• Imperative to remain vigilant.
• We still face risks that inflation outlook could turn out higher than expected.
• This discussion (on when interest rates can be cut) is not helpful. It is much, much too early.
• Inflation is a greedy beast, a very greedy beast.
• When we have to deal with a beast that is so stubborn, we have to be even more stubborn.

Wednesday

PBoC Governor Pan Gongsheng touched on the central bank monetary policy and its future objectives:

• Shifting economic growth model is more important than pursuing high growth rate.
• China's economy continues to improve, 5% growth target expected to be successfully achieved.
• China's economic growth momentum improves recently, production and consumption recover steadily, employment and consumer prices stable.
• Monetary policy will pay more attention to cross-cyclical and counter-cyclical adjustments in next stage.
• Will always keep prudent monetary policy, support stable growth of real economy.
• Will provide a good monetary and financial environment to stabilize price, promote economic growth and expand employment.
• Will resolutely guard against overshooting risks of yuan exchange rate.
• Will resolutely deal with behaviours that disrupt market order.
• Will prevent the formation of one-sided and self-reinforced market expectations.
• Spillover effect of property market adjustments on the financial system are generally manageable.
• Will guide financial institutions to keep stable financing channels open through property credit, bonds.
• Some provinces are making plans to resolve risks of small and mid-sized banks.
• Supports LGFVs to become market-oriented firms which do not rely on government credit and are financially independent and sustainable.
• The central bank will provide emerging liquidity support to areas with relatively high debt burdens when necessary.
• Will strictly control new govt-invested projects in areas with high debt burdens.
• Will guide financial institutions to resolve debt risks through debt extension and replacement more to come.

ECB’s Kazaks (hawk – non voter) reaffirmed the central bank commitment to bring inflation back to target but expressed uncertainty around the outlook:

• We are committed to our target of 2% and we shall deliver it.
• Our current outlook forecasts that we will achieve it in the second half of 2025.
• We are very clear on our target and of course we are determined, and we shall reach it.
• We cannot exclude the possibility that further rate increases might be necessary.
• But we simply don’t know, so we will do the best we can, we will not hold the rates at very high levels a minute longer than necessary.

ECB’s Lane (dove – voter) welcomed the progress on inflation but added that progress in underlying inflation wasn’t enough.

ECB’s Makhlouf (dove – voter) highlighted the “huge uncertainty” that the central bank must navigate and new risks that could emerge:

• Early signals of the impact of inflation and monetary tightening on borrower resilience are becoming visible among tracker mortgages, personal loans and certain corporate lending segments.
• Having said that there is huge uncertainty as to what lies ahead. A large part of monetary tightening has yet to be passed through to the financial system and to the economy; and while some risks are fading, new risks are emerging.

The Eurozone Retail Sales for September slightly missed expectations:

• Retail Sales M/M -0.3% vs. -0.2% expected and -0.7% prior.
• Retail Sales Y/Y -2.9% vs. -3.1% expected and -2.1% prior (revised from -1.8%).

The BoC release the Minutes of the October Monetary Policy Meeting:

• Members were divided on whether rates would need to be hiked again.
• Some members of governing council felt it more likely than not that overnight rate would need to rise further.
• Other members felt 5% would likely be enough to bring inflation to target.
• There was a strong consensus that with increasing evidence of falling inflation, BoC should be patient.
• Agreed to revisit need for rate hike at future decisions, after seeing more data.
• The lack of downward momentum in underlying inflation caused considerable concern, could mean more time needed or that policy not restrictive enough.
• Agreed overall inflationary risks had increased.
• Persistence in core, elevated expectations, wage growth and atypical corporate pricing behaviour indicate high inflation is becoming entrenched.

Thursday

The BoJ released the Summary of Opinions report of the October Monetary Policy Meeting:

• Sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and thus the Bank needs to patiently continue with monetary easing under yield curve control.
• Will continue with the framework of yield curve control and the negative interest rate policy, at least as long as it is necessary for maintaining the price stability target of 2 percent in a stable manner.
• To confirm that this aim has been achieved, it is necessary to carefully examine future developments in wage hikes and whether the virtuous cycle between wages and prices is operating from both sides.
• Extremely high uncertainties surrounding economies and financial markets at home and abroad, it is appropriate for the Bank to increase the flexibility in the conduct of yield curve control, so that long-term interest rates will be formed smoothly in financial markets in response to future developments.
• There is still a distance to go before achieving the 2 percent target with the virtuous cycle between wages and prices, it is important for the Bank to keep supporting the momentum for wage hikes through continuation of monetary easing.
• In this situation, the Bank should maintain the framework of yield curve control while modifying the conduct of it.

The Chinese inflation data disappointed once again as deflation remains present:

• CPY Y/Y -0.2% vs. 0.1% expected and 0.0% prior.
• CPI M/M -0.1% vs. 0.0% expected and 0.2% prior.
• Core CPI Y/Y 0.6% vs. 0.8% prior.
• PPI Y/Y -2.6% vs. -2.7% expected and -2.5% prior.

Fed’s Harker (neutral – voter) continues to support the “wait and see” approach:

• Says he supported the steady interest rate stance at latest FOMC meeting.
• Fed will stay higher for longer, no sign of near-term rate cuts.
• Now is a time to take stock of past rate hikes’ impact.
• Next Fed rate choice "could go either way" depending on the data.
• Labor market is moving into a better balance.
• Unemployment rate to rise to 4.5% in 2024 before falling.
• Confident consumers will help achieve a soft landing.
• Unclear yet whether consumers have expended spending power.
• No recession seen, but growth is likely to cool off.
• Inflation steadily falling, to hit 3% in 2024, 2% after.

ECB’s de Guindos (dove – voter) continues to support the “higher for longer” stance highlighting the negative growth outlook:

• We are not there yet. We will see how things evolve month by month, but our approach now is to keep interest rates at this level long enough to reach our target.
• Any discussion about lowering interest rates is clearly premature.
• We believe that, if interest rates are maintained at their current levels, inflation will continue to fall and converge towards our target.
• Our most recent projections indicated some downside risks to growth; some of these risks have now started to materialise and this will have an impact on inflation.
• It might be premature to say it, but leading indicators point to the growth outlook being somewhat more negative than we previously projected.
• As regards inflation, the evolution may not be very different from what we projected in September.

Fed’s Goolsbee (dove – voter) highlighted the tightening from higher long term rates and how that could increase the risk of overtightening:

• The historical evidence suggests that long rates, even more than short rates, have a very substantial effect on real economic performance in a number of predictable areas—construction, investment, consumer durables.
• If that is sustained, the Fed will have to think about the tightening impact of those credit conditions on economic performance and would there be dangers of overshooting.

ECB’s Centeno (dove – voter) reaffirmed his “wait and see” stance:

• We are at a plateau in terms of interest rates.
• Monetary policy is working and helping inflation to come down.

Fed’s Barkin (hawk – non voter) is debating whether the Fed has done enough and he’s not equating the increase in long term rates to rate hikes:

• Whether more is needed from the Fed remains to be seen.
• We are making real progress on inflation.
• The job isn't done, inflation remains too high.
• Not yet convinced inflation on a smooth glide path to 2%.
• Will need economic slowing to beat inflation.
• Any downturn will be less severe than past recessions.
• I don't see us as done yet.
• I have a hard time declaring 'sufficiently restrictive' at any point in time.
• Long-term rates have loosened but I don't think of them as a policy variable or equate them to rate hikes.
• A return to elevated inflation will mean we need to look hard if we need to do more.
• Core issue on whether another rate hike is needed is inflation.
• I anticipate more disinflation on goods.

BoC’s Rogers talked about the importance of adjusting to higher rates as she sees a world with persistently higher rates:

• Canadians are feeling some pressure as they adjust to higher rates.
• It's easy to see a world where rates are persistently higher.
• It's important for people and businesses to adjust to a potentially higher-rate environment.
• Adjusting early and bit by bit lowers the risk of abrupt steps later.
• Adjustment to higher rates is well underway globally, there is less wiggle room for the global financial sector in the event of a shock.
• Canadians are adjusting as they feel some pressure and juggle effects of inflation and higher rates.
• Data suggest most Canadian businesses can service existing debt as servicing costs rise and revenue growth slows.
• Bank is watching high levels of fixed-payment mortgage debt, given that 60% of mortgages holders must renew by end-2026.
• Most mortgage holders still expect they can deal with higher payments when they renew.
• BoC is not yet talking about reducing rates.
• Does expect house prices will likely come off a bit more.

Fed’s Paese (non voter) leans on the hawkish side as she pushes back on the market’s rate cuts pricing:

• Too soon to rule out further US rate hikes.
• Central bank still has time to decide next step.
• Watching 10-year yield for signals on financial conditions.
• Too soon to declare victory on inflation.
• Local contacts report better balance in jobs market.
• Not sure public expectations are aligned with likely Fed policy path.

The US Initial Claims slightly beat expectations, but Continuing Claims continue to increase steadily:

• Initial Claims 217K vs. 218K expected and 220K prior (revised from 217K).
• Continuing Claims 1834K vs. 1.820K expected and 1818 prior.

Fed Chair Powell (neutral – voter) remains totally committed to bring inflation down to target as he’s keeping all the options on the table:

• We are not confident that we've achieved sufficiently restrictive policy.
• If it becomes appropriate to tighten policy further, 'we will not hesitate'.
• We will continue to move carefully, decide meeting by meeting.
• Attentive to risk that stronger growth could undermine inflation progress, which could warrant a monetary policy response.
• We expect GDP growth to moderate in coming quarters but remains to be see.
• Labor market tight but coming into better balance.
• The US economy has been stronger than expected this year.
• Economy has been 'remarkable'.
• US economy may be structurally more resilient to higher rates, but I don't see evidence yet.
• It's hard to draw a 'direct line' from things like higher bond yields to a monetary policy response.
• The Fed is "not going to ignore" a significant bond tightening, but do not have to make a decision now.
• There are many candidate explanations for higher bond rates, says there are 5-6 good ones.
• We won't ignore higher yields but don't have to make a decision now.
• The bigger mistake is not getting rates high enough.
• R-star is not a particularly useful way to think about policy.

The New Zealand Manufacturing PMI fell further into contraction:

• Manufacturing PMI 42.5 vs. 45.3 prior.

ECB’s Vujcic (neutral – voter) has a soft landing as the base scenario but keeps all the options on the table:

• If our current projections materialize, then we will have a soft landing with a low sacrifice ratio, meaning without a recession and without a significant increase in unemployment.

• We cannot be certain that it will stay that way until we reach our goal, but in my view the soft landing is still a central scenario.
• However, we have to stand ready either for a possibility of rate increases or rate cuts, depending on incoming data in 2024.

Friday

The UK GDP for Q3 beat expectations although growth was flat:

• GDP Q3 Y/Y 0.6% vs. 0.5% expected and 0.6% prior.
• GDP Q3 Q/Q 0.0 vs. -0.1% expected and 0.2% prior.
• GDP September M/M 0.2% vs. 0.0 expected and 0.1% prior (revised from 0.2%).
• GDP September Y/Y 1.3% vs. 1.0% expected and 0.5% prior (revised from 1.3%).

The University of Michigan Consumer Sentiment survey missed expectations by a big margin with inflation expectations continuing to climb:

• Consumer Sentiment 60.4 vs. 63.7 expected and 63.8 prior.
• Current conditions 65.7 vs. 69.5 expected and 70.6 prior.
• Expectations 56.9 vs. 59.5 expected and 66.0 prior.
• 1-year inflation expectations 4.4% vs. 4.2% prior.
• 5-10 year inflation expectations 3.2% vs. 3.0% prior.

The highlights for next week will be:

• Monday: Japan PPI.
• Tuesday: UK Jobs data, German ZEW, NFIB Small Business Optimism Index, US CPI.
• Wednesday: Japan GDP, Australia Wage data, China Industrial Production and Retail Sales, UK CPI, US PPI, US Retail Sales, PBoC MLF.
• Thursday: Australia Jobs data, US Jobless Claims, US Industrial Production, NAHB Housing Market Index, New Zealand PPI.
• Friday: UK Retail Sales, Canada PPI, US Building Permits and Housing Starts.

That’s all folks. Have a great weekend!