Monday

China’s inflation data over the weekend surprised to the downside as the economy continues to face deflationary pressures:

• CPI Y/Y -0.5% vs. -0.1% and -0.2% prior.
• CPI M/M -0.5% vs. -0.1% expected and -0.1% prior.
• Core CPI Y/Y 0.6% vs. 0.6% prior.
• Core CPI M/M -0.3% vs. 0.0% prior.
• PPI Y/Y -3.0% vs. -2.8% expected and -2.6% prior.

The November New York Fed survey for inflation expectations showed the 1 year ahead expectations falling but the 3 and 5 years ahead remaining unchanged:

• One year seen at 3.4% vs. 3.6% prior.
• Three year ahead unchanged at 3%.
• Five year ahead unchanged at 2.7%.
• Respondents see moderating wage growth.
• Rent seen at 8% vs. 9.1% prior.

Tuesday

The Japanese PPI for November beat expectations:

• PPI Y/Y 0.3% vs. 0.1% expected and 0.8% prior.
• PPI M/M 0.2% vs. 0.2% expected and -0.4% prior.

The UK Labour Market report showed a steady unemployment rate with lower-than-expected wage growth and job losses in November:

• November Payrolls Change -12K vs. 39K prior (revised from 33K).
• October ILO unemployment rate 4.2% vs. 4.2% expected and 4.2% prior.
• October employment change 50K vs. 54K prior.
• Average weekly earnings 7.2% vs. 7.7% expected and 8.0% prior (revised from 7.9%).
• Average weekly earnings ex-bonus 7.3% vs. 7.4% expected and 7.8% prior (revised from 7.7%).

The US NFIB Small Business Optimism Index fell further in November:

• NFIB 90.6 vs. 90.7 prior.

This is the 23rd straight month that the index is below its 50-year average of 98. It reinforces the notion that small business sentiment is still rather languishing but not really pointing to any major recession-like signals at least. One thing to note is that NFIB says the net percentage of firms increasing employment has been negative since March, with more firms decreasing jobs than adding them.

The US CPI for November came in line with expectations:

• CPI Y/Y 3.1% vs. 3.1% expected and 3.2% prior.
• CPI M/M 0.1% vs. 0.0% expected and 0.0% prior.
• Core CPI Y/Y 4.0% vs. 4.0% expected and 4.0% prior.
• Core CPI M/M 0.3% vs. 0.3% expected and 0.2% prior.
• Shelter 0.4% vs. 0.3% prior.
• Services less rent of shelter M/M 0.6% vs. 0.3% prior.
• Core services ex-housing M/M 0.44%.
• Real weekly earnings 0.5% vs. -0.1% prior.

Wednesday

The UK October monthly GDP contracted more than expected:

• October GDP -0.3% vs. 0.0% expected and 0.2% prior.
• GDP Y/Y 0.3% vs. 0.6% expected and 1.3% prior.
• Services output M/M -0.2% vs. 0.0% expected and 0.2% prior.
• Industrial output M/M -0.8% vs. -0.1% expected and 0.0% prior.
• Manufacturing output M/M -1.1% vs. 0.0% expected and 0.1% prior.
• Construction output M/M -0.5% vs. -0.2% expected and 0.4% prior.

The Eurozone Industrial Production for October missed expectations by a big margin:

• Industrial Production Y/Y -6.6% vs. -4.6% expected and -6.8% prior (revised from -6.9%).
• Industrial Production M/M -0.7% vs. -0.3% expected and -1.0% prior (revised from -1.1%).

The US PPI for November missed expectations across the board:

• PPI Y/Y 0.9% vs. 1.0% expected and 1.2% prior (revised from 1.3%).
• PPI M/M 0.0% vs. 0.1% expected and -0.4% prior (revised from -0.5%).
• Core PPI Y/Y 2.0% vs. 2.2% expected and 2.3% prior (revised from 2.4%).
• Core PPI M/M 0.0% vs. 0.2% expected and 0.0% prior.

The Federal Reserve kept interest rates unchanged at 5.25-5.50% with a couple of dovish tweaks to the statement:

• “Recent indicators suggest that growth of economic activity expanded at strong pace in the third quarter” was changed into “has slowed from its strong pace in the third quarter”.
• “In determining the extend of additional policy firming that may be appropriate” was changed into “the extent of any additional policy firming that may be appropriate".

The Fed has also released its Summary of Economic Projections (SEP) where it revised growth and inflation down in 2024 but kept the unemployment rate unchanged (soft landing). The Dot Plot was revised to show the peak rate in 2024 at 4.6% which translates into 3 rate cuts vs. 2 that were expected.

Moving on to the Press Conference, Fed Chair Powell did not push back against rate cuts expectations, on the contrary, he said that they started to discuss rate cuts and that they are focused on not making that mistake of holding high rates for too long, which suggests that a rate cut might come soon:

• Path forward is uncertain. Full effects of tightening to come.
• Growth in economic activity has slowed substantially.
• Given how far we've come, and given uncertainties, we are proceeding carefully.
• Inflation has eased with a significant rise in unemployment.
• Labor demand still exceeds supply, but gap has narrowed.
• Wage growth appears to be easing.
• Activity in housing sector has flattened out.
• Higher interest rates also weighing on business fixed investment.
• Lower inflation readings are welcome, but we will need to see further evidence.
• We anticipate that the process of getting inflation all the way to 2% will take time.
• We're highly attentive to the risks that high inflation poses to both sides of our mandate.
• We believe that we're at or near peak rates in this cycle.
• We are prepared to tighten further if appropriate.
• Will keep policy restrictive until confident on path to 2% inflation.
• Officials don't want to keep possibility of hikes off the table.

Q&A:

• Noted that officials talked about path for cuts today and there was a general acknowledgement that more of that talk will be coming.
• Far too early to declare a soft landing.
• I have always felt there was a possibility economy would avoid recession.
• There's always a possibility of recession next year.
• Little basis for thinking there's a recession now.
• There was a general expectation that rate cuts will be a topic of conversation going forward.
• We are pleased with progress but need to see further progress on inflation.
• Fair to say that there is a lot of uncertainty.
• There is a back-and-forth with market pricing.
• In the long run, it's important that market conditions become aligned with policy.
• People will have different forecasts on economy.
• We're still well above 3% on core PCE.
• We're very focused on "not making that mistake" of holding high rates too long.

The New Zealand GPD for Q3 missed expectations by a big margin with negative revisions to the prior figures:

• Q3 GDP Q/Q -0.3% vs. 0.2% expected and 0.5% prior (revised from 0.9%).
• Q3 GDP Y/Y -0.6% vs. 0.5% expected and 1.5% prior (revised from 1.8%).

Thursday

The Australian Labour Market report for November beat expectations with the unemployment rate rising more than expected although the participation rate ticked much higher:

• Employment change 61.5K vs. 11.0K expected and 42.7K prior (revised from 55.0K).
• Unemployment rate 3.9% vs. 3.8% expected and 3.8% prior (revised from 3.7%).
• Participation rate 67.2% vs. 66.9% expected and 67.0% prior.
• Full-time employment 57.0K vs. 10.7K prior (revised from 17.0K).
• Part-time employment 4.5K vs. 32.0K prior (revised from 37.9K).

The SNB left interest rates unchanged at 1.75% as expected but removed the line that said “it cannot be ruled out that further tightening may become necessary":

• Will adjust monetary policy if necessary to ensure inflation remains in range consistent with price stability over the medium-term.
• Willing to be active in FX market as necessary.
• 2023 inflation seen at 2.1% (prior 2.2%).
• 2024 inflation seen at 1.9% (prior 2.2%).
• 2025 inflation seen at 1.6% (prior 1.9%).

Moving on to the Press Conference, Chairman Jordan clearly stated that the central bank is done with the tightening cycle and added that they will look at inflation very closely when making next decision, so if inflation continues to drop, we can expect a rate cut:

• We are no longer focusing on forex sales.
• Inflation pressures have decreased slightly but uncertainty remains high.
• Swiss inflation likely to rise in the coming months.
• Assessment for upside and downside risks for inflation are currently balanced.
• Will adjust monetary policy if necessary to keep within price stability goal.
• We believe monetary conditions are appropriate at the moment.
• We do not forecast any tightening given the forecasts so far.
• Will adapt policy to contain inflation within price stability target.
• Will look at inflation very closely when making next decision.

The BoE left interest rates unchanged at 5.25% as expected, but did not add any dovish language as they reaffirmed that they would keep policy restrictive for sufficiently long and further tightening will be required if there were evidence of more persistent inflationary pressures:

• Bank rate vote 6-3 vs. 6-3 expected (Greene, Haskel, Mann voted to raise by 25 bps).
• The decision to hike or to hold was again "finely balanced".
• Still some way to go on inflation.
• To take necessary decisions to get inflation all the way back to 2%.
• Policy will need to be sufficiently restrictive for sufficiently long.
• Most policymakers say it is too early to conclude that services inflation or pay growth are on a firmly downward path.
• Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.
• Sees inflation just under 4.5% by year-end (previously 4.75%).

Moving on to the Press Conference, Governor Bailey pushed back against the market’s rate cuts pricing but what central bankers are saying is falling on deaf ears now:

• We cannot say that interest rates have peaked.
• Markets form their own view.
• We are more cautious than markets.
• It's really too early to start speculating about rate cuts.
• There is more to do on bringing inflation down to target.
• But there are encouraging signs on inflation.

The ECB left the deposit rate unchanged at 4.0% as expected with no dovish tweak as they maintain the usual data-dependent language:

• Main refinancing rate 4.50% vs. 4.50% prior.
• Deposit facility rate 4.00% vs. 4.00% prior.
• Marginal lending facility 4.75% vs. 4.75% prior.
• Inflation has dropped in recent months but likely to pick up against temporarily in the near-term.
• Past rate hikes are continuing to be transmitted forcefully to the economy.
• Tighter financing conditions are dampening demand, and this is helping to push down inflation.
• Expects economic growth to remain subdued in the near-term.
• Future decisions will ensure that rates will be set at sufficiently restrictive levels for as long as necessary.
• To continue a data-dependent approach in determining the appropriate level and duration of restriction.
• Rate decisions will be based on assessment of the inflation outlook in light of incoming economic, financial data.
• ECB intends to discontinue reinvestments under the PEPP at the end of 2024.
• 2023 inflation seen at 5.4% (previously 5.6%).
• 2024 inflation seen at 2.7% (previously 3.2%).
• 2025 inflation seen at 2.1% (previously 2.1%).
• 2026 inflation seen at 1.9%.

Moving on to the Press Conference, President Lagarde highlighted the uncertainty around inflation and the risks to economic growth. Moreover, she pushed back against rate cuts expectations as she said that they did not discuss rate cuts at all and stressed that their projections are conditions on data from November, so they may have a different view now:

• Inflation decline was broad based.
• Inflation to increase in December due to base effects but will decline slowly afterwards.
• All measures of underlying inflation declined in October.
• Underlying measures of inflation rose due to wage growth and falling productivity.
• Most measures of longer-term inflation expectations currently stand at around.
• The risks to economic growth remain tilted to the downside.
• The prospects are weak for construction and manufacturing.
• Services to soften.
• We are determined to make sure inflation returns to our 2% inflation target in the medium term.

Q&A:

• We need to see more data on wages.
• When we look at wage data right now, it's not declining.
• We will have a lot more data in 2024 and we need that to determine if declining inflation is sustainable.
• We have to keep our guard up.
• Decision on PEPP was shared by a "very, very large majority". Some would have liked a different taper, earlier or later.
• We did not discuss rate cuts at all.
• We are at the medium-term target that we set for ourselves of reaching the 2% at the end of our projection. We are probably a bit severe with ourselves. We are going to look very carefully at the end of 2025, where we're at 2.1% right now. The projections we have now are conditions on data from Nov 23.
• We will be looking at our three criteria in the months ahead.
• There are signs of reduced profit margins suggesting that companies are finally absorbing the input and wage increases which would be good news going into 2024.

The US Retail Sales for November beat expectations across the board:

• Retail sales M/M 0.3% vs. -0.1% expected and -0.2% prior (revised from -0.1%).
• Retail sales Y/Y 4.1% vs. 2.2% prior (revised from 2.5%).
• Ex-autos 0.2% vs. -0.1% expected and 0.1% prior.
• Control group 0.4% vs. 0.2% expected and 0.2% prior.
• Retail sales ex gas and autos 0.6% vs. 0.1% prior.

The US Jobless Claims beat expectations across the board:

• Initial Claims 202K vs. 220K expected and 221K prior (revised from 220K).
• Continuing Claims 1876K vs. 1887K expected and 1856K prior (revised from 1861K).

Friday

The New Zealand Manufacturing PMI for November jumped higher although it remains in contraction:

• Manufacturing PMI 46.7 vs. 42.5 prior.

The Australian PMIs improved in December although they remain in contraction:

• Manufacturing PMI 47.8 vs. 47.7 prior.
• Services PMI 47.6 vs. 46.0 prior.

The Japanese PMIs for December saw once again Manufacturing falling and Services rising:

• Manufacturing PMI 47.7 vs. 48.3 prior.
• Services PMI 52.0 vs. 50.8 prior.

The PBoC kept the MLF rate unchanged at 2.5% as expected.

The Chinese Industrial Production for November beat expectations:

• Industrial Production Y/Y 6.6% vs. 5.6% expected and 4.6% prior.

The Chinese Retail Sales for November missed expectations:

• Retail Sales Y/Y 10.1% vs. 12.5% expected and 7.6% prior.

ECB’s Muller (hawk – voter) pushed back against rate cuts expectations:

• Too early to talk about rate cuts in the near-term.
• Too early to celebrate victory over inflation.
• Still a little bit to go to reach 2% inflation target.

ECB’s Villeroy (neutral – voter) acknowledged that the economy is slowing faster than expected and added that the next move will be rate cuts as the ECB has ended its tightening cycle:

• Nobody suggested rate cuts at latest meeting.
• We will bring inflation back down to 2% target by 2025.
• Important signal yesterday was the changed inflation outlook.
• Monetary policy transmission is slightly faster than initially expected.
• We are on a plateau, "have to take the time to enjoy the view".
• Will be guided by data when determining next policy steps.
• Next policy move should be lowering rates barring any surprises.
• Europe will be spared from a recession, the same applies to France.

The Eurozone PMIs for December missed expectations across the board:

• Manufacturing PMI 44.2 vs. 44.6 expected and 44.2 prior.
• Services PMI 48.1 vs. 49.0 expected and 48.7 prior.

The UK PMIs for December missed expectations on the Manufacturing side but beat on the Services one:

• Manufacturing PMI 46.4 vs. 47.5 expected and 47.2 prior.
• Services PMI 52.7 vs. 51.0 expected and 50.9 prior.

ECB’s Holzmann (hawk – non voter) pushed back against rate cuts expectations:

• There was no discussion of a change to rates at latest meeting.
• Majority said there are risks to the upside on inflation.
• For most of us, core inflation is what we are looking at.
• Wouldn't say we are at terminal rate, but the chance has increased.

Fed’s Williams (neutral – voter) pushed back a little on the aggressive market’s pricing as he said that it’s premature to be even thinking about March cuts. He maintained a generally neutral stance but the damage has been already done and the market will need facts to change its pricing and not just words:

• The question is: Have we gotten monetary policy to a sufficiently restrictive stance, that's what we're thinking about.
• We're focused on whether interest rates are in the right place.
• We aren't really talking about rate cuts right now.
• The base case is good, inflation is down.
• It's looking like we're at or near 'sufficiently restrictive' but things can change.
• We need to be ready to tighten further if progress on inflation were to stall.
• The market reaction to all kinds of news has had a pattern of being larger than normal.
• The view of the committee is a gradual removal of policy easing over the next three years.
• The market reaction has gone further than our predictions.
• If we get the progress I'm hoping to see, it will be natural to cut.
• Of course, we need to move policy back to more-normal levels over a period of time.
• It's premature to be even thinking about March cuts.
• The question we're thinking about is 'do we have the level of rates right'.
• Right now, we're seeing everything around QT and balance sheet working as intended.
• Not ready to say when balance sheet wind down stops.
• Financial conditions have tightened in the big picture (despite drop in 10y yields).

The US Industrial Production for November missed expectations across the board:

• Industrial Production M/M 0.2% vs. 0.3% expected and -0.9% prior (revised from -0.6%).
• Manufacturing output M/M 0.3% vs. 0.4% expected and -0.8% prior (revised from -0.7%).
• Capacity utilization 78.8% vs. 79.1% prior.

The US PMIs for December missed expectations on the Manufacturing side and beat on the Services one:

• Manufacturing PMI 48.2 vs. 49.3 expected and 48.9 prior.
• Services PMI 51.3 vs. 50.6 expected and 49.4 prior.
• Cost pressures gained momentum as input prices increased at the quickest pace since September.
• Although firms continued to pass through higher costs to customers, and at a strong rate, the overall pace of prices charged inflation softened from November.
• Employment improves, highest since September.

The highlights for next week will be:

• Monday: US NAHB Housing Market Index.
• Tuesday: RBA Meeting Minutes, BoJ Policy Decision, Canada CPI, US Building Permits and Housing Starts.
• Wednesday: PBoC LPR, UK CPI, US Consumer Confidence, BoC Summary of Deliberations.
• Thursday: Canada Retail Sales, US Q3 GDP Final, US Jobless Claims.
• Friday: Japan CPI, UK Retail Sales, Canada GDP, US PCE, University of Michigan Consumer Sentiment Final.

That’s all folks. Have a nice weekend!