Monday

Taiwan's Presidential election was held over the weekend. William Lai, of the pro-sovereignty Democratic Progressive Party (DPP) has been elected President. The party has governed Taiwan for the past eight years. This will be its third consecutive presidential term.

• Lai won 40% of the vote.
• Ahead of the main opposition Kuomintang (KMT) party's Hou Yu-ih (the KMT is friendlier with the mainland CCP) on 33%.
• The third candidate Ko Wen-je, from the Taiwan People's Party, scored just over a quarter of the vote.

Voters also chose legislature candidates, Seats won:

• Kuomintang (KMT) won 52.
• Democratic Progressive Party (DPP) won 51 seats, a net loss of 11 seats, dropping from 62.
• Taiwan People's Party (TPP) won 8.
• two independent legislators won seats, both of whom are ideologically most aligned with the KMT.

Thus:

• The DPP has lost its majority.
• The opposition KMT gained ground.
• No party has enough seats to control Parliament, this would require 57 seats.
• Taiwan political pundits expect the most likely parliamentary outcome is for the KMT and TPP to hammer out a deal to govern.

The PBoC left the MLF rate unchanged at 2.50% vs. 2.40% expected:

• MLF 2.50%.
• Injected cash via MLF for the 14th month in a row.
• Added net CNY 216bn.

The Eurozone November Industrial Production came in line with expectations:

• Industrial Production M/M -0.3% vs. -0.3% expected and -0.7% prior.
• Industrial Production Y/Y -6.8% vs. 6.6% prior.
• Durable consumer goods -2.0%.
• Capital goods -0.8%.
• Intermediate goods -0.6%.
• Energy 0.9%.
• Non-durable consumer goods 1.2%.

ECB’s Holzmann (hawk – non voter in January) pushed back aggressively on rate cuts expectations:

• Should not count on rate cuts at all this year.
• Rate cut expectations are optimistic.
• Geopolitical developments pose a risk to prices outlook.
• Does not see a real recession coming to the Eurozone.

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

• It is too early to talk about rate cuts.
• Markets are sometimes overly optimistic.
• We are data dependent.
• Inflation is still too high.
• Maybe can wait until summer break before contemplating rate cuts.

The BoC Business Outlook Survey showed even more contraction in Q4 2023:

• Sentiment fell every month in Q4, from 22% at the start of the quarter to 9% at the end.
• 38% of firms expect a recession in the year ahead vs. 33% in Q3.
• 54% of firms expect inflation to remain above 3% for the next two years vs. 53% in Q3.
• 75% of firms think wage growth will be back to normal by 2025.
• Consumer survey inflation expectations for 5 years to 2.62% from 2.75%.
• Future sales 20% vs. 14%.
• Indicators of future sales vs. a year ago -10% vs. 0% prior.
• Firms see slight improvement in labour availability.

Tuesday

The Japanese December PPI beat expectations:

• PPI M/M 0.3% vs. 0.0% expected and 0.2% prior.
• PPI Y/Y 0.0% vs. -0.3% expected and 0.3% prior.

The UK December Labour Market report showed job losses and lower wage growth:

• December Payrolls change -24K vs. 9K prior (revised from -13K).
• November ILO unemployment rate 4.2% vs. 4.2% expected and 4.2% prior.
• November employment change 73k vs. 50k expected and 50K prior.
• Average weekly earnings 6.5% vs. 6.8% expected and 7.2% prior.
• Average weekly earnings (ex bonus) 6.6% vs. 6.6% expected and 7.2% prior (revised from 7.3%).

The German January ZEW index improved further:

• ZEW 15.2 vs. 12.0 expected and 12.8 prior.
• Current conditions -77.3 vs. -77.0 expected and 77.1 prior.
• Expectations 15.2 vs. 12.8 prior.

ECB’s Villeroy (neutral – voter) pushed back against the aggressive rate cuts expectations:

• Too early to declare victory over inflation.
• Next move will be a rate cut some time this year.

ECB’s Centeno (dove – non voter in January) he sounded a bit more neutral compared to his previous dovish comments:

• Need to be prepared for all topics, including rate cuts.
• Recent data have confirmed December projections.
• But inflation was slightly below forecast.
• We should avoid undershooting on inflation.
• Q1 GDP is still looking stagnant.
• Do not see reasons for concern about wages.
• Inflation trajectory is good.

ECB’s Valimaki (hawk – voter) pushed back against the aggressive rate cuts expectations:

• Must not jump the gun on rate cuts.
• Better to wait a bit longer than cut rates prematurely.
• Inflation is on the right track, but the job is not done.
• Restrictive monetary policy is still called for.
• Soft landing for the economy is still the baseline but risks are tilted to the downside.

The US January Empire State Manufacturing Index missed expectations by a big margin with the lowest reading on record (excluding covid):

• Empire State Manufacturing Index –43.7 vs. -5.0 expected and -14.5 prior.
• New orders -49.4 vs. -11.3 last month.
• Shipments -31.3 vs. -6.4 last month.
• Prices paid 13.2 vs. 16.7 last month.
• Prices Received 9.5 vs. 11.5 last month.
• Employment -6.9 vs. -8.4 last month.
• Average Employee workweek -6.1 vs. -2.4 last month.
• Unfilled orders -24.2 vs. -24.0 last month.
• Delivery times -8.4 vs. -15.6 last month.
• Inventories -7.4 vs. -5.2 last month.

The 6-month forward index:

• General business condition 18.8 vs. 12.1 last month.
• new orders 25.2 vs. 11.3 last month.
• shipments 24.6 vs. 15.8 last month.
• prices paid 40.0 vs. 25.0 last month.
• prices received 32.6 vs. 27.1 last month.
• employment 16.8 vs. 10.9 last month.
• average employee workweek 14.7 vs. 10.4 last month.
• unfilled orders 16.8 vs. 5.2 last month.
• delivery times 11.6 vs. -1.1 last month.
• inventories 5.3 vs. 9.4 last month.
• capital expenditures 13.7 vs. 4.2 last month
• technology spending 9.5 vs. 10.3 last month

The Canadian December CPI report came in line with expectations although the underlying inflation measures ticked higher:

• CPI Y/Y 3.4% vs. 3.4% expected and 3.1% prior.
• CPI M/M -0.3% vs. -0.3% expected and 0.1% prior.
• Core CPI Y/Y 2.6% vs. 2.8% prior.
• Core CPI M/M -0.5% vs. 0.1% prior.
• Trimmed Mean CPI Y/Y 3.7% vs. 3.5% expected and 3.5% prior.
• Median CPI Y/Y 3.6% vs. 3.4% expected and 3.6% prior (revised from 3.4%).
• Common CPI Y/Y 3.9% vs. 3.9% prior.

Fed’s Waller (neutral – voter) pushed back against the aggressive rate cuts expectations although he did it in a balanced way keeping some optionality on the table:

• Data in the last few months allowing Fed to consider cutting rates this year.
• Changes in policy path must be 'carefully calibrated' and 'not rushed'.
• I am more confident that we are within striking distance of achieving sustainable 2% inflation.
• We are close but I will need more info in coming months to be sure.
• I view risks to Fed's mandates as more closely balanced.
• Fed will be able to cut rates this year as long as inflation doesn't rebound or stay high.
• This view is consistent with Fed projections for three 25 bps cuts in 2024.
• Timing and actual number of cuts will depend on data.
• Economic activity has moderated.
• Setting of policy needs to proceed with more caution to avoid over-tightening.
• Financial conditions remain restrictive.
• Highlights signs that the labour market continues to come into better balance.
• Data on job openings indicates ongoing moderation in labour demand.
• It will be up to committee on timing of when to start cuts.
• The economy is doing and giving us the flexibility to move carefully and methodically.
• We have to see firm evidence of improvement on rates.
• If we think we have to move faster on rates, we can but key is that we have flexibility.
• We're in an unusual place where we can move rates down without a shock to the economy.
• There are things we want to be careful about.
• Whether we miss the timing on rate cuts by six weeks, it hard to believe that's going to have a big effect on the economy.
• Once supply adjustment is complete [from the pandemic], it will be clearer whether demand is falling enough to finish the inflation fight, it's an issue to watch.
• Approx endpoint for reserves is likely around 10-11% of GDP ... overnight repo doesn't need to have anything in it.
• 4% wage growth is a 'little high' but not much.

ECB’s Simkus (hawk- voter) pushed back against the aggressive rate cuts expectations:

• I am far less optimistic than markets on rate cuts.
• Cuts may begin around the summer.
• Wage data is going to be very important.

ECB’s Muller (hawk- voter) pushed back against the aggressive rate cuts expectations:

• Market expectations for 2024 ECB rate cuts are aggressive.
• Wage growth is not in line with the inflation target.

Wednesday

The Chinese Q4 GDP missed expectations slightly although still above the 5% CCP target:

• Q4 GDP Y/Y 5.2% vs. 5.3% expected and 4.9% prior.
• GDP Q/Q 1.0% vs. 1.0% expected and 1.5% prior.

The Chinese December Industrial Production beat expectations:

• Industrial Production Y/Y 6.8% vs. 6.6% expected and 6.6% prior.

The Chinese December Retail Sales missed expectations:

• Retail Sales Y/Y 7.4% vs. 8.0% expected and 10.1% prior.

The UK December CPI report beat expectations across the board:

• CPI Y/Y 4.0% vs. 3.8% expected and 3.9% prior.
• CPI M/M 0.4% vs. 0.2% expected and -0.2% prior.
• Core CPI Y/Y 5.1% vs. 4.9% expected and 5.1% prior.
• Core CPI M/M 0.6% vs. 0.4% expected and -0.3% prior.

ECB’s Lagarde (neutral – voter) pushed back against the aggressive rate cuts pricing:

• Confident inflation will reach 2% target.
• Inflation is not where the ECB wants it.
• But on the right path towards 2% target, though no victory yet.
• Too optimistic markets not helpful in fight against inflation.

ECB’s Knot (hawk – non voter in January) pushed back against the aggressive rate cuts expectations:

• Markets are getting ahead of themselves on rate cuts.
• A lot must go well for inflation to hit 2% in 2025.
• We need to see a turnaround in wages.
• Policy easing, if and when it happens, will be very gradual.
• Rate path priced by markets can be self-defeating.
• The more easing markets are doing, the less likely we'll cut.

ECB’s Panetta (dove – voter) kept a neutral stance with a focus on incoming data to confirm the disinflationary trend:

• Disinflation is happening, is strong and will continue.
• Monetary conditions should adjust but awaiting data first to confirm disinflation outlook.
• Awaiting data to confirm disinflation outlook.

The US December Retail Sales beat expectations across the board:

• Retail Sales Y/Y 5.6% vs. 4.0% prior.
• Retail Sales M/M 0.6% vs. 0.4% expected and 0.3% prior.
• Ex-autos M/M 0.4% vs. 0.2% expected and 0.2% prior.
• Control group M/M 0.8% vs. 0.2% expected and 0.5% prior (revised from 0.4%).
• Retail sales ex gas and autos M/M 0.6 vs. 0.6% prior.

The US December Industrial Production beat expectations:

• Industrial Production Y/Y 1.0% vs. -0.6% prior (revised from -0.4%).
• Industrial Production M/M 0.1% vs. 0.0% expected and 0.0% prior (revised from 0.2%).
• Capacity utilization 78.6% vs. 78.7% expected and 78.6% prior (revised from 78.8%).

The US December NAHB Housing Market Index beat expectations:

• NAHB 44 vs. 39 expected and 37 prior.
• Single family 48 vs. 41 prior.
• Next six months 57 vs. 45 prior.
• Traffic of prospective buyers 29 vs. 24 prior.

The Federal Reserve released the Beige Book for Q4 with most districts reporting little or no change in economic activity:

• Of the four Districts that differed, three reported modest growth and one reported a moderate decline.
• Consumers delivered some seasonal relief over the holidays by meeting expectations in most Districts and by exceeding expectations in three Districts.
• Contacts from nearly all Districts reported decreases in manufacturing activity.
• Districts continued to note that high interest rates were limiting auto sales and real estate deals; however, the prospect of falling interest rates was cited by numerous contacts in various sectors as a source of optimism.
• concerns about the office market, weakening overall demand, and the 2024 political cycle were often cited as sources of economic uncertainty.
• Seven Districts described little or no net change in overall employment levels, while the pace of job growth was described as modest to moderate in four Districts.
• Six Districts noted that their contacts had reported slight or modest price increases, and two noted moderate increases. Five Districts also noted that overall price increases had subsided to some degree from the prior period, while three others indicated no significant shift in price pressures.
• Firms in most Districts cited examples of steady or falling input prices, especially in the manufacturing and construction sectors, and more discounting by auto dealers.
• Premium increases for property and casualty insurance and for health insurance continue to impact most firms.

Thursday

The Australian December Labour Market report missed expectations by a big margin:

• Employment Change -65.1K vs. 17.6K expected and 72.6K prior (revised from 61.5K).
• Unemployment Rate 3.9% vs. 3.9% expected and 3.9% prior.
• Participation Rate 66.8% vs. 67.1% expected and 67.3% prior (revised from 67.2%).
• Full-time employment -106.6K vs. 57K prior.
• Part-time employment 41.4K vs. 15.7K prior (revised from 4.5K).

The US Jobless Claims beat expectations by a big margin (this report corresponds with the NFP survey week):

• Initial Claims 187K vs. 207K expected and 203K prior (revised from 202K).
• Continuing Claims 1806K vs. 1845K expected and 1832K prior (revised from 1834K).

The US December Housing Starts and Building Permits beat expectations:

• Housing starts 1.460M vs. 1.426M expected and 1.525M prior (revised from 1.560M).
• Housing starts M/M -4.3% vs. 10.8% prior (revised from 14.8%).
• Building permits 1.495M vs. 1.480M expected and 1.467M prior.
• Building permits M/M 1.9% vs. -2.1% prior.

The New Zealand December Manufacturing PMI fell further into contraction:

• Manufacturing PMI 43.1 vs. 46.7 prior.

Friday

The Japanese December CPI eased further across all measures:

• CPI Y/Y 2.6% vs. 2.8% prior.
• Core CPI Y/Y 2.3% vs. 2.3% expected and 2.5% prior.
• Core-Core CPI Y/Y 3.7% vs. 3.8% prior.

The UK December Retail Sales missed expectations by a big margin:

• Retail sales M/M -3.2% vs. -0.5% expected and 1.4% prior (revised from 1.3%).
• Retail sales Y/Y -2.4% vs. 1.1% expected and 0.2% prior (revised from 0.1%).
• Retail sales (ex autos, fuel) M/M -3.3% vs. -0.6% expected and 1.5% prior (revised from 1.3%).
• Retail sales (ex autos, fuel) Y/Y -2.1% vs. 1.3% expected and 0.5% prior (revised from 0.3%).

The Canadian November Retail Sales missed expectations:

• Retail Sales M/M -0.2% vs. 0.0% expected and 0.5% prior (revised from 0.7%).
• Retail Sales Y/Y 1.8% vs. 1.9% prior (revised from 2.2%).
• Ex auto M/M -0.5% vs. -0.1% expected and 0.4% prior (revised from 0.6%).
• Ex auto and gas M/M -0.6% vs. -1.2% prior.
• December advance estimate 0.8%.

Fed’s Goolsbee (dove – non voter) reiterated that rate cuts can come just from inflation progress but if that progress were to reverse, then a rate hike would be warranted:

• If we make good progress on inflation, we need to factor that into rates.
• Goods price inflation is back to normal and surprising progress on services inflation too.
• Says they need to see more progress on housing inflation.
• When the unemployment rate goes up, it tends to go up rapidly; we haven't had that.
• We're coming into 2024 in a much better place than we came into 2023.
• The market should be focusing on economic data.
• "We are definitely not off the Golden Path".
• The Fed is not facing an imminent threat from the labour market.
• If inflation progress reverses, it could merit a rate hike.

The January University of Michigan Consumer Sentiment survey beat expectations across the board:

• Consumer sentiment 78.8 vs. 70.0 expected and 69.7 prior.
• Current conditions 83.3 vs. 73.3 prior.
• Expectations 75.9 vs. 66.4 prior.
• One-year inflation 2.9% vs. 3.1% prior.
• Five-year inflation 2.8% vs. 2.9% prior.

The highlights for next week will be:

• Monday: PBoC LPR, New Zealand Services PMI.
• Tuesday: BoJ Policy Decision, New Zealand CPI, Australia Flash PMIs.
• Wednesday: Japan/Eurozone/UK/US Flash PMIs, BoC Policy Decision.
• Thursday: ECB Policy Decision, US Durable Goods Orders, US Jobless Claims, US Q4 Advance GDP.
• Friday: Tokyo CPI, US PCE.

That’s all folks. Have a nice weekend!