Weekly Outlook: Jan 10 — Jan 14: Powell’s Testimony, US Inflation and UK GDP
There are no central bank decisions on this week’s agenda, but we do have a few data and events that could shape expectations around monetary policy. On Tuesday, Fed Chair Jerome Powell testifies on his nomination for a second term, while a couple of days later, it will be the turn of Lael Brainard, who was appointed as the Vice Chair. On Wednesday, we have the US CPIs for December, while on Friday, we do get the UK monthly GDP for November.
Monday appears to be a relatively light day, with no major indicators or events on the agenda.
Tuesday seems to be more interesting as Fed Chair Jerome Powell is due to testify before the Senate Banking Committee at a hearing to confirm his nomination to a second term. Fed Governor Lael Brainard is also scheduled to appear before the same committee two days later for a confirmation on her nomination as Vice Chair.
On Friday, the US employment report revealed that nonfarm payrolls slowed to 199k in December from 249k in November, missing estimates of an acceleration to 400k. This resulted in a retreat in the US dollar, but it did not change expectations around the Fed’s future course of action. After all, the unemployment rate tumbled to a 22-month low of 3.9%, while wages accelerated unexpectedly in monthly terms.
According to the Fed funds futures, market participants are still fully pricing in the first quarter-point rate increase to be delivered in May, with a decent chance of this happening one or even a couple of months earlier. Many believe that this will happen in March. Therefore, it will be interesting to hear what those two officials have to say, especially with the minutes of the latest gathering revealing that officials said that the “very tight” labor market may warrant sooner rate increases. Brainard, who has been considered a dove before her nomination, appeared more hawkish than expected when she was appointed, declaring commitment to getting inflation down. In our view, the risks are for both officials to support a faster than previously assumed rate path. After all, Wednesday’s CPI data are expected to reveal that inflation has continued to accelerate in December, with the headline rate hitting 7.0% for the first time since 1982, and the core one rising to 5.4%. Anything suggesting a more cautious approach could come as a surprise and perhaps bring the US dollar under strong selling interest.
We will also get to hear from several other Fed officials during the week, including Esther George, James Bullard, Loretta Mester, Charles Evans, Thomas Barkin, and John Williams. It will be interesting to hear what they have to say as well, in order to have a clearer picture on the consensus within the Committee.
On Wednesday, as we already noted, we have the US CPIs for December, with both the headline and core rates expected to have risen further. We get more inflation data though, earlier in the day, during the Asian session, and this is from China. Both the CPI and PPI rates are expected to have slowed to +1.8% yoy and +11.1% yoy, from +2.3% and +12.9% respectively. With China being the second largest economy in the world, this could be a sign that exporting lower inflation could result in a slowdown elsewhere as well. However, this is far from a safe conclusion, as the nation has adopted a zero-tolerance policy with regards to the coronavirus, imposing strict lockdowns in cities reporting increasing infections. This could keep supply chain disruptions well on the table for longer, and perhaps, result in even higher inflation around the globe in the months to come. So, with all that in mind, we don’t expect a potential slide in China’s CPI and PPI rates to alter the tightening plans of several major central banks around the world.
On Thursday, the only release worth mentioning on the economic calendar is the US PPIs for December. Both the headline and core rates are expected to have accelerated as well, adding credence to the CPI forecasts. Usually, higher producer prices result in higher consumer prices. However, bearing in mind that we will already have the actual CPI figures in our hand, we don’t expect any notable market reaction to the PPIs.
Finally, on Friday, we have the UK monthly GDP for November, as well as the industrial and manufacturing production rates for the month. No forecast is available for the GDP, but both the IP and MP monthly rates are expected to have increased to +0.2% mom, from -0.6% and 0.0% respectively. In our view, this could add some credence to market expectations over a rate hike by the BoE very soon, and some more throughout the year. Thus, combined with PM Boris Johnson’s remarks that there will be no fresh covid-related restrictions, it could result in some more GBP-buying.
Ahead of this data set, during the Asian trading, China releases its trade data for December, while later, ahead of the US open, the earnings season kicks off with Q4 results from several large banks, including JPMorgan Chase, Citigroup, and Wells Fargo.
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