US initial jobless claims dropped -1k to 205k in the week ending January 7, below expectation of 210k. Four-week moving average of initial claims dropped -2k to 213k.
Continuing claims dropped -63k to 1634k in the week ending December 31. Four-week moving average of initial claims dropped -9k to 1680k.
US CPI declined -0.1% mom in December, below expectation of 0.0% mom. CPI core (ex food and energy) rose 0.3% mom, matched expectations. Food index rose 0.3% mom. Energy index dropped -4.5% mom.
Over the last 12 months, CPI slowed from 7.1% yoy to 6.5% yoy, matched expectations. That’s also the lowest level since October 2021. CPI core slowed from 6.0% yoy to 5.7% yoy, matched expectations. Energy interest was at 7.3% yoy while food was at 10.4% yoy.
In ECB’s November Consumer Expectations Survey, mean inflation expectations for the 12 months ahead dropped back to 7.3%, comparing to October’s 8.1% and September’s 7.3%.
Median inflation expectations for the 12 months ahead dropped to 5.0%, comparing to October’s 5.4% and September’s 5.1%.
Mean inflation expectations for the 3 years ahead dropped to 4.6%, comparing to October’s 4.9%, and September’s 4.8%.
Median inflation expectations for the 3 years ahead dropped to 2.9%, comparing to October’s 3.0%, and September’s 3.0%.
In the monthly Economic Bulletin, ECB said, “evidence from surveys and markets shows that forecasters continue to expect inflation to peak soon, with longer-term expectations remaining at around the ECB 2.0% target.” Still, “close monitoring is warranted given the further above-target revisions of some indicators”.
In the December Eurosystem staff macroeconomic projections, headline inflation in Eurozone ill fall from average 8.4% in 2022 to 6.3% in 2023, 3.4% in 2024, and then 2.3% in 2025. Headline inflation is expected to remain above the ECB’s target of 2.0% until mid-2025
Boston Fed President Susan Collins said in a New York Times interview that “25 or 50 would be reasonable ” for rate hike in February. She added, “I’d lean at this stage to 25, but it’s very data-dependent.”
“Adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we’re going to hold. Smaller changes give us more flexibility,” she said.
ECB Governing Council member Pablo Hernandez De Cos said yesterday, “we plan to continue increasing interest rates significantly in the next meetings.” Also, tightening will continue “until reaching sufficiently restrictive levels to ensure that the inflation returns to the 2% target over the medium term.”
“Keeping interest rates at tight levels will reduce inflation by dampening demand and will also protect against the risk of a persistent upward shift in inflation expectations”, he explained.
De Cos also noted that Since last meeting, markets have raised the expected terminal rate by 30bps to 3.4%. However, market rates incorporated a positive premium, and “the market’s genuine expectation of what the maximum level of the deposit facility rate would be is somewhat below that figure.”
ECB Governing Council member Olli Rehn said, “Policy rates will still have to rise significantly… This means significant rate hikes at this winter’s remaining meetings.”
Though he also admitted that it’s a fair argument that it takes time to reverse the a decade of stimulus.
“With the benefit of hindsight, there may be some truth in this argument, at least from the standpoint that we could thus have created more policy space to react if the euro zone economy falls into recession,” Rehn said.
ECB Governing Council member Francois Villeroy de Galhau told Radio Classiqu, “activity in France is showing a better than expected resistance,” and a hard landing should be avoided. He expects inflation in France to peak in H1 2023, then falls back to 4% towards the end of the year.
Villeroy also said that ECB should aim to reach terminal interest rate by summer, and emphasized the need to be pragmatic about the pace of tightening.
According to BoJ’s December Survey on the General Public’s Views and Behavior, 32.5% of respondents expect prices will go up significantly one year from now, up from September’s survey of 28.9%. Those expecting prices to go up slightly dropped to 52.5%, down from 56.8%. Together, those expecting prices to go up dropped to 85.0%, down slightly from 85.7%. Only 2.4% expects prices to go down.
Regarding economic condition one year from now, those expecting improvement dropped to 9.1%, down from 10.5%. Those expecting unchanged dropped to 44.4%, down from 46.0%. Those expect worsening conditions rose to 46.2%, up from 42.9%. DI dropped to -37.1, down from -32.4.
Australia retail sales rose 1.4% mom in November, well above expectation of 0.7% mom. The seasonally adjusted turnover of AUD 35.92B was a new record high.
Ben Dorber, ABS head of retail statistics, said, “While we typically see a rise in spending around Black Friday sales, the strong seasonally adjusted rise in November 2022 shows that the effect is increasing over time, as the event has become more common across retailers and sales periods become longer.”
“Given the increasing popularity of Black Friday sales, the smaller increase in October may reflect consumers waiting to take advantage of discounting in November, particularly in light of cost-of-living pressures.”
Australia monthly CPI accelerated from 6.9% yoy to 7.3% yoy in November, above expectation of 7.2% yoy.
Michelle Marquardt, ABS Head of Prices Statistics, said “This month’s annual movement of 7.3% compares to 6.9% in October and 7.3% in September, indicating ongoing inflationary pressures.”
The most significant contributors to the annual rise in November were Housing (+9.6%), Food and non-alcoholic beverages (+9.4 per cent), Transport (+9.0%), Furniture, household equipment and services (+8.4%) and Recreation and culture (+5.8%).
ECB Governing Council member Mario Centeno said yesterday, “we are approaching the end of the current process of interest rate hikes, I believe that is true.”
Centeno said that “wage updates in Europe could make it difficult for prices to continue to fall” in the next two months, but “after that, inflation will fall again from March onwards.”
Fed Governor Michelle Bowman said in a speech, “In recent months, we’ve seen a decline in some measures of inflation but we have a lot more work to do, so I expect the FOMC will continue raising interest rates to tighten monetary policy, as we stated after our December meeting.”
“My views on the appropriate size of future rate increases and on the ultimate level of the federal funds rate will continue to be guided by the incoming data and its implications for the outlook for inflation and economic activity.”
“I will be looking for compelling signs that inflation has peaked and for more consistent indications that inflation is on a downward path, in determining both the appropriate size of future rate increases and the level at which the federal funds rate is sufficiently restrictive.”
“I expect that once we achieve a sufficiently restrictive federal funds rate, it will need to remain at that level for some time in order to restore price stability, which will in turn help to create conditions that support a sustainably strong labor market.”
The World Bank lowered global growth forecast to 1.7% in the latest Global Economic Prospects report, down sharply from 3.0% expected six months ago. It said, “Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine.”
2023 GDP growth:
2024 GDP growth:
US NFIB Small Business Optimism Index declined -2.1 pts to 89.8 in December, below expectation of 91.6. That’s also the 12th consecutive month the index was below 49-year average of 98.
“Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate,” said NFIB Chief Economist Bill Dunkelberg. “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.”
ECB Executive Board member Isabel Schnabel said in a speech “inflation will not subside by itself”. She added that preliminary data for December “point to a persistent build-up of underlying price pressures even as energy price inflation has started to subside from uncomfortably high levels.”
“To resolve today’s inflation problem, financing conditions will need to become restrictive,” she said. “Tighter financing conditions will slow growth in aggregate demand, which is needed to reduce the upward pressure on prices that has resulted from the long-lasting damage to the euro area’s production capacity inflicted by the energy crisis.”
“Monetary policy would need to raise interest rates even more forcefully to restore trust in the economy’s nominal anchor. In the 1970s, financing conditions tightened to an extent that made capital accumulation prohibitively expensive.”
At an event in Stockholm, BoJ Governor Haruhiko Kuroda said, “central banks, which are independent from governments cannot unconditionally respond to climate change,” and must “autonomously decide their actions within their mandate” from a long-term perspective.
He added that central banks must try to affect the overall economy, but not specific industries.
While BoJ doesn’t have specific mandata on climate change, it’s “generally accepted by the public” that the central bank’s measures are in line with the government. Back in 2021, BoJ launched a scheme to offer zero-interest loans to boost green and sustainable loans.
Atlanta Fed President Raphael Bostic said, “if the CPI comes in showing the same kind of trending that we saw in the jobs number, that will make me have to take 25 more seriously,” regarding the rate hike in February.
But he also emphasized that “we are just going to have to hold our resolve,” and expect interest rates to rise to 5.00-5.52% range to bring inflation down. As how long he saw rates above 5%, Bostic said: “Three words: a long time.”
“I am not a pivot guy. I think we should pause and hold there, and let the policy work,” he said. The “base case” for him it no rate cuts in 2024.
San Francisco Fed President Mary Daly said in a WSJ interview that she expects interest rate to rise from the current 4.25-4.50% to 5.00-5.25%. But she added that “doing it in more gradual steps does give you the ability to respond to incoming information.”
Daly said the “case can be made for either” a 25bps or 50bps hike in February. But at the same time, “I want to be data dependent, not wall off a 50 basis point increase.”
She expects unemployment to rise from current 3.5% to 4.5-4.6% as tightening continues. Inflation, now running at 5.5%, will fall to low 3% range by the end of 2023, and closer to 2% in 2024.
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Fed Bullard prefers getting rates above 5% asap
St. Louis Fed President James Bullard said yesterday that it’s “encouraging” that inflation “went in the right direction.” “So far, so good. My bottom line for 2023 is that it will be a year of disinflation,” he said”. Yet, he emphasized his preference is still to get interest rate to above 5% “as soon as possible”.
“There’s probably too much optimism inflation is going to easily come back to 2%. That is not the history of inflation,” Bullard said, “We are really moving into an era of higher nominal interest rates for quite a while going forward as we try to continue to put downward pressure.”