Summary
United States: War Not Yet Won on Inflation
- The December Consumer Price Index data was the most significant macroeconomic development of the week and showed modest deflation to finish 2022. We now expect the Fed to hike the federal funds rate by just 25 bps at its next policy meeting on February 1, but a slower pace of tightening does not necessarily mean less.
- Next week: Retail Sales (Wed), Industrial Production (Wed), Existing Home Sales (Fri)
International: What’s Happening in the Rest of the World?
- Brazil’s December CPI data showed inflation receding less than expected. Over the past several months, inflation has sharply fallen from its peak, but with Lula now in office, fiscal policy may begin to move in a more inflationary direction. Down under, inflation pressures in Australia remain persistent. After receding from its 7.3% peak in October, headline CPI re-accelerated to 7.3% year-over-year in November. Housing, food and transport prices saw the most significant price rises. Last but not least, U.K. November GDP registered a surprise 0.1% month-over-month gain, lowering the likelihood that a U.K. recession occurred at the end of last year.
- Next week: China GDP (Tue), Canada CPI (Tue), Bank of Japan/Japan CPI (Wed/Thu)
Interest Rate Watch: Pace of Fed Tightening to Downshift Further
- We have changed our expectation for the outcome of the February 1 FOMC meeting from a rate hike of 50 bps to 25 bps. But we maintain our view that the FOMC will ultimately raise its target range for the federal funds rate by a cumulative amount of 75 bps from its current setting of 4.25%-4.50%.
Credit Market Insights: Consumers Continue to Tap Credit…for Now
- The swing in revolving credit over the past year or so reflects, at least in part, consumers reaching for their credit cards to help sustain spending as decades-high inflation outpaced income growth.
Topic of the Week: Brazil’s “January 6 Moment”
- While political risk is typically elevated in Brazil and could weigh on local asset prices, we believe Brazil’s “January 6 moment” will not have a long-lasting impact on local financial markets nor the economy.
