After the FOMC, BOE, and ECB met 2 weeks ago, last week was all about follow through from those meetings. The hawkish tone by the FOMC set the stage as Powell reiterated that although the disinflationary process has started, interest rates still need to rise to get inflation under control, citing the NFP print of 517,000 as an example. As a result, US stocks sold off (although FTSE continues to make all-time highs) and the US Dollar went bid. This week, markets will get a sense of how much inflation rises have slowed in January, as the US, UK, and Canada report inflation data. In addition, the RBA provided markets with a hawkish hike last week. This week, Australia will report its Employment Change. And the new BoJ Governor should be announced this week. Will it matter for the Yen?
Powell and CPI
Last week, Fed Chairman Powell spoke at the Economic Club of Washington. Traders waited eagerly for any comments to clarify the previous week’s FOMC meeting or the much stronger than expected jobs report. They didn’t get it. Powell stuck to the FOMC’s view that the disinflationary process has begun. However, more importantly to the markets, Powell pointed out that the inflation recovery will be a bumpy road, and that the 517,000 jobs added to the economy in January is evidence of that. He also noted that he anticipates ongoing rate hikes will be appropriate as we have still not reached restrictive levels. In addition, Powell said that “we may need to do more if we continue to have a strong labor market or high inflation.” This week, the US reports CPI data for January. Expectations are for the headline print to fall to 6.2% YoY vs a previous reading of 6.5% YoY. Core CPI is expected to fall to 5.5% YoY vs a previous reading of 5.7% YoY. (See my colleague Matt Weller’s US CPI preview here.) The print is expected to be weaker, however one must consider what may happen if the reading is stronger! Stocks may head lower while the DXY moves higher on anticipation of another rate hike in March.
The RBA hiked rates last week by 25bps, as expected, to bring the overnight rate to 3.35%. However, the surprising part was that the RBA warned of further hikes in the coming months. The board projects inflation to fall to 4.75% in 2023, but won’t reach its 2%-3% target until 2025. The committee also noted that there is considerable uncertainty around the outlook. This week, Australia will report its Employment Change. Expectations are for jobs to rise by 20,000 for January vs a drop of -14,600 in December. The Unemployment Rate is expected to remain unchanged at 3.5%.
And the new BoJ Governor will be…..
On Tuesday, Japan will bring forward its formal nominees for BoJ Governor. Current BoJ Governor Kuroda’s term ends in April. Originally, the favorite was BoJ Deputy Governor Amamiya. Markets were happy with this choice as he was thought to maintain the current easy monetary policy that Kuroda had put in place. However, after Amamiya gave the role a hard pass, it was reported that former BoJ member and professor Ueda will be selected by PM Kishida to replace Kuroda. When the news was released, the Yen went bid (USD/JPY fell from 131.57 to 129.79) as Ueda is thought to bring a more hawkish stance to the BoJ. However, the Yen gains were quickly reversed after Ueda said that “the Bank of Japan’s current policy is appropriate and monetary easing needs to be continued at this point”. Watch for more details regarding an Ueda nomination over the weekend and next week to see if the markets believe he will lead with a continued dovish stance or more of “less dovish” stance.
After strong earnings last week from BP and Disney, US earnings will be highlighted by results from Airbnb and Roblox. However, the focus shifts to the UK where the banking industry kicks off their earnings season with results from Barclays and Standard Chartered. Other big-name earnings to be released this week are as follows:
ABNB, KO, CSCO, RBLX, TWLO, SHOP, AMAT, DASH, DE
In addition to the US CPI and the Australia Employment Change, the UK will release its Claimant Count Change and inflation data for January. Also, the US and UK will release Retail Sales data and the Japan will release its first look at Q4 2022 GDP. Other important economic data due out this week is as follows:
- Switzerland: CPI (JAN)Tuesday
- Australia: Westpac Consumer Confidence Index (FEB)
- Japan: GDP Growth Rate Prel (Q4)
- Australia: NAB Business Conditions (JAN)
- New Zealand: Business Inflation Expectations (Q1)
- Japan: Industrial Production Final (DEC)
- UK: Claimant Count Change (JAN)
- EU: GDP Growth Rate 2nd Est (Q4)
- US: CPI (JAN)
- UK: Inflation data (JAN)
- EU: Industrial Production (DEC)
- Canada: Housing Starts (JAN)
- Canada: Manufacturing Sales Final (DEC)
- US: Retail Sales (JAN)
- US: NY Empire State Manufacturing Index (FEB)
- US: Industrial Production (JAN)
- US: Manufacturing Production (JAN)
- US: NAHB Housing Market Index (FEB)
- Crude Inventories
- New Zealand: Services NZ PSI (JAN)
- Japan: Trade Balance (JAN)
- Japan: Machinery Orders (DEC)
- Australia: Consumer Inflation Expectations (FEB)
- Australia: Employment Change (JAN)
- US: PPI (JAN)
- US: Building Permits Prel (JAN)
- US: Housing Starts (JAN)
- US: Philadelphia Fed Manufacturing Index (FEB)
- Norway: Norges Bank Governor’s Annual Address
- Australia: RBA Governor Lowe Speech
- UK: Retail Sales (JAN)
- Canada: PPI (JAN)
Chart of the Week: AUD/USD (240 Minutes)
Source: Tradingview, Stone X
AUD/USD has been moving higher since making near-term lows on October 13th, 2022, at 0.6170 (not shown). As the pair began to reach the pinnacle of the move higher from those lows, AUD/USD formed an ascending wedge, which began January 3rd when price was trading near 0.6688. As price reached the apex of the wedge, it broke below the bottom trendline, as expected. The expected target for an ascending wedge is a 100% retracement, which would be 0.6688. On its way to the target, price stalled and at horizontal support and the 61.8% Fibonacci retracement level from the lows of January 3rd to the highs of February 1st near 0.6860. AUD/USD then bounced in a pennant formation to the 50% retracement of the highs from February 1st to the lows of February 6th, near 0.7011, and began moving lower. The target for the break of a pennant is the distance of the pennant “pole” added to the breakdown point of the pennant. In this case, the target is close to the target for the ascending wedge between 0.6708 and 0.6688.
All eyes will be focused on the US CPI on Tuesday. If the data is stronger than expected, we could see stocks sell off and the US Dollar continue its recent bid. The same can be said for UK stocks and the Pound when UK inflation data is released on Wednesday. In addition, watch for news over the weekend regarding the potential new BoJ Governor, Udea. Will he be viewed as dovish or less dovish? It may decide the next direction for Yen.
Have a great weekend!