Week In Focus

Jan 30th - Feb 3rd

AUSTRALIAN RETAIL SALES (TUE): The December Retail Sales data is seen printing at -1.0% vs the prior of +1.4%. Desks highlight that November's Black Friday and Cyber Monday events were successful, as indicated in the November data, although analysts will now assess the impact of higher rates over the Christmas period. Westpac, citing the Westpac Card Tracker, suggests that conditions in December were buoyant, although "retail components were softer with gains in card activity centering on non-retail segments like travel and recreational services. The high weighting of food (accounting for just over half of all retail) also looks to have been a drag, some of which may be price-related.", the desk says, as it forecasts a shallower contraction of 0.3%. CHINESE NBS PMI (TUE): January's official PMIs are expected to signal improved sentiment following the abandonment of China's zero-COVID policy. Markets expect the Manufacturing metric to rise to 49.7 from 47.0 in December - remaining in contraction territory, while there are currently no forecasts for the Non-Manufacturing (prev. 41.6) and Composite (prev. 42.6) metrics. Analysts at ING also expect the Manufacturing PMI to remain in contraction while forecasting that the Non-Manufacturing PMI should recover slightly, with a similar pattern expected in the Caixin reports. As usual, the PMI releases will likely be dissected for anecdotal commentary on growth, inflation, and firms' sentiment.

EZ PRELIM. GDP (TUE): Expectations are for prelim Q/Q GDP for Q4 to contract 0.1% vs. the 0.3% expansion in Q3, with the Y/Y rate forecast at 1.7% vs. prev. 2.3%. Ahead of the release, analysts at Investec highlight that the upcoming release will likely see a break in the trend seen through Q1-Q3 of the Eurozone economy expanding despite headwinds from the surge in energy prices. Investec anticipates just a modest contraction for Q4, but notes that it does not expect the Eurozone to "escape a shallow recession this winter", adding that despite the recent declines in spot gas prices, consumers in Europe are still being squeezed by higher energy prices and higher inflation more generally. Investec also cautions that H2 2023 could bring a renewed set of headwinds for the region amid the potential for renewed energy price pressures and the impact of prior rate increases being felt. For the upcoming ECB policy announcement, ING (who hold an above consensus call) notes that Q4 "GDP is likely to see growth stalling, though avoiding outright shrinkage, which should also give the ECB more confidence to stay the course".

US EMPLOYMENT COSTS (TUE): In remarks on January 19th, Federal Reserve Vice Chair Brainard said that there were tentative signs that US wage growth was moderating, noting that the growth in average hourly earnings has softened recently, stepping down to a pace of 4.1% annualised on a 3-month basis in December, which is down from roughly 4.5% on a 6- and 12-month basis. The influential Fed policymaker said that she would be closely watching to see whether the employment cost index data for Q4 continues to show the deceleration from Q3. Brainard said that price trends and the deceleration in wages provides some reassurance that we are not currently experiencing a 1970s#style wage-price spiral, and therefore, it remains possible that a continued moderation in aggregate demand could facilitate continued easing in the labour market and a reduction in inflation without a significant loss of employment. This could give the Fed enough confidence to potentially hike rates further as it assesses what impact the 425bps of tightening implemented so far has had on bringing down price pressures. According to Refinitiv, analysts expect the data to print 1.2% in Q4, matching the rate seen in Q3. Money markets are currently pricing that the Fed will be cutting rates towards the end of this year, and while officials have leaned back on this narrative, cooling in the employment cost index, combined with a continued softening in other inflation and wage measures, will at least give the central bank scope to slow down monetary tightening as the economy slows, if it needs to.

EZ FLASH CPI (WED): Expectations are for Y/Y HICP for January to decline to 9.0% from 9.2%, with the core reading (ex-food and energy) seen remaining at 6.9% and the super-core print set to decline to 5.1% from 5.2%. The prior report was characterised by a return of headline inflation to single-digits, driven by declines in energy prices, however, the super-core metric actually rose from 5.0% to 5.2% amid increases in goods and services inflation. At the time, ING cautioned "the next two months will be critical as many businesses traditionally change prices at the start of the year. It could therefore be that core inflation rises further from now". Ahead of the upcoming release, Moody's looks for more of the same for headline inflation with energy prices on the decline. However, there are forces slowing the extent of the decline with analysts highlighting "the rebound in German energy inflation following the one-off policy effect in December, and the lifting by 15% of France's price cap on electricity and gas". Moody's adds that it expects food inflation to remain strong and anticipates an increase in the core reading given "that PMI surveys from January reported a tangible increase in selling prices by manufacturers and service-providers". From a policy perspective, the release will likely have little sway on Thursday's ECB policy announcement with markets assigning a circa 87% chance of a 50bps move. However, beyond February, a strong print for core inflation could convince some market participants that another 50bps in March is on the cards despite recent source reporting suggesting that 25bps may be on the table for that meeting.

US ISM MANUFACTURING PMI (WED): The headline is expected to slip a little further below the 50-level, which divides expansion and contraction, with the consensus view expecting 48.2 in January from 48.4 in December. Although the data sets don't always behave in the same way, S&P Global's flash PMI data for January reported a small increase from 46.2 to 46.8, signalling a solid decline in operating conditions at the start of 2023 as manufacturing demand conditions remained subdued, the survey compiler said. The report also noted that input prices increased at a faster pace in January, ending a sequence of moderation in cost inflation that began in mid-2022. There will be attention on the forward-looking new orders sub-index, which has not been above the 50-mark since August. "The worry is that, not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks," S&P Global said.

NEW ZEALAND JOBS (WED): The Q4 Unemployment rate is forecast to dip to 3.2% from 3.3% with the Participation Rate seen at 71.00% against 71.70% in Q3, whilst the Q/Q Employment Change was previously at 1.3%. Analysts at Westpac expect a 0.3% rise in the employment change, partially aided by the return of migrant workers. "We expect that unemployment will rise in the coming years as the economy cools off. But with labour typically being a laggard in the economic cycle, we are not likely to see signs of that just yet.", the Aussie bank cautions. From a central bank standpoint, the RBNZ is seemingly more focused on inflation after Q4 CPI eased from the prior quarter, but printed hotter-than-expected, whilst the newly-appointed New Zealand PM Hipkins also suggested more must be done to combat high inflation.

US JOBS REPORT (FRI): The rate of payroll additions to the US economy is expected to moderate to 175k in January (vs 223k prior, three-month average 247k, six-month average 307k, 12-month average 375k). The unemployment rate is forecast to tick-up by 0.1ppts to 3.6%. With monetary policymakers firmly fixated on reducing inflationary pressures, there will again be outsized attention on average hourly earnings, which are expected to rise 0.3% M/M, matching the rate seen in December. Labour market proxies continue to allude to tight conditions; the weekly initial and continuing jobless claims data for the week that coincides with the establishment survey window declined vs the comparable week for the December data. That said, Capital Economics points out that while layoffs remain low, demand for labour has eased in recent months, as evidenced by the employment sub-indices in the S&P Global PMI data, and along with other measures, the consultancy says it implies a slowdown in overall employment growth soon. Elsewhere, it is worth noting that annual benchmark revisions are also due to be made to the data series, and some believe that this could see a downward revision to many of the payrolls numbers we saw in the second half of 2022, as hinted at by the Quarterly Census of Employment and Wages.

US ISM SERVICES PMI (FRI): Analysts expect the Services ISM headline will return above the 50-mark, which separates expansion and contraction, with the consensus looking for 50.5 in January from 49.6 in December. As a comparison, S&P Global's flash US services business activity index posted 46.6 in January from 44.7 in December, signalling a solid fall in service sector output, but one that was the softest since last October. "The slower fall in business activity was in part linked to a less marked contraction in new orders at service providers," S&P Global said, adding that "the decrease in new business was only marginal overall." However, the report noted that "customer hesitancy and the impact of inflation on spending remained a key drag on new domestic and external sales."