Today’s podcast

Overview:  A big week ahead

• Solid US PPI cements apprehension ahead of the US CPI & FOMC
• Equities fall (S&P500 -0.7%); yields up (US 10yr +9.6bps to 3.58%)
• One Chinese official calls Omicron flu like, cementing the pivot
• No market moving news on the w/e, a quiet start likely to the week
• This week: AU Jobs; US CPI; FOMC; ECB; BoE, SNB, Norgesbank

Apprehension ahead of the key risk events this week (US CPI, FOMC, ECB and BoE) was evident on Friday with both yields higher and equities lower following higher than expected US PPI figures. A stronger than expected consumer confidence print also helped fuel the sell-off later in the session. Core PPI (excl. food and energy) was 0.4% m/m against 0.2% expected, highlighting the risk that while inflation is starting to ease, it may not ease as quickly as markets expect. On the positive side the 1yr inflation expectation out of the University of Michigan survey fell to 4.6% from 4.9%, its lowest since September 2021 and no doubt reflective of the fall in oil prices recently. The only other piece of interesting news from Friday and the weekend was one Chinese official calling the mortality rate of Omicron as flu like at 0.1% and that most people recover within 7-10 days. This hints that China is moving a little quicker in its pivot to starting to live with Omicron, which should be positive for countries exposed to Chinese demand.

Markets moves were choppy. The S&P500 fell -0.7% and for the week is down -3.4%. The NASDAQ was similar at -0.7% and is down by -4.0% on the week. Terminal Fed Funds pricing edged slightly higher to 4.96% by mid-2023 from 4.95% on Thursday, and pricing for cuts eased very slightly to 43bps worth of cuts in H2 2023 from 46bps on Thursday. The US 10yr yield rose 9.6bps to 3.58%, and the 2yr was up less by 3.4bps to 4.34%. The 2/10s curve steepened slightly to -77.3bps. Despite the PPI printing higher than expected, implied inflation break evens fell with the 10yr breakeven -3.1bps to 2.28%. Instead, moves in nominals were reflected in real yields with the 10yr TIP yields +12.0bps to 1.30%. The USD was choppy and finished Friday broadly steady with DXY +0.1% and BBDXY unchanged. Commodity currencies were mixed with the AUD and NZD both +0.5%, but USD/CAD +0.5%. Only moderate moves were seen in the other majors with EUR -0.2% and GBP +0.2% and USD/JPY was unchanged at 136.60. The one commodity worth noting is oil, with WTI falling -0.6% to $71.02 and over the week is down some 11%.

The US PPI was the main data point on Friday. It printed higher than expected with Core PPI excl. food and energy at 0.4% m/m against 0.2% expected. Importantly the y/y figures continue to ease, suggesting inflation pressures are easing, but just not as quickly as hoped for. The print will also validate Chair Powell’s recent speech that while the October inflation numbers were encouraging, it will take substantially more progress to bring inflation down. The PPI isn’t usually a market mover, but markets are jittery ahead of key risk events this week. With PPI printing a little hotter, attention now turns to the CPI data on Tuesday, ahead of the FOMC decision on Wednesday. Also out on Friday was the University of Michigan Consumer Confidence measure which was a little stronger than expected at 59.1 vs. 57.0 and 56.9 previously. Encouragingly the 1yr inflation expectation fell to 4.6% from 4.9%, the lowest since September 2021 and likely reflective of lower petrol prices. The 5-10yr inflation expectation remained at 3.0%.

The main news headline worth highlighting is from China. One official was quoted as saying the mortality rate from Omicron is around 0.1%, similar to the common flu and that most people recover within 7-10 days. The change in language continues to tentative pivot from China over the past few weeks, both in rhetoric around the virus, and also in the easing of restrictions. The FT also reported authorities had loosened Covid testing and quarantine rules for transport workers, a move which might help ease supply chain bottlenecks (although some disruption is almost guaranteed in the short term as Covid spreads more widely). A more comprehensive re-opening probably still isn’t likely until after the winter, though in the first article the Chinese official did point to movement of people during the Lunar New Year holidays (“ It’s unlikely people will stay put for the 2023 Lunar New Year holiday so I advise those who will travel home to get booster shots so that even if they are infected, symptoms will be mild”).

Finally, in Australia on Friday the government unveiled its energy plan with passage contingent on getting The Greens and Independent Senator Pocock on board. Three key components of the plan were to cap domestic gas at $12 a gigajoule, which is a large step down from the average price so far this year of $41 a gigajoule. Cap he price of domestic thermal coal at $125 a tonne for uncontracted coal (coal was being sold at $300 a tonne at one stage), and provide $1.5bn in Commonwealth funding – matched by the states – to reduce energy bills for vulnerable households. Note household power bills have risen by 20-30% in many parts of Australia, and the government’s October Budget had forecast them to rise another 56% over the next two years (see ABC News for details).

Coming up this week

A busy week where most focus is offshore with the US CPI on Tuesday, followed by three central bank meetings within 24 hours with the FOMC (Wednesday), followed by the ECB and BoE on Thursday. We expect all three to hike by 50bps. Bookending an important week is the Global PMIs on Friday. As for domestic focus, Employment for November is on Thursday, while across the ditch in NZ Q3 GDP figures are on Thursday. More details below:

• Australia: Employment data for November headlines the week. We expect solid employment growth on the back of a still strong labour demand backdrop and pencil in a 30k gain along with a steady unemployment rate at 3.4% (consensus 17k/3.4%). Markets are likely to discount a strong print given widespread expectations of the economy softening in 2023. We will also be looking at hours worked given higher Covid cases and recent weather disruptions. Also out during the week is the last read on business and consumer confidence for the year (NAB Survey on Tuesday). RBA Governor Lowe is the keynote speaker at an AusPayNet Summit on Monday, though given the forum is on payments, it is not likely to add much on policy.
• US: CPI for November is Tuesday, the FOMC is Wednesday, and Retail Sales is Thursday. For CPI there was a notable slowing in core inflation last month and the consensus is that it continues this month at 0.3% m/m and 6.1% y/y. Some hefty falls on the goods side could skew the risks to a below consensus print. Fed Chair Powell noted recently that: “while October inflation data received so far showed a welcome surprise to the downside, these are a single month’s data…[and]…It will take substantially more evidence to give comfort that inflation is actually declining”. As for the FOMC, a 50bp hike has been well telegraphed and that the terminal dot plot will be lifted higher to around 5.0% – similar to market pricing of 4.96% by mid-2023, though markets thereafter price in 46bps worth of cuts in H2 2023.
• CH: Focus remains on China’s pivot towards living with Covid, especially with cases elevated and as hospitalisations grow. A shift in describing Omicron mortality to being akin to the flue by one official suggests China’s pivot is likely occurring a little faster than previously expected; a more comprehensive re-opening is still not likely until after the winter in March/April. Although it will not be smooth, markets are looking to the other side and are able to discount weak data in the near term. Monthly activity numbers on Thursday should make for sober reading as indicated by the PMIs. Consensus for Retail sits at  4.0% y/y, Industrial Production 3.6% y/y and Fixed Asset Investment 5.6% y/y.
• EZ/UK: We expect both the ECB and BoE to hike rates by 50bps on Thursday, a view also broadly held by the market. For the ECB, assuming no surprise, focus will be around how high rates may need to go, as well as the prospective discussion of QT. Markets currently price a terminal rate around 2.8% by mid-2023. As for the BoE, assuming no surprise, focus will remain around the BoE’s assessment of how deep the recession is likely to be, and whether the BoE still sees market pricing as being too much in terms of getting inflation back to target. Recall back in the November MPS that even assuming ” constant interest rates at 3%, CPI inflation is projected to be 2.2% and 0.8% in two years’ and three years’ time“. Markets currently price a terminal rate of 4.56%.

Coming up today

An extremely quiet day ahead of major risk events later in the week. More details below:

• JN: PPI: Unlikely to be market moving. Consensus sits at 0.5% m/m and 8.8% y/y.
• UK: Monthly GDP/Industrial Production: Markets are likely more sensitive to a below consensus read ahead of the BoE on Thursday. Expectations are for Monthly GDP of 0.4% m/m, with weakness in Industrial Production (-0.1% m/m) to be offset by still solid Services (0.5% m/m).

Macro chart of the day – US PPI was stronger than expected, though on the goods side it is still pointing to an easing of inflation pressures

Markets chart of the day – central bank pricing is starting to divergence. Although more near-term hikes are expected, the market is also pricing hefty cuts by the US Fed in H2 2023 and 2024

Market Prices

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