Week Ahead: US Inflation In The Spotlight

The new year has kicked off with a reversal of the 2023 year end mega-rally in stocks and bond markets. Traders are reining in the aggressive rate cut expectations which were being baked into central bank pricing for the months ahead. Friday’s key monthly US employment report showed still solid job gains, with low unemployment and sticky wages also suggesting there probably won’t be a rush to ease policy just yet.

This week sees the release of the second part of the Fed’s mandate, inflation, shape price action. The FOMC seem to be fairly comfortable with current price pressures as upside risks are deemed to have diminished. But markets still see a high chance of a Fed rate cut in March as the central bank’s favoured inflation measure, the core PCE deflator, has been softer than the more widely followed CPI data. The dollar started 2024 on the front foot but prices in the DXY just about remain in a descending channel from the late October highs.

There’s a bunch of other inflation data from around the globe including releases from Australia and China. Any further dip into deflation in the latter in November is likely to intensify the downbeat risk mood that has seen US stocks turn red with their first losing streak in 10 weeks. However, this could also put pressure on the Chinese government to adopt bolder stimulus measures to support the economy.

Friday sees the start of the fourth quarter US company results season with analysts forecasting annual earnings growth again. Looking ahead, a longer-term poll from Reuters predicts that US corporate earnings should improve at a stronger rate this year as inflation and interest rates fall, though concerns surrounding slower economic growth cloud the outlook.

In Brief: major data releases of the week

08 January 2024, Monday

– Tokyo CPI: Expectations are for lower inflation, after a notable slowdown in both November headline and core prints. That would point to similar national CPI readings, which could mean the BoJ will continue to be cautious with policy normalisation and exiting NIRP.

09 January 2024, Tuesday

-Australia CPI: Annual headline inflation should finally fall decisively through 5%. Last year’s spike higher was due to poor weather. That could result in a potentially steep decline in the November figures.

11 January 2024, Thursday

–US CPI: The headline print is forecast to rise one-tenth to 0.2% m/m. The core reading is likely to match the prior 0.3% m/m. The annual core rate is seen falling below 4% for the first time since May 2021. Some economists warn that service sector wages still remain sticky. Market bets on a first Fed rate cut in March are currently priced around 75%.

12 January 2024, Friday

–China Inflation: November’s slide further into deflation is predicted to ease back closer to zero. Gasoline and food prices are not falling as much, and this may help allay fears of a deflationary spiral.

–UK GDP: A rebound in the monthly November figures to 0.1% is expected due to mostly temporary factors behind the prior 0.3% contraction. That could still mean a technical recession grabs the headlines, with activity flat going forward.

–US Earnings Season: The Q4 results season kicks off with several US banks including JP Morgan, Citi and Bank of America. FactSet forecasts a second consecutive quarter of annual growth at 2.4%.

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