On Deck for Thursday, January 19


  • Risk-off sentiment continues…
  • …on lingering over-reaction to yesterday’s US data…
  • …plus hawkish speak from Lagarde…
  • …and soft-ish AU jobs
  • Why I think markets over-reacted to retail sales and PPI
  • Norges Bank skips and sets up final hike as expected
  • Bank Negara surprises with a hold
  • Bank Indonesia hikes, says it’s probably done
  • Turkey’s CB holds on Erdogan’s orders
  • Fed-speak on tap
  • Lighter US data on tap for today

Risk-off sentiment continues this morning with hawkish ECB comments and softer AU jobs reinforcing yesterday’s risk-off market sentiment following US data. I still think markets over-reacted to the US data (see below). In any event, if markets are surprised by evidence of damage to the economy and thinking that will scare off central banks from rate hikes when that’s been the whole point of the exercise all along then they missed a few memos along the way. My bigger concern is that the downside risks to the global economy have lessened while bond markets have eased financial conditions and these two things complicate the inflation fight on a durable basis. Market volatility is swinging from pessimism after major releases one second, toward optimism that developments since Fall have reduced downside risk to the global economy going forward.

US equity futures are down by almost 1% with TSX futures faring a touch better. European cash markets are down by about 1½%+ after Tokyo fell 1%+ while mainland China rallied by about ½% and took the Kospi along with it. Sovereign bond yields are under mild further upward pressure in the US while Canada’s curve is richer at the very front-end and cheaper further along the curve and European bonds underperform. The USD is very slightly softer mainly due to gains by the euro and yen while the A$/NZ$ crosses underperform post-AU jobs. Oil is off by just under a buck.

I think the US front-end rates reaction to US macro data particularly after US retail sales and producer prices was overdone yesterday for the following reasons.

  • US retail sales growth got pulled forward to earlier in the season than normal due to a combination of earlier discounting and shopping ahead on the basis of supply chain warnings. Black Friday and Cyber Monday sales no longer have much of anything to do with Black Friday and Cyber Monday as the promotions starts weeks and months in advance. August through October was stronger in terms of core sales ex-autos.
  • secondly, I think there was a rotation of spending toward services in December. On the notion that consumers can't spend on everything all at once and that retail sales only capture under half of the picture, it’s imperative to look at indicators of spending on services that are not well represented in retail. This year was stronger than last year in December for restaurants/bars (chart 1) and so were flights (chart 2). There were more people flying, travelling through multiple modes, eating and drinking at restaurants. We'll find out on the 27th when we get total consumption for the month.
Chart 1: US OpenTable Reservations; Chart 2: US Air Travel
  • always bear in mind that the first shot at retail sales is a guess. It's a series that is notoriously revised. That could be either up or down, but the initial reaction often shows more confidence in the data than turns out to have merit.
  • on PPI, it always amazes me to see such reactions to the headline reading that is a lagging indicator of commodity prices we already know. Like lower energy prices. Core PPI wasn't as weak but disappointed including revisions. The market is assuming a tight pass-through effect into core CPI that has some evidence to support it given correlations over time, but a) there can be wide deviations between the two readings, and b) we already knew CPI anyway! PPI lags CPI releases so there wasn't any terribly new information, yet markets react to developments by pricing commodities like energy, then react to its influences on headline CPI and then react again to its influences on headline PPI. Go figure.

Today’s US data risk to markets should be comparatively light to yesterday’s. Housing starts are expected to fall by around 5% m/m when December data lands (8:30amET). US initial jobless claims will be monitored for whether they continue to hover in the low-200ks as they have over the prior two weeks (8:30amET). The Philly Fed’s manufacturing gauge for January will further inform ISM-manufacturing expectations, but its volatility usually means the best call is a spin of wheel (8:30amET).

There is also a fair amount of Fed-speak on tap including from senior officials. Vice Chair Brainard (1:15pmET), NY Fed President Williams (6:35pmET) and Boston’s Collins (9amET) are the headliners.

Australian markets exhibited hypersensitivity to the latest jobs print. The A$ fell to lead decliners versus the USD and the 2-year yield plunged by 22bps post data. Pricing for the RBA’s February meeting shaved a couple of basis points but terminal rate pricing fell by 16bps to about 3½% from a target rate presently set at 3.1%. That was all because Australia’s jobs juggernaut misfired with the first decline in jobs since July. 15k jobs were lost which may be the beginning of the end or it may just be a one-month flesh wound on an incredible trend (chart 3), but a silver lining (beyond the small number) is that full-time was up 18k and the overall drop was driven by a 32k drop in part-time jobs which carries less of a hit to hours worked. The unemployment rate held steady at 3.5% after the prior month was revised up a tick to that same rate as the small dip in jobs was offset by a lower participation rate. If China roars back later in the year, will it drag Australian jobs higher? 

Chart 3: Australia Has 760k More Jobs Than Pre-Pandemic Levels

ECB’s Lagarde reinforced a hawkish stance with comments this morning that emphasized that inflation is “way too high” and that developments for the economy have turned relatively more favourable with only a small contraction looking likely.

Four regional central banks weighed in as follows and with accompanying charts 4–7: 

Chart 4: Malaysia: Overnight Rate vs Headline Inflation; Chart 5: Bank Indonesia Continues Rate Hikes; Chart 6: Norges Bank Pauses Hike as Inflation Shows Signs of Peaking; Chart 7:  Turkey: Deeply Negative Real Interest Rates
  • Norges Bank held its deposit rate at 2.75% and said its policy rate “will most likely be raised in March” which was expected. Their revised explicit forward guidance in December had said there would be one final hike in Q1.
  • Bank Negara Malaysia unexpectedly held its overnight rate at 2.75% with only one out of 18 in consensus getting the call right. The central bank flagged giving time to assess lagged effects of rate hikes to date. It may have also been concerned about ringgit appreciation since the last decision.
  • Bank Indonesia hiked 25bps and set the 7-day reverse repo rate at 5.75% as expected, but indicated it was done as Governor Perry Warjiyo was quoted as saying that the cumulative tightening to date was “adequate” to address inflation.
  • Turkey’s CB held at 9% as expected because Erdogan told them to.
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