On Deck for Wednesday, January 25


  • Tech earnings drag on risk appetite
  • BoC: Why not hiking and/or a firm pause would be a setback to fighting inflation
  • Four BoC scenarios
  • RBA hike bets intensify after inflation surprises higher
  • BoT hikes with hawkish guidance as tourism recovers
  • US mortgage purchase applications continue to climb as 30-year rate drops
  • Fed could lose a senior, politicized dove…
  • …throwing the Fed’s #2 spot into turmoil once again
  • IFO completes the sweep as all 4 German surveys improved

US tech earnings and three central banks are the focal points this morning with the BoC being nearest-and-dearest to many of us. Microsoft’s release last evening is contributing toward a drop in US equity futures with the S&P off ¾%. TSX futures are almost ½% lower and European cash markets are down by up to ½%. Sovereign bonds are generally picking up some safe haven flows as curves richen especially in Europe but with Australia’s curve getting hit by CPI (see below). The USD is little changed as strength in the A$ (CPI again) and yen, little change in CAD and some softness across European crosses are offsetting one another.

The RBA got an inflation jolt that reset rate hike pricing higher and the BoT hiked with a hawkish bias. Germany’s final soft data release completed a suite of four improvements across consumer confidence, ZEW investor expectations, PMIs and now IFO business confidence as all sources of opinions across different classes of respondents point toward less downside risk in Germany’s economy (chart 1).

Chart 1: All German Surveys Point to Improved Outlook

As we await the BoC, Australian inflation serves as a warning to central banks counting on inflation just rapidly going away. RBA bets heated up and drove sharp underperformance across the Australian rates curve while driving the A$ to the top of the class. The culprit was hotter than expected inflation readings. December’s CPI jumped 8.4% y/y (7.7% consensus, 7.3% prior) with core up 8.1% y/y(6.7% prior) and was up 0.9% m/m SA or over 11% m/m SAAR. A major driver of the m/m surge was holiday travel and accommodation (+27% m/m SA). The ABS has suspended publication of the monthly trimmed mean CPI measure out of concern it does not adequately line-up with quarterly trimmed mean CPI. The somewhat narrowly driven surge in m/m CPI might suggest that had there been a trimmed mean measure then it might have weeded out the hotter components. Still, inflation for Q4 overall was up 8.4% y/y (7.7% consensus) and 1.9% q/q SA non-annualized (1.6% consensus). Trimmed mean CPI was up 6.8% q/q SAAR and weighted median CPI was up 6.7% q/q SAAR and hence far above the RBA’s headline CPI target range of 2–3%. See chart 2 for the trend.

Chart 2: Australian Core Inflation

And so, markets reacted by upping pricing for the February 7th meeting to closer to a full quarter point hike and raised terminal rate pricing by about 17bps to 3¾% from a current policy target rate of 3.1%.

The Bank of Thailand is another hiking central bank and added 25bps overnight to raise its benchmark rate to 1.5% in a unanimous decision while saying “it’s still appropriate to raise the rate for while.” The BoT was a lagging central bank held back by the collapse of its tourism sector that is now rapidly recovering while inflation has picked up. Chart 3.

Chart 3: Bank of Thailand Policy Rate vs Headline Inflation

The US posted its second weekly gain in the mortgage purchase index, up 3.4% w/w after the prior week's 24.7% w/w rise. Refis are also still rising (+14.6% w/w after 34.2% w/w rise the prior week). The purchase index is back up to August levels which isn't great but this winds the clock back several months as Americans take advantage of declining 30 year mortgage rates following the start of the rally in US 10s last October with the buyback trial balloon that's now dead but replaced by the debt ceiling ruckus.

There is nothing else due out today in the US and with the Fed in blackout. Vice Chair Brainard may depart the Fed to head up the National Economic Council (here). She has had an embarrassment of riches foisted upon her through options presented by the Biden administration ranging from potential Treasury Secretary before choosing Yellen, the Fed’s #2 spot she now holds, and now this. Brainard is overtly political in her role as a staunch Democrat who supported Hillary Clinton who donates to the Dems and has long been a favourite within the party. Her departure would open up yet another search for a top role and—depending upon her potential successor—would remove a moderate/dove and critic of the financial industry. Her successor would have to clear the Senate that the Dems barely control in deeply divided Washington and depending upon how Manchin and some others choose to align themselves.

Bank of Canada—Final Thoughts

The BoC is the full deal today with the statement and MPR including fresh forecasts due at 10amET, and an hour-long press conference spanning from about 11am until noon including an opening statement. They will start to publish minutes with this meeting as announced last year, but they won’t be available until February 8th and I have low expectations for them in any event. I’ll be amazed if the group culture at the BoC suddenly pivots toward being much more transparent.

+25bps is the house call. It’s mostly priced. All of the big 5 bank econ groups expect a hike. Of the rest, 5 out of 27 expect a hold. Full rationale is provided in multiple publications.

Risk-reward puts more risk on a surprise hold than reward to a hike. How they play the bias is also important with scenarios offered below.

What plays to both the imminent decision and the bias is how to interpret the line in the December statement when they said they “will be considering whether the policy interest rate needs to rise further.” Some took that to mean they were done, but both Macklem and DepGov Kozicki said they meant they were fully data dependent. We’ve also since gotten a ripping jobs report, fairly resilient core inflation, Q4 GDP tracking a full point higher than they forecast and generally less pessimism toward the global outlook pointed at China and Europe and aided by easier financial conditions. Core inflation is still tracking above target and the next phase of inflation worries is partly focused upon the job market as trend wage gains and awful worker productivity trends reinforce one another in terms of the inflationary implications (chart 4).

Chart 4: Canadian Hourly Wages

I interpret that line to instead be a sign they would let this meeting be guided by data while teeing up a possible pause after this meeting when they have the opportunity to provide a full sales job, numbers and all. The line is likely to be replaced by something that more directly alludes to a pause at least for a time. I would prefer that they keep their bias data dependent.

Open to other thoughts but here’s my guess at scenarios.

  1. Hold and signal pause: get out the rally monkey! Heap on even more cut bets. I think this would be the most ill-advised scenario but the one that pays off the most. Markets would have their ‘gotcha’ moment with Macklem getting weak kneed. So, the reverse logic argument against a hold is that it’s highly premature to go out of your way to drive easier financial conditions. If they do, housing rips, inflation resurfaces, and they’re back at it all again later imo.
  2. Hike and signal a soft pause: Repeat that they remain prepared to be ‘forceful’ if they get surprised to the upside of developments. This might not be a bad compromise and largely priced in OIS but there would still be some uncertainty around whether they are done which might restrain any front-end pile-on.
  3. Hike and signal a hard pause: This could drive a modest front-end rally imo on the conviction the BoC would signal that it’s sure it doesn’t need any further tightening and this may be taken as a sign they’re worried if they have such a high degree of conviction.
  4. Hike and remain data dependent toward future moves: This would probably drive a sell off at the front-end with nothing priced by way of hikes after today. This is what I would do if I were them.