ON DECK FOR THURSDAY, FEBRUARY 6
KEY POINTS:
- Yen-sterling divergence driven by hawkish BoJ, dovish BoE
- US mass layoffs plunged compared to recent patterns to start the year
- BoC’s Macklem to weigh in on monetary policy…
- …and may provide freshened guidance with the uncertainty damage done
- Did markets take the Bank of England too dovishly?
- Banxico expected to cut
- Hawkish BoJ talk
- US productivity-adjusted wages likely accelerated
Four central banks are weighing in alongside limited data. The list includes a BoE cut and guidance that may have been taken a little too dovishly by markets, a pending Banxico cut, BoJ comments overnight, and pending BoC remarks that may be informative. So far, the market tone is constructive with equities up across most exchanges, sovereign yields a touch higher, and the dollar broadly stronger except against the yen after BoJ-speak.
US Layoffs Were Seasonally Low Ahead of Expected Gain in Labour Costs
More US labour market data is on tap before the only data that truly matters tomorrow.
Mass layoffs in January were much lower than is seasonally normal for recent like months of January which is the approach to take since the data is not seasonally adjusted. There were 49,795 layoffs in January versus 82k last January and 103k the January before that. The past couple of years have seen a surge in layoffs to start the year in a definite departure from prior years and this likely reflects distorted seasonal hiring and firings at the start of each new corporate fiscal year. That didn’t happen this year. And it wasn’t due to California fires or anything like that, since the biggest decline in layoffs last month compared to the prior two months of January was in the East.
Chart 1 shows layoffs, and chart 2 makes the seasonal point by illustrating how low this year is starting off compared to the prior two.
Q4 productivity and unit labour costs will be released at 8:30amET and they are expected to signal an acceleration of productivity-adjusted labour costs. Initial claims (8:30amET) are also due after the prior week fell largely due to California’s fires that temporarily interrupted filings.
Hawk Talk from the BoJ
Hawkish talk from the BoJ lit up the yen again at least on a relative basis to other crosses while it holds it own against the dollar. BoJ Board member Tamura said overnight that he thinks the policy rate of 0.5% now should rise to 1% over the second half of fiscal 2025 ending March 31st next year. That added a little to BoJ pricing that was leaning in that direction with a next hike fully priced by September. Tamura is viewed as among the most hawkish Board members, if not the most hawkish.
Former BoJ Governor Kuroda also sounds enthused. He said “Japan’s economy is completely back. It’s perfectly natural for the BoJ to conduct policy normalization. There is no mistake that a virtuous cycle between wages and inflation has been recovered. The BoJ will proceed with normalization by carefully watching those trends.”
There is still a need for caution in my view as the BoJ marches through elevated global trade and investment uncertainty.
Bank of England Cuts, Dovish Stance Drives Weaker Sterling, Lower Yields
The Bank of England wasn’t as dovish sounding as markets seemed to think in my opinion. They cut Bank Rate by 25bps as widely expected, but the rest of the statement and forecasts amplified market pricing for further easing.
For one thing, the vote was 7 in favour of a 25bps cut and two (Dhingra, Mann) who preferred 50 and so yes, the fact that a minority were driving a debate for a bigger cut is somewhat dovish at the margin. The statement (here) continued to signal serial downside surprises to GDP growth in the near-term. Yet forecasts for inflation were revised up across 2025, 2026, and 2027 and CPI inflation remains above 2% for longer than expected in the last round of forecasts in November. Forecasts for growth were revised a little lower in 2025 but higher in 2026 and 2027. The supply side is expected to grow more slowly than previously expected and guidance indicates that while tariffs are not incorporated into the forecasts, the uncertainty is expected to hamper investment.
Guidance noted that “Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restrain is appropriate.” They also indicated ‘a gradual approach’ in the prior statement.
Banxico Expected to Cut Again
Banxico is (almost) unanimously expected to cut its overnight rate by 50bps on Thursday, taking it down to 9.5%. Inflation continues to make progress (chart 3). There is obviously significant ongoing risk surrounding tariff developments. MXN has depreciated from about 16.7 to the dollar last Spring to about 20.6 now.
BoC Governor May Give Freshened Guidance
A BoC speech drop occurs after the market close today. BoC Governor Macklem will issue a speech titled “Future Challenges for Monetary Policy in the Americas” at 5pmET. He was to have attended the BIS conference in Mexico in person but cancelled that earlier this week and will now just issue his prepared speech on the BoC’s website. There will be no media lock up or Q&A. Watch closely what he says about the heightened trade uncertainty. My hunch is that he may lean toward saying the damage has been done regardless of whether tariffs actually do arrive or not, but with mixed effects on the supply side (via reduced investment) and demand (exports).
Light Overnight Data
As for data, the only notable release overnight was strong German factory orders. December was up 6.9% m/m which more than tripled consensus expectations, though recall that orders fell by over 5% the prior month. Maybe it’s tariff front-running, or just the latest extension of see-sawing German data.
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