After a relatively quiet start to the year on the economic event front, if not in markets where last week's FOMC Minutes sparked the worst bond rout since 2020 triggering the worst first week for the Nasdaq since the dot com bubble burst...
... we have a "simply a massive week ahead for markets" according to Nomura's Charlie McElligott, with Powell testimony and bunches of Fed speakers, along with US economic releases headlined by the market’s most important datapoint in the CPI release Wednesday, in addition to PPI, Retail Sales and Consumer Sentiment over the course of the week, plus two Duration-heavy auctions ($36B of 10Y and $22B 30Y, on top of tomorrow’s $52B 3Y) and finally, US corporate earnings season kickoff (highlighted by JPM, C and WFC this upcoming Friday)
Picking up the weekly preview baton, Rabobank writes that there will be little opportunity not to think about the Fed in the week ahead. The Bloomberg market consensus for Wednesday’s US December CPI inflation release stands at an astounding 7% y/y. This blows out of the water the 5.6% y/y cyclical high recorded in July 2008, and would be just a hair below the 7.1% y/y high of June 1982. The Fed goes into pre-FOMC blackout at the weekend and all this week’s Fedspeak will therefore be very closely watched as the committee are moving very rapidly at the moment towards an ever tightening bias in their commentary. Even the doves are coming over to the other side.
US December PPI inflation data due on Thursday will likely turn the inflation thermostat up another notch or two. Later in the week, the University of Michigan inflation expectations survey will be watched closely and used to judge to what degree to Fed may have fallen behind the curve. That said, US retail sales data are expected to soften in December on the back of supply shortages and possibly as a result of Omicron. Several G10 central banks have suggested that the impact of this variant of Covid is unlikely to throw their respective economic recoveries off-course. However, it remains a threat and, in the US, fears about the impact of the fiscal cliff are also in the background. In addition to a slew of data releases, the coming week will bring another new earnings season and a rich line up of Fed speakers. Among them will be Mester, George and Bullard; all hawks and all voting members of the FOMC this year. The Senate confirmation hearings for Fed Chair Powell and Vice-Chair Brainard will enhance the focus on the Fed this week.
Eurozone CPI inflation unexpectedly hit 5% y/y in December last week. ECB Chief economist Lane issued fresh reassurances on Friday that this current level of prices is part of the pandemic inflation cycle and that inflation will come down this year. Friday also saw the Bundesbank formally appointing Nagel as its new head. According to Germany’s Finance Minister Lindner, Nagel will ensure “continuity”. This suggests that it may not be long before Nagel issues a few hawkish remarks in an attempt to reconcile Germany’s historic fear of price pressures with the ECB’s continued dovish stance. Eurozone economic data releases this week include November industrial production and trade. Given the subsequent wave of Omicron both may be little outdated to provide much market fresh impetus.
Better news on Omicron continues to come from the UK. As the number of new cases continues to slip, Education Minister Zahawi has suggested that the UK could set an example of how to move from a pandemic to an endemic by cutting the isolation period to five days to ease pressures in the workforce. Given signs that the symptoms of Omicron may be less deadly than those of Delta, PM Johnson may have got away with his light touch restrictions for England over the holiday period. That said, his appeasement of his backbenchers may not have gone far enough. Yesterday, the PM was urged by MP Harper, Chair of the lockdown-sceptic Tory Recovery Group, to end all Covid related restrictions by the end of this month, or face a massive revolt within the party and the prospect of a leadership challenge later this year.
UK PM Johnson’s insistence that Brexit is ‘done’ has always been controversial. UK officials continue to grapple to put together new free trade deals and the full impact of Brexit is unlikely to be known for a generation. For Northern Ireland in particular Brexit appears to be far from ‘done’. Following the shock resignation last month of former Brexit Secretary Frost, Foreign Secretary Truss has taken over the role of negotiator with Brussels. Ahead of her first meeting with the EU’s Sefcovic, Truss has reignited the threat that the UK would be prepared to trigger Article 16 and find a unilateral solution for Northern Ireland if a negotiated compromise cannot be found. Northern Ireland’s membership of the EU’s single market has made trade difficult between the region and the British mainland. 2022 is a key election year for Northern Ireland with polls showing unionist parties on course to lose their majority for the first time since the partition of the island. By triggering Article 16, the UK could find itself on a path towards a trade war with the EU. UK economic data releases this week include November monthly GDP and production figures.
US and Russian officials are set to meet today for talks aimed as de-escalating tensions around Ukraine. Secretary of State Blinken commented over the weekend that he does not expect any breakthroughs this week but is hoping to find grounds for moving forward.
On Sunday evening Kazak officials retracted a statement alleging that more than 164 people had died during the recent wave of violence and instead confirmed ‘only’ 22 deaths. Blinken criticised President Kassym-Jomart Tokayev’s shoot-to-kill order remarking that it “is wrong and should be rescinded." The violence was triggered by the removal of a price cap that resulted in a surge in fuel prices. However, the uprising comes against the backdrop of general discontent with how the country is governed. As such global financial markets may be eying the developments in Kazakhstan as many other countries, notably also in the developing world, are currently grappling with rising energy and food prices, which have the potential to trigger unrest across the globe.
Elsewhere we start US earnings season, albeit slowly and late in the week with some important financials reporting: the highlights include Delta Air Lines on Thursday, before we hear from Citigroup, JPMorgan Chase, Wells Fargo and BlackRock on Friday.
Here is a quick look at key evens this week:
Monday January 10
- Data: Euro Area November unemployment rate, Italy November unemployment rate
Tuesday January 11
- Data: Japan preliminary November leading index, Italy November retail sales, US December NFIB small business optimism index
- Central Banks: Nomination hearing for Fed Chair Powell’s second term at Senate Banking Committee, Fed’s Mester, George and Bullard speak
Wednesday January 12
- Data: China December CPI, PPI, Euro Area November industrial production, US December CPI, monthly budget statement
- Central Banks: Federal Reserve releases Beige Book, BoJ Governor Kuroda speaks
Thursday January 13
- Data: Japan preliminary December machine tool orders, Italy November industrial production, US December PPI, weekly initial jobless claims, Japan December PPI (23:50 UK time)
- Central Banks: Nomination hearing for Governor Brainard as Fed Vice Chair at Senate Banking Committee, Fed’s Barkin and Evans speak
- Earnings: Delta Air Lines
Friday January 14
- Data: China December trade balance, UK November GDP, US December retail sales, capacity utilisation, industrial production, preliminary January University of Michigan consumer sentiment index
- Central Banks: Bank of Korea monetary policy decision, Fed’s Williams speaks
- Earnings: Citigroup, JPMorgan Chase, Wells Fargo, BlackRock
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Finally, courtesy of Goldman, here is a look at just the US, where the key economic data releases this week are the CPI report on Wednesday and the retail sales report on Friday. There are several speaking engagements from Fed officials this week, including Chair Powell and Governor Brainard’s confirmation hearings on Tuesday and Wednesday respectively.
Monday, January 10
- 10:00 AM Wholesale inventories, November final (consensus +1.2%, last +1.2%)
Tuesday, January 11
- 06:00 AM NFIB small business optimism, December (consensus 98.5, last 98.4)
- 09:12 AM Cleveland Fed President Mester (FOMC voter) speaks: Cleveland Fed President Loretta Mester will speak in an interview on Bloomberg Television. In her last public appearance, on December 1st, President Mester emphasized her view that “with the inflation data the way it is and with the job market as strong as it is”, the Fed should be in a position to “raise rates a couple of times next year.” Since President Mester’s remarks, labor market data has pointed to further tightening in the labor market, and inflation data has surprised to the upside.
- 09:30 AM Kansas City Fed President George (FOMC voter) speaks: Kansas City Fed President Esther George will discuss her outlook for the economy and monetary policy. Audience Q&A is expected. President George has not made public remarks since November 5th, when she stressed that “the argument for patience in the face of these inflation pressures has diminished.”
- 10:00 AM Fed Chair Powell’s confirmation hearing (FOMC voter): Fed Chair Jerome Powell will appear before the U.S. Senate Committee on Banking, Housing, and Urban Affairs for his confirmation hearing for his re-nomination to the role of Chair. Chair Powell’s re-appointment will preserve continuity at the Fed. As inflationary pressures continue and the labor market continues to tighten, we will be looking for indications of incremental changes to Chair Powell’s outlook in his testimony.
- 04:00 PM St. Louis Fed President Bullard (FOMC voter) speaks: St. Louis Fed President James Bullard will discuss the economy and monetary policy in a virtual event with the Mid-Sized Bank Coalition of America. President Bullard made public remarks earlier this week, in which he argued that the FOMC “could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation” and start balance sheet runoff “shortly after lifting off the policy rate.”
Wednesday, January 12
- 08:30 AM CPI (mom), December (GS +0.53%, consensus +0.4%, last +0.8%); Core CPI (mom), December (GS +0.58%, consensus +0.5%, last +0.5%); CPI (yoy), December (GS +7.12%, consensus +7.0%, last +6.8%); Core CPI (yoy), December (GS +5.49%, consensus +5.4%, last +4.9%): We estimate a 0.58% increase in December core CPI (mom sa), which would boost the year-on-year rate by 0.6pp to 5.5%. Our forecast reflects a further rise in used car auction prices and related upward pressure on new car prices. We also assume upward pressure on other core goods categories due to supply chain bottlenecks and low promotionality during the holiday season. While Omicron likely weighed on travel prices late in the month, we expect a more visible impact in the January report. We estimate rent +0.43% and OER +0.40% in December, reflecting the strength in our shelter tracker but an OER drag from imputed utilities. Health insurance prices also likely rose again, reflecting the gradual flow-through of the annual source data. We estimate a 0.53% increase in headline CPI (mom sa), reflecting rising food costs but a pullback in energy prices.
- 01:00 PM Minneapolis Fed President Kashkari (FOMC non-voter) speaks: Minneapolis Fed President Neel Kashkari will speak on interest rates, labor force participation, and bringing the labor market back to pre-pandemic strength at a St. Paul Area Chamber townhall event. Audience Q&A is expected. Earlier this week, President Kashkari argued that “using core inflation to indicate when we have reached maximum employment may be simpler than the more judgmental estimations of short-run vs. long-run maximum employment,” and that, while he believed inflationary pressures would eventually subside, “the costs of ending up in the high-inflation regime are likely larger than the costs of ending up back in the low-inflation regime.”
- 02:00 PM Beige Book: The Fed’s Beige Book is a summary of regional economic anecdotes from the 12 Federal Reserve districts. In this Beige Book, we look for anecdotes related to wage growth, price inflation, and supply chain disruptions. Earlier this week, Minneapolis Fed President Neel Kashkari noted that business contacts in his region continued to warn of labor shortages. Since President Kashkari’s comments, Friday’s employment report surprised to the upside on average hourly earnings and to the downside on payrolls.
Thursday, January 13
- 08:30 AM PPI final demand, December (GS +0.4%, consensus +0.4%, last +0.8%); PPI ex-food and energy, December (GS +0.5%, consensus +0.5%, last +0.7%); PPI ex-food, energy, and trade, December (GS +0.5%, consensus +0.5%, last +0.7%): We estimate a 0.5% increase for PPI ex-food and energy and PPI ex-food, energy and trade services, which would bring the year-on-year rates to +9.4% and +7.0% respectively. Our forecast reflects a continued boost from supply chain bottlenecks, labor shortages, and commodity prices. We estimate that headline PPI increased by 0.4% in December, which would bring the year-on-year rate to +9.8%, reflecting firm core inflation but a sequential decline in energy prices. Continued increases in input costs, along with strong profit margins, are one reason why we expect price pressures to remain elevated through the first half of 2022.
- 08:30 AM Initial jobless claims, week ended January 8 (GS 195k, consensus 200k, last 207k); Continuing jobless claims, week ended January 1 (consensus 1,760k, last 1,754k): We estimate initial jobless claims declined to 195k in the week ended January 8.
- 10:00 AM Fed Governor Brainard’s confirmation hearing (FOMC voter): Fed Governor Lael Brainard will appear before the U.S. Senate Committee on Banking, Housing, and Urban Affairs for her confirmation hearing for her nomination to the role of Vice Chair. Governor Brainard, one of the more dovish members on the FOMC, has not given a public speech since October 13th, so in her confirmation hearing we will be looking for further insight into her current stance and expectations for policy normalization.
- 12:00 PM Richmond Fed President Barkin (FOMC non-voter) speaks: Richmond Fed President Thomas Barkin will discuss the economic outlook at an event hosted by the Richmond Chamber of Commerce. In his last public appearance, on December 2nd, President Barkin said he expected “the readings for inflation over the next year … to be messy,” and that he supported normalizing monetary policy as the FOMC was doing.
- 01:00 PM Chicago Fed President Evans (FOMC non-voter) speaks: Chicago Fed President Charles Evans will discuss the economy and monetary policy at an event hosted by the Milwaukee Business Journal. Audience and moderated Q&A are expected. President Evans noted on November 18th that he still thought “the relative price increases coming from supply shocks will be diminishing, and … that the inflation data by the end of 2022 is going to be a lot closer to 2% than so many people think.”
- 06:00 PM Dallas Fed holds townhall on search for next President: The Dallas Fed will host a virtual townhall discussion on the ongoing search to choose its next President.
Friday, January 14
- 08:30 AM Retail sales, December (GS -0.5%, consensus -0.1%, last +0.3%); Retail sales ex-auto, December (GS -0.3%, consensus +0.2%, last +0.3%); Retail sales ex-auto & gas, December (GS -0.3%, consensus -0.1%, last +0.2%); Core retail sales, December (GS -0.2%, consensus +0.1%, last -0.1%): We estimate a 0.2% decline in core retail sales (ex-autos, gasoline, and building materials) in December (mom sa). While brick and mortar shopping activity picked up in the final weeks of the holiday season, we estimate a sequential decline in the nonstore category (mom sa). Relatedly, the elevated level of retail sales implies a high hurdle for incremental growth during the holiday season. We estimate a 0.5% decline in headline retail sales, reflecting the decline in auto sales.
- 08:30 AM Import price index, December (consensus +0.2%, last +0.7%): Export price index, December (consensus +0.3%, last +1.0%)
- 09:15 AM Industrial production, December (GS -1.0%, consensus +0.2%, last +0.5%); Manufacturing production, December (GS +0.5%, consensus +0.4%, last +0.7%); Capacity utilization, December (GS 76.0%, consensus 77.0%, last 76.8%): We estimate industrial production declined by 1.0% in December, reflecting declines in utilities and oil and gas extraction. We estimate capacity utilization declined by 0.8pp to 76.0%. We estimate a modest seasonally-adjusted increase in motor vehicle production in December, but expect production to remain well below its pre-pandemic level, reflecting continued supply-chain disruptions that may be further exacerbated by the Omicron wave in coming months.
- 10:00 AM University of Michigan consumer sentiment, January preliminary (GS 68.6, consensus 70.0, last 70.6): We expect the University of Michigan consumer sentiment index declined by 2.0pt to 68.6 in the preliminary January reading, reflecting declines in other confidence measures and increase spread of the Omicron variant.
- 10:00 AM Business inventories, November (consensus +1.2%, last +1.2%)
- 11:00 AM New York Fed President Williams (FOMC voter) speaks: New York Fed President John Williams will give a virtual speech to the Council on Foreign Relations. Text, and audience and moderated Q&A are expected. On December 17th, President Williams emphasized that inflation expectations were “a little higher in our projections now, especially for next year,” and noted that “raising interest rates would be a sign of a positive development in terms of where we are in the economic cycle.”
Source: Nomura, Rabobank, BofA, DB, Goldman