Markets pricing significantly less rate cuts for the BoC than the Fed this year yet see BoC policy more restrictive than the Fed

January employment hints at seasonal strength in Q1

• CAD: Canada’s employment data released Friday shows a 37.7k jobs rise in January versus consensus looking for +15k and stronger than the pace of the last few months but still a modest pace of job growth overall relative to the even faster increase in population. Despite the comparatively modest job gains relative to population growth, the unemployment rate falls to 5.7% versus the prior month’s 5.8% and consensus expectations for 5.9% due to a drop in the labor force participation rate. Citi Research expect the participation rate may rebound after January but do not expect the BoC to be particularly concerned over a weakening labor market until the unemployment rate climbs towards the mid-6% range.
   
• CAD: While the increase in employment is stronger than consensus expectations, more important is the 0.6%MoM increase in actual hours worked in January. This is the strongest increase in hours worked since January 2023, and while not always closely correlated with activity, does suggest that similar issues with seasonal adjustment may repeat this year. This led to a very strong increase in Q1 GDP in 2023. While Q1-2024 growth is unlikely to be as strong as the 2.5% increase last year, solid Q1 activity following a likely stronger Q4-2023 could complicate BoC’s expectations that a closed output gap will continue to weigh on inflationary pressures (Citi Research however still expect soft 0.2% growth). Meanwhile, wages in January do retrace modestly following a jump higher in December, but wage growth is still running around 4-5% despite many months of labor market loosening. The longer wage growth remains strong, it will be harder for BoC officials to keep saying they expect wages to slow.

Week Ahead:

US - Inflation watch and retail sales in focus this week

• USD: US January CPI MoM – Citi: 0.1%, median: 0.2%, prior: 0.3%; CPI YoY – Citi: 2.9%, median: 2.9%, prior: 3.4%; CPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 3.7%, median: 3.7%, prior: 3.9% - Citi Research expect a 0.168%MoM increase in core CPI in January, a softer reading than in recent months. However, many services prices should remain strong overall in January but core services prices excluding shelter should rise 0.23%MoM, softer than the 0.4-0.5% monthly pace of the last few months.
   
• USD: US January PPI Final Demand MoM – Citi: 0.1%, median: 0.1%, prior: -0.1%; PPI Final Demand YoY – Citi: 0.6%, median: NA, prior: 1.0%; PPI ex Food, Energy MoM – Citi: 0.1%, median: 0.1%, prior: 0.0%; PPI ex Food, Energy YoY – Citi: 1.7%, median: NA, prior: 1.8%; PPI ex Food, Energy, Trade MoM – Citi: 0.2%, median: 0.1%, prior: 0.2%; PPI ex Food, Energy, Trade YoY – Citi: 2.1%, median: NA, prior: 2.5% - Citi Research expect a modest 0.1%MoM increase in total PPI final demand in January, with a 0.2%MoM increase in core PPI which excludes food, energy, and trade services prices. Aside from the details that matter for PCE inflation, PPI data will be increasingly important to watch in the coming months for signs that new supply disruptions in the Red Sea and the resulting increase in shipping costs could be passed on to consumer inflation.
   
• USD: US January Industrial Production – Citi: 0.0%, median: 0.3%, prior: 0.1%; Manufacturing Production – Citi: -0.3%, median: 0.0%, prior: 0.1%; Capacity Utilization – Citi: 78.6%, median: 78.9%, prior: 78.6% - industrial production should remain unchanged on the month, with a 0.3%MoM decline in the largest subset of manufacturing. Weakness in production should be largely broad-based across subsectors, with a decline in auto production despite production levels not quite reattain levels from before the autoworkers’ strike in September/October. But recent strengthening in ISM manufacturing bears watching, as manufacturing activity would benefit from lower rates ant the loosening of financial conditions in the last months of 2023.
   
• USD: US January Retail Sales – Citi: -0.6%, median: -0.2%, prior: 0.6%; Retail Sales ex Auto – Citi: -0.2%, median: 0.1%, prior: 0.4%; Retail Sales ex Auto, Gas – Citi: -0.2%, median: 0.2%, prior: 0.6%; Retail Sales Control Group – Citi: 0.1%, median: 0.2%, prior: 0.8% - retail sales have been surprising to the upside for several months in a row and the rebound in real goods demand has been stronger than expected. Goods and services have been contributing almost equally to growth over the last couple of quarters. Consumption overall should remain generally supported as long as the labor market holds up and incomes are increasing but Citi Research expect a softer retail sales print in January. Seasonal adjustment dynamics also imply some downside risk to the January retail sales this year as they expect sales to decline by less in non-seasonally adjusted terms than they did during the prior year.
   
• USD: University of Michigan Sentiment – Citi: 78.5, median: 80.0, prior: 79.0; 1Yr Inflation Expectations – Citi: 3.1%, median: NA, prior: 2.9%; 5-10Yr Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.9% - consumer sentiment has been improving in recent months as gasoline prices have been declining and inflation has moderated faster than expected while the labor market has held up well. Citi Research expect the University of Michigan Sentiment Index to remain around the current level in the February preliminary report. Consumer sentiment has also improved as inflation expectations have declined sharply. Citi Research expect 1Yr inflation expectations to bounce back modestly to 3.1% from 2.9% in February, which would still be around the pre-pandemic level when inflation was low. 5-10Yr inflation expectations have declined too and Citi Research expect them to stay stable at 2.9%. A modest bounce back in inflation expectations would not be very surprising or concerning for Fed officials.

Euro area and UK – UK inflation, jobs and GDP data as well as Swiss CPI and German ZEW in focus this week

• GBP: UK Inflation: Underlying pressures still easing — Citi Research expect headline inflation to accelerate marginally this week from 4.0% to 4.1%. Sequential inflation – excluding energy – will likely remain very close to pre-Covid rates at just 0.1pp above. Citi Research expect services inflation in a 6.7-6.8% range but overall, the MPC’s preferred measure of underlying inflation is likely to remain flat at 6.4%. UK CPI Inflation, January – Citi Forecast 4.1% YY, Consensus 4.2%, Prior 4.0% YY (BoE: 4.1% YY - Feb MPR); CPI Core, January – Citi Forecast 5.2% YY, Consensus 5.2%, Prior 5.1% YY (Services still adding, goods weighing); BoE: Bailey speaks.
   
• GBP: UK Labor Market: Bonus Pay Weighing — this week’s UK LFS data will likely show a deceleration in employment growth in line with weak survey data. Payrolls will likely remain negative. Unemployment more likely ticked up than not from the revised 3.9% level – although uncertainty here given the response rate remains large. On wages, Citi Research expect private sector regular pay to print at 6.0% - in line with the Bank’s February nowcast. Headline total and regular pay will likely print at 6.0% and 5.5% - in the latter case a little below consensus. UK Vacancies, Nov-Jan – Citi Forecast 923k, Prior 934k (Larger fall to come in Q1-24); Pay rolled Employees (MM Change), January – Citi Forecast -7.5k, Consensus -20k, Prior -24k (Upward revision to December likely); Employment, Oct-Dec – Citi Forecast 25k 3M, Consensus 63k, Prior 102k 3M/3M (Soft data still very weak); Unemployment Rate, Oct-Dec – Citi Forecast 4.0%, Consensus 4.0%, Prior 3.9% (Average Weekly Earnings, Oct-Dec); Citi Forecast 5.5% 3M YY, Consensus 5.7% YY, Prior 6.5% 3M YY (three month by three month rates falling to 1.6% on private sector regular pay measure); AWE Ex Bonus, Oct-Dec – Citi Forecast 6.0%3M YY, Consensus 6.0%, Prior 6.6% 3M YY (private sector regular pay in line with BoE).
   
• GBP: UK Growth: Shallow Recession — Citi Research expect the monthly output measure of GVA to show activity shrinking by 0.1% QoQ in this week’s GDP data, meeting the definition of a technical recession. Construction activity should tick up marginally. Consumer facing and public sector services output both likely fell on the month – in the former case meaningfully. Citi Research expect the impact to be partly offset by a continued improvement in professional services and real estate output. Monthly GDP, December – Citi Forecast -0.1%MM, Consensus -0.2% MM, Prior 0.3% MM (retrenchment after a strong November); 3M/3M, December – Citi Forecast -0.1% 3M/3M, Prior -0.2% 3M/3M (shallow recession); UK: Retail Sales, January – Citi Forecast 1.8% MM, Consensus 1.5%, Prior -3.2% MM (CHAPS indicator improving); Ex Auto Fuels, January – Citi Forecast 1.3% MM, Consensus 1.9%, Prior -3.3% MM.
   
• CHF: Swiss Inflation — under pressure from the strong Franc, SNB President Thomas Jordan has repeatedly intervened verbally and the Citi Research FX intervention tracker suggests that the SNB may have been buying FX assets at the fastest rate since 2020. So far, it has not used interest rate cuts, but if inflation comes in significantly lower than expected (Citi 1.9% for January, SNB 1.8% in Q1), the SNB could cut as early as March. Switzerland: CPI Inflation, January – Citi Forecast 1.9% YY, Consensus 1.7% YY, Prior 1.7%; CPI Core, January – Citi Forecast 1.8% YY, Prior 1.5%.
   
• EUR: ZEW investor confidence — divergence between investor expectations for Germany and the rest of the Euro Area are rare. After disappointing growth data and street protests in Germany, Citi Research expect the widest gap in expectations since 2017. ECB speeches and data cut-off — the data cut-off for March projections has varied from 4 weeks before the meeting in 2023 to just 2 weeks in 2022. If it is 3 weeks this time, Wednesday 14 February could be the date. Philip Lane on Monday at a statistics conference and Isabel Schnabel on Friday give keynote speeches. Germany: ZEW Expectations, February – Citi Forecast 17.0, Consensus 18.1, Prior 15.2; ZEW Current Assessment, February – Citi Forecast -79.0, Consensus -79.5, Prior -77.3; Euro Area: ZEW Expectations, February – Citi Forecast 28.0, Prior 22.7.

Japan – Q4 real GDP in focus this week

• JPY: Japan real GDP to increase 1.1% QoQ annualized in Q4’24 — Citi Research estimate that real GDP increased 0.3% QoQ and 1.1% QoQ annualized in the fourth quarter, turning around from negative growth of -0.7% QoQ and -2.9% QoQ annualized in the third quarter. However, the content of growth looks unsustainable because some large deals in services exports pushed up external demand. With real wages continuing to decrease YoY, growth in domestic demand, private consumption in particular, remained lackluster. If the Citi Research projection is correct, the output gap that the BoJ calculates looks unlikely to turn visibly positive in the fourth quarter. However, this would not get in the way of the BoJ’s lifting of NIRP.

Commodity Bloc - Australia’s January jobs report in focus this week

• AUD: Australia Labor Force Survey: Citi employment change forecast; 10k, Previous; -65.1k; Citi unemployment rate forecast; 4.1%, Previous; 3.9%; Citi participation rate forecast;66.9%, Previous; 66.8% - risks to the January LFS are fairly even sided. Taken together, both December and January tend to have the largest swing for employment growth in original terms. Generally, December tends to see a large amount of new job-additions ahead of the X-mas period and Summer Holidays. These tend to be reversed in January. So in original terms, December has a large increase in employment while January has a large reduction. Given this is seasonal, the ABS aims to smooth these patterns out in the seasonal-adjusted estimate. The December LFS saw one of the weakest increases in NSA employment of only 18k. The usual pre-covid average was above 100k. It was also one of the weakest increases in December employment since the early 1980s, thus leading to a large 65k decrease in SA employment. This would mean a weaker seasonally adjusted employment increase in January. However, the risk is that the changing seasonal patterns could impact the estimate and could see a larger increase in employment in February, and the unemployment rate fall back.

Asia EM - China new Yuan loans, social financing and money supply in focus this week

• CNH: China New Yuan Loans (CNY bn) January – Citi Forecast 4500, Consensus 4500, Prior 1170.9; Total Social Financing (CNY bn); Money Supply (M2, %YoY); Money Supply (M1, %YoY) – Citi Forecast 3.8, Consensus 2.9, Prior 1.3 – Citi Forecast 9.5, Consensus 9.3, Prior 9.7 – Citi Forecast 5500, Consensus 5600, Prior 1940.1 – Citi Research do not expect a supercharged opening of new loans or Total Social Financing (TSF) in 2024. New RMB loans could hit ~RMB4.5trn in January, driving new TSF to ~RMB5.5trn. The PBoC could be aiming to smooth the pace of lending this year and to enhance the stability of loan growth (PBoC, Jan 24, 2024). The share of this January for new loans in the whole year could be lower compared with 21.5% in 2023. In the meantime, credit demand could remain muted. The property sector had a soft start with primary sales at top-30 cities contracting by another -5.6%YoY in January. The manufacturing PMI data also pointed to a picture with supply better than demand, and external demand stronger than domestic demand. In addition, government bond issuance was slow, with net financing at ~RMB300bn vs. RMB414bn in last January. Policymakers could be counting on the spillover from stimulus placed in late 2023, especially the budget revision and the PSL resumption. For monetary aggregates, M1 could be distorted by the late CNY. There could be much higher M1 growth at 3.8%YoY for January, but it is unlikely to mark a turning point.