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UK data fails to lift – BoE likely to signal a “dovish” hike at its February meeting

  • GBP: UK retail sales contract again in December, disappointing expectations. Headline retail sales fall -1.0% (Consensus 0.5%, Citi 0.6%) while retail sales excluding auto fuel decline -1.1% MM (Consensus 0.4%, Citi 0.5%). In both cases, prior data is also revised down. Sales are now 1.7% below their pre pandemic levels in volume terms due largely to consumers cutting back in the face of growing affordability concerns. Elsewhere, the UK GFK consumer confidence index also falls again in January to -45% (Citi and Consensus -40), with the data still at record lows. The weakness in discretionary spending, alongside consumer confidence, suggests any hope of a near term turnaround in consumer sentiment is likely misplaced. On balance, the data adds to dovish risks going into February’s BoE MPC meeting – given recent headline reductions in inflation. For now though, Citi analysts flag a 50bps hike at the February meeting – with wage growth and services inflation still in focus.
  • GBP: In comments Friday, BoE Governor Bailey argues ‘inflation has turned’ – speaking in an  interview, Governor Bailey notes that recent reductions in gas prices suggests the peak in UK inflation may now have likely passed. He adds that despite the positive impact on demand, this would – in his view – provide a dovish impetus at the margin, allowing the MPC to pause somewhat sooner. However, Bailey still remains concerned about the labor market, noting competitive pressures remain intense, putting upside pressure on wages, but adding that while the MPC had felt the need to push back on market expectations in November of terminal rate pricing of 5.2%, the subsequent reduction to 4.5% means the same reference could now be removed.

Japan December nationwide CPI hits 4.0% YoY but expected to moderate in H2’2023 

  • JPY: Japan’s nationwide core CPI rises 4.0% YoY in December, up from a 3.7% YoY climb in November, marking the highest inflation rate since December 1981 (4.0% YoY). The result matches consensus and is largely due to upward pressure from energy while core CPI inflation excluding special factors (energy, mobile phone charges and hotel charges) also picks up further, driven by higher inflation for “food other than fresh food.” Japan’s underlying inflation now at upper 1% range — core CPI inflation excluding special factors rises 3.25% YoY in December, accelerating from a 3.06% YoY advance in November and excluding “food other than fresh food,” core CPI (underlying inflation) increases 1.77% YoY, modestly up from a 1.72% YoY advance in November. Japan headline inflation to peak at 4.3% YoY in January — Citi analysts expect core CPI to reach +4.3% YoY in January but likely followed by a marked moderation from February as government measures to curb electricity and gas prices take effect (Citi analysts  pencil in +3.0% YoY in February and +2.6% YoY in March). With the impact of past increases in international commodity prices and earlier Yen depreciation vs USD diminishing from mid-year, core CPI inflation looks likely to slow to the 1% range from September.

Week ahead – Australia and NZ CPI data and the Bank of Canada policy meeting

  • USD: US Q4 GDP Annualized QoQ – Citi: 2.5%, median: 2.6%, prior: 3.2%; Personal Consumption – Citi: 3.1%, median: 2.7%, prior: 2.3%; Core PCE QoQ – Citi: 4.0%, median: 3.9%, prior: 4.7% - Citi analysts expect a 2.5% annualized increase in real GDP by expenditure in Q4, another quarter of above-potential GDP growth despite much higher interest rates weighing on sectors like housing. Consumption and business investment should also be stronger (a likely 3.1% rise in consumption in Q4). Notably, even throughout the last quarter of softer core CPI prints, Citi analysts still expect core PCE to rise at a 4.0% annualized pace, still twice the Fed’s 2% target.
  • USD: US December Personal Income – Citi: 0.3%, median: 0.2%, prior: 0.4%; Personal Spending – Citi: -0.1%, median: -0.1%, prior: 0.1%; Core PCE MoM – Citi: 0.3%, median: 0.3%, prior: 0.2%; Core PCE YoY – Citi: 4.5%, median: 4.4%, prior: 4.7% - Citi analysts expect a 0.3%MoM increase in personal income in December, a slightly softer increase than over much of 2022 while spending should fall a modest 0.1%MoM, declining for the first time since July. More importantly, core PCE in December is likely to rise by 0.32%MoM, based on elements of CPI and PPI. This would be a slightly stronger increase than 0.30% core CPI with risks of a print that rounds to 0.4%.
  • USD: US January S&P Global US Manufacturing PMI – Citi: 46.0, median: 46.8, prior: 46.2; S&P Global US Services PMI – Citi: 45.6, median: 45.5, prior: 44.7 – Citi analysts expect a slight decline in S&P Manufacturing PMI in January. Generally hard and soft data have been pointing to weaker demand for goods in recent months and the S&P Manufacturing PMI is likely to continue staying in contractionary territory in the coming quarters. Meanwhile, S&P Services PMI should increase modestly to 45.6 from 44.7, which would bring it more in line with the ISM Services PMI that fell into contractionary territory last month.
  • NZD: NZ Q4 CPI Citi QoQ forecast; 0.9%, Previous; 2.2%; Citi YoY forecast; 6.7%, Previous; 7.2% - Citi analysts’ NZ Q4 2022 CPI forecast of 0.9% represents a substantial slowing from the average of 1.9% for all preceding quarters last year and is also considerably below RBNZ’s 1.7% forecast in November. This means total CPI inflation has probably peaked and would provide RBNZ with an opportunity to cool its jets. RBNZ Governor Orr will update the market on OCR guidance is February 22. Citi analysts remain comfortable with their +50bps OCR increase for February followed by a final +25bp increase in April for a peak rate of 5.00%.
  • AUD: Australia Q4 CPI Citi QoQ forecast; 1.7%, Previous; 1.8%, Citi YoY forecast; 7.7%, Previous; 7.3% - Australia’s inflation is set to accelerate in Q4 with Citi analysts also upwardly revising their estimate of underlying inflation to 1.5% (previous 1.4%). This is because inflation is more broad-based, particularly across the services sector. On a yearly basis, headline inflation is expected to accelerate to 7.7% in Q4, and underlying inflation to 6.1%. These are still comfortably within the RBA’s previous forecasts of 8% and 6.5%, respectively but risks to the Q4 CPI report remain to the upside due to a tight labor market with wages growth accelerating.
  • CAD: Bank of Canada Rate Decision – Citi: 4.50%, median: 4.50%, prior: 4.25% - since the December meeting, local  data has pointed towards stronger growth and higher inflation than expected, Citi analysts expect another 25bp hike this week to 4.50% with the updated policy statement likely to describe both growth and the labor market as having evolved somewhat stronger than expected, although with increasing concerns over softer activity as shown in the Q4 Business Outlook Survey. While there is a possibility that the BoC could show some preference for pausing rates and assessing how economic conditions evolve, Citi analysts expect only very minor changes to guidance and their base case remains for another 25bp hike in March, although  highly data-dependent.