Ahead Today
G3: US Retail Sales, UK CPI, Eurozone CPI, US Mortgage Applications
Asia: China GDP, China Retail Sales, Industrial Production, Fixed Investment
Market Highlights
Markets pared back expectations of the pace of Fed rate cuts as Governor Christopher Waller, one of the more hawkish and respected members of the FOMC spoke yesterday. There were 3 takeaways from his speech. First, he said that rate cuts can be slow and methodical, given resilient (and moderating) growth so far, and also given the good progress seen in bringing inflation toward 2%. Second, his tone was neutral, with the balance shifting to both growth and inflation. He is also looking out closely for any signs of labour market weakness including if the job vacancy rate falls below 4.5% (from 5.3% currently). Lastly, the Fed can cut rates this year as long as inflation doesn’t rebound and stay elevated, likely indicating that he is willing to look past temporary supply-side driven price spikes.
The important takeaways are that the bar to Fed rate hikes are high, and the path of least resistance for the Fed is to cut rates this year, but the open question is really about the pace and perhaps also timing. The US Dollar strengthened by 0.93%, US 10-year yields rose to 4.06%, while equity markets declined.
Meanwhile former US President Trump trumped in the Iowa caucus to kickstart the US Presidential Elections, while supply chain disruptions in the Red Sea continued.
Regional FX
Asian FX were generally weaker against the Dollar, with KRW underperforming (-0.6%) while USDCNH rose to 7.21. China will release its 4Q GDP estimates, together with key monthly data such as retail sales, industrial production and fixed assets investment later today. This also comes on the back of the recent surprise decision by PBOC to keep its 1-year MLF rate unchanged. We had news overnight saying China is considering issuing 1 trillion yuan of special sovereign bonds, to fund projects related to food, energy, supply chains and urbanization. We will also have Bank Indonesia’s policy decision up today. While we expect an unchanged rate decision, markets will also watch closely for any dovish hints or change in tone.
