It’s another holiday-shortened week in the US.
Traders coming off the three-day weekend (the third in the last 23 days, as BMO’s US rates team pointed out) will be treated to Fed speak and a few notable data releases from the world’s largest economy, albeit nothing with the potential to be a game-changer.
Retail sales could conceivably erode what’s now quite a lot of conviction around a March rate cut from the Fed, but it’d take a multi-standard deviation upside surprise to upend those bets entirely.
Consensus is looking for a 0.4% advance on the headline. It’d be the eighth in nine months. Growth projections for Q4 will be refined based on the underlying aggregates. For what it’s worth, Atlanta Fed GDPNow stands at 2.2%.
As discussed at length in the latest Weekly, rate-cut bets for 2024 escalated meaningfully late last week, as markets looked right through upside on headline CPI in favor of trading PPI, which tipped more in the way of pipeline disinflation. Odds of a March Fed cut are now near 80%. That’s the context for the update on nominal spending.
Jobless claims will garner some attention too. Initial claims were just 202,000 in last week’s release, which pushed the four-week moving average to 207,750, the lowest since mid-October. Thursday’s update is for an NFP survey week. So that’ll be on the radar, as will existing home sales data for December and the preliminary read on University of Michigan sentiment for January.
A quick word on the Michigan release: Consumer sentiment and confidence were relatively buoyant last month thanks in part to meaningfully higher asset prices, but also to declining inflation expectations.
The Biden administration really (really) needs for sentiment and confidence to remain supported in the countdown to election day.
The geopolitical situation is exceptionally fraught following US airstrikes on Yemen, and the domestic political environment in the US has no precedent. Although Biden presided over an economic boom and full employment, inflation was a blight. So was foreign policy. There’s no room for error over the next 10 months, and any indication that the nascent rebound in consumer moods is fading would be unwelcome news indeed.
As far as Fed speakers, traders will hear from Barr, Bostic, Bowman, Williams and, most importantly, Waller. Twice. Markets will hear from Waller twice.
It was Waller, you’ll recall, who effectively pre-announced the Fed’s dovish pivot during remarks on November 28. That day, Waller suggested the Fed would likely cut rates multiple times in 2024 assuming inflation receded — recession or no recession. The “Waller doctrine” was born.
(As a quick aside: There’s nothing new or novel about Waller’s approach. It’s effectively just a reiteration of a rules-based framework to setting rates that says if you don’t cut as inflation falls, the real policy rate rises mechanically. John Williams discussed the prospects for 2024 cuts predicated on avoiding that sort of passive tightening over the summer, but no one was listening until Waller said it three months later.)
With the market now all but convinced of a March Fed cut, and pushing the envelope on full-year cuts (more than half a dozen priced versus three tipped by the December dot plot), any comments from Waller on the likely timing and scope of rate reductions could be market-moving.
Globally, activity data out of China will be eyed closely, particularly in light of CPI figures which showed Chinese consumer prices spent a third month in deflation in December. The PBoC may cut a key policy rate. China will also release GDP figures.
