The Week Ahead: Fed, ECB, Bank of England, UK and US CPI
- US CPI (Nov) - 13/12 – the catalyst for the recent sharp slide in the US dollar was October’s CPI numbers, which came in well below expectations. The fall to 7.7% on the headline number along with a decline in core prices to 6.3% also saw yields slip back as well. Since then, we’ve heard a number of Fed speakers claim that any policy change won’t be made on the basis of one number, however this latest drop in headline CPI has followed a trend that has been in place since the June peaks of 9.1%. With US PPI also showing similar signs of having peaked, markets are taking the view that the Fed is likely to slow the pace of its rate hiking cycle to smaller increments. While the recent unexpected jump in average hourly earnings to 5.1% won’t have offered encouragement to some Fed policymakers that inflation is falling sustainably, it shouldn’t alter the calculus for a slowdown to a 50bps hike when the Fed concludes its last meeting of the year on Wednesday. Last week’s PPI numbers showed further evidence of a slowdown in inflationary pressures, despite coming in slightly higher than expected, and consequently expectations for November CPI are for a further slowdown to 7.3% from 7.7%, while core prices are expected to slip back to 6% from 6.3%. While this week’s numbers won’t alter the calculus for a December rate hike of 50bps the numbers could well offer important clues as to what next year might bring. If inflation continues to slow the choices for January could well see 25bps become a base case scenario.
- Fed rate decision – 14/12 – it seems almost certain in the wake of Fed chair Jay Powell’s speech at the Brookings Institute that we’ll see the Federal Reserve slow the pace of its rate hikes to 50bps this week. With rising evidence that growth is slowing, inflation is peaking and growing concerns over the effects of policy lags there appears to be a growing acknowledgement that a slowing of the pace of rate hikes is required in the full knowledge that the Fed can go on hiking for longer until it becomes apparent what the terminal rate actually is. In the past few days, the narrative has shifted towards what comes after this week, after the November payrolls report showed higher than expected wage growth and the latest ISM services report showed the US economy in fairly decent shape. This resilience has raised concerns that we could see further 50bps rate hikes heading well into next year, rather than a gradual slowing. Will this week’s CPI number for November reaffirm the slightly more hawkish narrative or shift the focus back to disinflationary concerns. Will Powell’s press conference offer any new insights into whether the prospect of a 25bps hike in January has become more or less likely in the face of mixed economic data.
- ECB rate decision – 15/12 – last month ECB President Christine Lagarde went to great lengths to suggest that as far as they were concerned inflation probably hadn’t peaked. While they could well be right, recent data suggests they probably aren’t. In October we saw big falls in German and Italian PPI, while headline CPI in the EU also fell back sharply from the record highs seen in October of 10.6% to 10% in the recent flash CPI numbers for November. A lot of ECB policymakers have expended a lot of capital in pushing the case for another 75bps rate hike this week, despite it being self-evident that the eurozone economy is slowing sharply in Q4. While the likes of the Bundesbank and other northern European countries are pushing the case for more aggressive hikes, it’s more likely that we’ll see a slowdown from the ECB as well from the 75bps hikes we saw at the last two meetings to 50bps when they meet later this week. It’s unlikely that there will be a big enough consensus for anything more than 50bps over concern of what a more aggressive posture might prompt, particularly when it comes to the borrowing costs of countries like Italy. It’s also difficult to see how much more the ECB will be able to do in 2023 given these same concerns. What might save them is that inflation does appear to be peaking, although the weather could still have a part to play if the weather gets extremely cold, and energy usage spikes.
- Bank of England rate decision (Nov) – 15/12 – when the Bank of England last met in November, they raised rates by 75bps then spent the press conference undermining that decision by expressing concern about the prospect of surging mortgage costs. Behind all of that was the fact that the fallout from the UK gilt market volatility may have made them slightly more cautious about being too hawkish. This seems a long time ago now. The key messaging in November was that rates were unlikely to go anywhere near as high as markets were pricing at the time, although they were still expected to rise, and that the UK economy was likely to face a 2-year recession. Given that a weak currency helps make the process of controlling inflation much more difficult the bank appears to have been let off the hook in recent weeks by the recent weakness in the US dollar which has pushed the pound sharply higher since that meeting. This rebound of almost 20% from the recent lows will make the central banks job that much easier to help keep a lid on prices, assuming that they don’t blow it by being too dovish when they meet this week. Unlike in the US and EU there are fewer signs in the UK that inflation is near to a short-term peak, even as the economy slows sharply. Nonetheless it probably won’t alter the fact that we will see a 50bps rate hike later this week, to 3.5% in line with the Federal Reserve and the ECB, although we can expect any guidance to be on the dovish side, with any terminal rate likely to be between 3.75% and 4%.
- UK CPI (Nov) – 14/12 – The main thrust of the move higher in UK October CPI to 11.1% from 10.1% in September was the increase in the energy price cap which pushed household bills up by 11.7%, while grocery food price inflation rose to 16.5%, with big increases in the price of staples like milk, eggs, and cheese. One of the more notable takeaways in recent weeks in the US and EU has been a sharp slowdown in inflationary pressure, although PPI in Europe is magnitudes higher than it is here in the UK so we aren’t comparing like for like. Nonetheless both annual input and output prices have been declining since June, albeit very slowly with input prices rising at their slowest pace since February back in October, by 17.2%, and similarly output prices which rose by 14.8%. Core prices were stable in October at 6.5%, remaining at a record high. We need to see some weakness in these prices as well as evidence that wage growth is slowing, and there has been little evidence of that, where we saw wages rise at 6% per annum in the three months to September. This remains the elephant in the room when it comes to the wider unemployment numbers, however vacancy rates still remain at elevated levels which means that there’s unlikely to be a spike in unemployment levels in the short term.
- UK Unemployment/Wages (Oct) – 13/12 – while unemployment edged slightly higher in September to 3.6%, it still remains close to 48-year lows. Wage growth including bonuses came in unchanged at 6%, over the same period, and 5.7% without bonuses, which is only just keeping pace with core prices. While all of this points to a tight labour market the focus remains very much on the economic inactivity rate which is at record highs, well above 20%, or over 2.5m.
- China retail sales (Nov) -15/12 - the recent China trade numbers showed a Chinese economy that has seen economic activity and demand collapse in the face of surging Covid cases, as well as popular revolt against its zero-covid policy, after an apartment block fire cost the lives of a number of people. The sharp fall in exports of -8.7% spoke to further weakness in economic output, the unrest at the Foxconn plant in Zhengzhou being one such example. Imports also fell sharply, by -10.6% a symptom of collapsing internal demand which could well be reflected in this week’s retail sales numbers. In October, retail sales in China fell by -0.5%, the first negative print since May, when the country was in the throes of another strict lockdown. The November numbers are expected to see a further decline of -3.9%, while industrial production is set to rise 3.9%, down from 5%.
- Adobe Q4 22 – 15/12 – Adobe shares slid back sharply in Q3, falling below their June lows after missing expectations on their Q3 numbers. In Q2 the company downgraded its Q3 guidance to $4.43bn below expectations of $4.52bn, and a full year forecast of $17.65bn, down from $17.9bn. While the Q3 numbers came in as expected, a further downgrade to Q4 spooked investors further with the company downgrading its outlook to $4.52bn, from $4.59bn. In addition, Adobe announced they had agreed a deal of $20bn in cash and stock to buy Figma, a mobile web interface design company, with perhaps the decline in the share price suggesting some scepticism on the part of shareholders that this is a good use of $20bn. Profits are expected to come in at $3.50c a share.
- Darden Restaurants Q2 23 – 16/12 – we’ve seen a decent rebound in Darden Restaurants shares in the last few weeks with the shares up over 25% from their June lows, and shrugging off a disappointing set of Q1 numbers. Net sales rose 6.1% to $2.45bn, slightly below expectations, while the costs of food, drink and labour costs ate into its profits. Its fine dining segment, Capital Grille outperformed with same store sales of 7.6%, however Olive Garden sales were lower than expected rising 2.3%. For the full year Darden expects EPS of $7.40 to $8, assuming an annual inflation rate of 6%, and revenues of $10.3bn. Q2 profits are expected to come in at $1.43c a share.
Author
Michael Hewson MSTA CFTe
Independent Analyst
Award winning technical analyst, trader and market commentator. In my many years in the business I’ve been passionate about delivering education to retail traders, as well as other financial professionals. Visit my Substack here.
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