Weekly economic and financial commentary

United States: Almost everything coming up roses

• Data released this week garnered further optimism that the economy can power through the Federal Reserve's efforts to corral inflation—an endeavor the Fed could increasingly be construed as achieving. Economic activity ended the year on a better footing than expected, and inflation continued its deceleration.
• Next week: Construction Spending (Thu.), ISM Manufacturing (Thu.), Employment (Fri.)

International: Foreign central banks at the forefront

• It was a busy week for foreign central banks. The Bank of Japan appears to be on course for an April rate hike, while a dovish Bank of Canada announcement suggested the risks are tilted toward an earlier initial rate cut than our June base case. We still forecast an initial rate cut from the European Central Bank in April, though we acknowledge that risks for a later June move do exist.
• Next week: China PMIs (Wed.), Bank of England Policy Rate (Thu.), Eurozone CPI (Thu.)

Interest rate watch: In a holding pattern

• As discussed in our Fed Flashlight report released this week, we share the near-universally held view that the FOMC will leave the fed funds rate and pace of quantitative tightening (QT) unchanged at its upcoming meeting on January 31.

Credit market insights: Increased borrowing in the Beige Book

• In the most recent Beige Book released by the Fed, a majority of the 12 Federal Reserve Districts reported little or no change in economic activity, reflecting the continuing resilience of the economy. However, closer examination of this month’s Beige Book reveals the cracks that are beginning to emerge in the economy, particularly for household borrowing.

Topic of the week: Sea of red

• The recent Houthi militant attacks in the Red Sea have thrown a wrench in global supply chains. Container ship spot rates have jumped as capacity is stretched and popular trade routes are diverted around the southern tip of Africa. For the U.S., the impact may be more muted as businesses look to be in far better shape to weather any potential supply disruption today.

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