Weekly Market Outlook – As central bank meetings commence in 2023, the Bank of Canada will announce its first policy decision of the year, a week after the Bank of Japan. As investors juggle to reach a consensus about the recessionary risks, they will be anxiously awaiting the first PMI readings of 2023 this week. Moreover, the advanced GDP estimate for the final quarter of 2022, together with PCE inflation data, will be released in the US. The latest CPI numbers in Australia and New Zealand also deserves attention.
What to watch on the Economic Calendar this week
Monday, Jan 23:
- JPY: BoJ Monetary Policy Meeting Minutes
- CAD: New Housing Price Index (DEC)
- EUR: Consumer Confidence Flash (JAN)
- AUD: Flash Manufacturing PMI
- JPY: Flash Manufacturing PMI
Tuesday, Jan 24:
- JPY: BOJ Core CPI
- CHF: Trade Balance
- EUR: GfK Consumer Confidence (FEB)
- EUR: French Flash Manufacturing PMI
- EUR: German Flash Manufacturing PMI
- GBP: Flash Manufacturing PMI
- GBP: CBI Industrial Trends Orders (JAN)
- USD: Flash Services PMI
- USD: Richmond Fed Manufacturing Index (JAN)
- NZD: CPI (Q4)
- AUD: CPI (Q4)
- AUD: CPI (DEC)
Wednesday, Jan 25:
- GBP: PPI (DEC)
- EUR: Germany Ifo Business Climate
- CAD: BoC Interest Rate Decision
- USD: Crude Inventories
- CAD: BOC Press Conference
- JPY: BoJ Summary of Opinions
Thursday, Jan 26:
- USD: Durable Goods Orders (DEC)
- USD: GDP Advanced Growth Rate (Q4)
- USD: Core PCE Prices Advanced (Q4)
- USD: Unemployment Claims
- USD: New Home Sales (DEC)
- JPY: Tokyo Core CPI
- AUD: PPI (Q4)
Friday, Jan 27:
- EUR: Spanish Flash GDP
- USD: Core PCE Price Index (DEC)
- USD: Personal Income (DEC)
- USD: Personal Spending (DEC)
- USD: Michigan Consumer Sentiment Final (JAN)
- USD: Pending Home Sales (DEC)
Stay informed of the most significant forex market events in the upcoming week by monitoring the Economic Calendar.
BoC may consider a 25bps rate hike!
With many central banks approaching the end of their tightening cycle after spending much of the last year’s front-loading rate hikes, this theme is likely to dominate at least the first half of 2023. Despite the possibility that the Bank of Canada might stop raising rates when it meets on Wednesday, the bank will likely increase its overnight rate by 25 basis points to 4.50% in one final tightening move.
The Canadian inflation rate peaked in June and has been gradually hovering below 7% ever since. A strong retreat in CPI gathered pace in December, dropping to 6.3% y/y. Yet underlying inflation hasn’t changed much. Moreover, employment surged in December, so a pause seems unlikely.
About 60% of bets are on a 25-bps rate increase, while the remaining 40% of bets are on no change. Consequently, the Canadian dollar may be able to gain if the Bank of Canada raises rates as expected. However, the Loonie is more likely to slip after the Bank’s decision if it continues to say that it “will consider whether the policy interest rate needs to be raised further”.
US data could have a mixed impact on the dollar
Investors are growing increasingly concerned about an impending recession south of the border due to the Fed’s continued rate hikes. While inflation in the United States is well under control, the economy is showing signs of cracks. One of the few bright spots is the hot labor market. The Fed has been able to raise rates at the terminal rate of somewhere above 5%, but markets are increasingly out of step with the Fed because payrolls are a lagging indicator.
This divergence has led to a sharp drop in the US dollar, and this week’s data could cause even more chaos. Both durable goods orders and the initial estimate of Q4 GDP are expected to be upbeat, with durable goods orders expected to increase 2.5% m/m in December and Q4 GDP estimated to rise 2.8% on an annualized basis. Both are due on Thursday.
Meanwhile, Friday’s personal income and spending numbers for December could show another dip in business activity, according to the flash S&P Global PMI readings out on Tuesday. It is important to note, however, that the core PCE price index – the Fed’s preferred inflation indicator – may be able to move closer to the 2% target.
US indicators, such as the non-manufacturing PMI and retail sales, may not be as dire as some of the more recent ones, which could support the dollar. The financial results of tech favorites Microsoft and Tesla will be among those reported by Wall Street this quarter. However, traders might shrug off the data and instead focus on the earnings season.
Eurozone’s situation is less bad than expected
Flash PMIs are expected to be more prominent in Europe on Tuesday. Since the summer, the PMI numbers have largely depressed the euro, but lately, the picture has improved, and this could continue in January. Despite a slight increase in manufacturing PMI, the services sector is likely to return to growth, with the PMI increasing to 50.2 from 49.8.
As economic backdrops shift on both sides of the Atlantic, there are signs that any recession in Europe will be mild while a soft landing in the US is less likely after all, which is a game changer for the euro.
As the European Central Bank reiterated its pledge for several more 50-bps rate hikes in the coming meetings, the single currency looks promising for 2023 as it tries to gain a foothold above the $1.08 mark. Despite the PMIs’ indications that the worst is over for the continent from last year’s energy crisis, the euro’s uptrend may still have room to grow.
UK PMIs points to new highs for sterling
There are many similarities between the United Kingdom and the Eurozone, but not quite. There is a slimmer possibility that the British economy will avoid a recession, but Brexit and political chaos have made it difficult for the country to see a brighter future. Nevertheless, the pound could still exceed its December peak of $1.2445 if further positive surprises in UK data are released.
The flash January PMIs will be released on Tuesday, and investors will be watching for an increase in both services and manufacturing. There may also be some interest in the producer price index for December on Thursday.
Aussie and Kiwi on inflation watch
There will be less activity in Asia next week because Chinese markets will be closed for Lunar New Year celebrations. In contrast, the incoming CPI data should be a source of great excitement for antipodean currencies.
New Zealand and Australia will publish their quarterly consumer price index readings on Wednesday. As a result of the annual CPI rate creeping back up to 7.3% in November, the Reserve Bank of Australia’s fight against inflation suffered a setback. It is likely that investors will increase their bets on a 25-bps rate hike at the February meeting if there is another deterioration in December and for the fourth quarter overall. At the current odds, it is just a coin toss between a hike and no change.
Also on Tuesday, the Aussie will keep an eye on the flash PMIs and business confidence figures.
In terms of the Kiwi, investors have priced in a 25% chance that the Reserve Bank of New Zealand will hike rates by 75 bps at its February meeting following stronger-than-expected CPI prints. At 4.25%, the RBNZ’s cash rate is expected to peak well above 5%, so any upside surprises are likely to boost the local dollar long after its peers have been paused.
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