The four most important events of the week. Central bank decisions and PCE inflation from the USA

Decision EBC on interest rates - 25/01 - looking at the economic performance of the euro area, we are seeing slight growth from the third quarter of 2022, while inflation is also slowing down rapidly. Yet for all this economic weakness, the ECB insisted it was not close to considering cutting interest rates, raising them as recently as September last year. Headline inflation fell to 2,4% in November, although it rose again to 2,9% in December, while core prices fell to 3,4%. This rebound in headline inflation, while undoubtedly driven by underlying effects, will be used as evidence by the hawks in the governing council that interest rates must remain high, but there is already evidence that the interest rate consensus is breaking down and while further rate increases, economic data increasingly supports the idea of ​​a cut sooner rather than later.

Markets currently assume that the ECB will cut rates four times this year in 4 bp increments, starting in June. This contrasts with the market valuation of 25 rate cuts by Federal Reserve, even though the US economy is much stronger than in Europe. No changes are expected this week, with the ECB's key refinancing rate currently set at 4,5%, but Q1 GDP, due to be published at the end of the month, and January CPI, due to be published on February 6, may in the coming In the next few weeks, there will be increasingly louder calls for a March rate cut, especially since PPI has been in deflation for XNUMX months.

Decision of the Bank of Japan on interest rates – 23/01

Expectations regarding an interest rate increase Bank of Japan have declined significantly over the past few weeks, and the latest economic data confirms there is no rush to lift rates from negative territory. The weakness of the US dollar in recent weeks has helped reduce pressure on the BOJ. The latest inflation data showed an easing of price pressures amid a sharp slowdown in cash gains in November. At its last meeting in December, the BOJ kept monetary policy unchanged while offering little guidance on its future intentions. However, the central bank is expected to continue trying to begin a process of more normal monetary policy over the next few months, with interest rates expected to move out of negative territory in the first half of this year.

Yields on Japanese 10-year bonds from November JGB dropped from a peak of 0,97% to below 0,6% earlier this year. For 2-year bonds, we are back to 0% after reaching 0,15%. Could we see a rebound following this week's policy announcement?

US GDP for the 25th quarter – 01/XNUMX

The U.S. economy is unlikely to grow at the same pace as in Q4,9, when the economy grew 3,1%, with personal consumption accounting for 1,9% of that growth after weaker results in Q2. The economy is expected to slow to an annualized 2023% to 2022% in Q0,6, which would be the weakest quarter of XNUMX and the weakest since QXNUMX XNUMX, when the U.S. economy contracted by -XNUMX%.

Nevertheless, the resilience of the American consumer was at the forefront of the resilience seen over the last 12 months, with a strong end to the year in terms of consumer spending. Given the continued tight nature of the U.S. labor market, there is no reason to believe this will not continue into QXNUMX.

Retail spending picked up late last year after a weak October, so Q3,3 personal consumption data may prove to be a weak spot before it is revised upwards. The price index is also expected to slow from the 2% seen in QXNUMX to around XNUMX%. Better-than-expected data may encourage markets to postpone the current date of the first Fed rate cut.

US Core PCE (December) – 26/01

With the US central bank scheduled to meet next week, markets are still trying to guess when the Fed's first rate cut might come, following Powell's surprisingly dovish turn at the central bank's last meeting just before Christmas. Data PCE will likely be a key benchmark for markets after the core PCE deflator slowed to 3,2% in November, falling from 3,4% in October and the lowest level since April 2021.

A further slowdown to 2,9%, which appears to be the consensus rate, could see markets continue to build on the prospect of a rate cut in March. A bigger concern for some Fed officials is that the headline CPI appears to be rising again. This will be the Fed's main concern before cutting early, as it could reignite the inflationary pressures that took so long to contain. This caution would suggest that March is too early for a US rate cut and that the market is getting ahead of itself.