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Investment Axioms: Week 04 | Jan 21-27, 2024

Updated: Jan 29

INSIDE

Highlights and Summary MacroEco Data

Highlights MacroEco Data

Timing the Bank of Japan (BOJ) and the European Central Bank (ECB) pivots; the People’s Bank of China (PBOC) stimulus

Last Monday night in the Western hemisphere (Tuesday morning in Japan), the BOJ kept its short-term rate at -0.1% and the target for the 10-year Japanese Government Bond (JGB) yield at 0.0% with an upper bound of 1.0%. Interestingly, BOJ Governor Ueda made a few surprising comments that suggested they're preparing to end yield-curve control (YCC) and negative rates sooner rather than later. Currently, it’s hard to pinpoint how soon they will act, but expectations from our research and the research of our partners suggest July more so than April. On the positive side, Mr. Ueda made it clear the BOJ will keep policy accommodative even after it moves away from its current framework.


With that said, January's surprisingly big drop in Tokyo inflation is likely to make the Bank of Japan think twice about ending negative rates sooner than later.


In China, the PBOC surprised the street with cuts to the Reserve Requirement Ratio (RRR), which we view as the first step to support a weakening economy. In his comments, Governor Pan Gongsheng made it clear this was just the beginning as he laid out the PBOC’s price objectives, the economy’s challenges, and the central bank’s room for other measurements.


The research of our partners showed weak demand in 2023, together more recently with a pickup in supply, has contributed the most to the Chinese disinflationary environment. The policy implication of that is very clear: the PBOC needs, and will have, to ease further.


In Europe, the ECB left its deposit facility rate unchanged at 4.00% and the main refinancing rates at 4.50% while preparing the ground for reductions. The two statements the ECB published on Thursday were somewhat dovish. That suggests the Governing Council is preparing the ground for an interest rate reduction. However, President Christine Lagarde refused to discuss when the cut may occur, suggesting it won't be anytime soon. The street believes that hawks will manage to delay cuts until June, mostly on the grounds of risk management (the economy isn’t collapsing and cutting too early and having to hike again later would be damaging).


While expectations that inflation will surprise towards the downside may create the momentum needed for an earlier cut, January preliminary PMI surveys, which suggests economic weakness but not a collapse, together with realized inflationary pressures that have been more difficult to control than expected,  are not helping to make the case for near term interest rate cuts. The ECB may conclude that waiting until June is the right and prudent thing to do.


Good news for the U.S. Federal Reserve Bank (the Fed)

In the US, growth, spending, and inflation data for the fourth quarter portrayed a “Goldilocks” economy that the Fed wants to see. However, data through mid-January show layoffs rising sharply. With the disinflation process well underway and risks more balanced, the direction of the decision by the Fed in March is currently a coin toss, literally.


A robust US GDP print fueled soft landing optimism, and core inflation undershot the Fed's 2% goal, but weaker survey data may indicate downward growth revisions. Here are some key insights from various sources[1] for week 04, which ended on January 27th, 2024:


  1. Recent jobless claims data may be painting a rosy labor market picture, as eligibility rates and income-coverage ratios paint a less optimistic picture.

    1. Layoff announcements have risen sharply in recent weeks. Seasonally adjusted initial jobless claims rose back to their 2019 average and continuing claims resumed their climb. Indicators from the Philadelphia Fed show the labor market weakening in nearly half of US states over the past three months.

  2. Personal Income and Spending registered robust gains in December, while core inflation, measured from personal consumption expenditures, stayed on track towards the Fed’s 2.0% target.

  3. Q4 GDP growth surprised even the most bullish estimate, rising at a +3.3% annualized rate, and boosted optimism for a soft landing. Core inflation, from GDP data, came in right at the Fed’s 2% goal.

    1. Inventory and improved trade balance drove the upside surprise, but both tend to be volatile and are not expected to contribute to growth in Q1.  Personal spending remained the primary source of GDP growth, with monthly data indicating spending accelerated throughout the quarter until a splurge over the holiday season, presumably from their credit cards. We’ll follow this point closely to see if this trend continues on a more fiscally responsible path or if uncontrollable spending will bring inflation back with a vengeance.

  4. With long-term interest rates off their peak, the Housing Sector is showing signs of life with new and pending home sales increasing in December.

  5. The biggest economic story of the week was the data for Personal Consumption Expenditures (PCE), the Fed’s preferred inflation metric, which came in-line with expectations with a +0.2% gain in December vs. -0.1% in the previous month. Year over year PCE headline also came in-line at +2.6% — flat from the previous month and at the lowest level since February of 2021 when inflation was on its way up. The spotlight is usually shunned on Core PCE data, which was up +0.2% in December vs. +0.1% in November. Year over year core PCE increased +2.9%, its first print below +3% since March of 2021. Core data refers to excluding potentially volatile food and energy costs.

    1. Even as personal income and spending registered robust gains in December, the inflation impulse is dulling. The three-month annualized pace of core inflation fell to 1.5%, and the six-month annualized pace remained at 1.9% — both below the Fed’s 2% average inflation target.

    2. The stage is set for the Fed to take steps toward cutting rates in coming months.

 

[1] As an independent company we gather various sources of information and analysis to create a mosaic of investment intellectual capital; further info at our endnotes.


Complete Summary of MacroEco Data By Region and Economic Model


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