ON DECK FOR WEDNESDAY, JANUARY 15
KEY POINTS:
- Markets have positive risk appetite on what may be the biggest day of the week
- Strong earnings from US financials supporting risk appetite with more on tap
- US CPI unlikely to influence FOMC expectations amid bigger developments
- UK core CPI and services inflation weaken, teeing up a BoE cut
- Canadian First Ministers meeting may reveal more on tariff responses
- Light Canadian data today
- Bank Indonesia delivers rate cut and currency intervention; rupiah weakens
Today is quite possibly the biggest day of the week. UK CPI teed up further expectations for a BoE cut. US core CPI and several big US bank earnings reports that are coming in strong so far but with key names after this note is published will dominate calendar-based risk, plus whatever other off-calendar risk we may face day to day. Watch for headlines this afternoon on Canada’s potential response to US trade aggression. So far, equities are broadly bid, so are sovereign bonds with gilts strongly leading the pack, and the dollar has a softer tone.
US BANK EARNINGS
US financials reporting before CPI this morning include GS, JP, Citi, Wells Fargo and BlackRock. The ones we know so far are shown in chart 1 along with expectations for the ones that are pending. JPMorgan handily beat expectations (EPS US$4.81, consensus $4.10) with better than expected ROE and revenues. BlackRock also beat with EPS of US$11.93 ($11.46 consensus). So did Wells Fargo (Q4 EPS US$1.43, consensus $1.348). On tap after this note is being published are Goldman Sachs (consensus Q4 EPS US$8.212, 7:30amET) and Citigroup (consensus Q4 EPS US$1.218, 8:00amET).
US CORE CPI SHOULDN’T MATTER TO NEARER-TERM FED EXPECTATIONS
Then US CPI arrives (8:30amET). It will matter, for as long as it takes to scan the sports scores. To the Fed by way of implications for tracking PCE? Nope. Not now anyway. Why? Nonfarm was strong, the economy is tracking well, and high uncertainty surrounds dual mandate pressures going forward. ’twas the week before Trump, and all through the house, not a creature was stirring, not even a mouse. Something’s shuffling down the chimney, Virginia, and this time I’m pretty sure it isn’t Santa! Or at least, not if what you wanted to wake up and see under your tree something like responsible fiscal policy, well informed trade policy, smart immigration policy, helpful crisis solutions, warmth toward allies, and something akin to a stable hand on the tiller. Maybe you think you found just that and of course I wouldn’t dream of suggesting otherwise…
For giggles, I went with 0.4% m/m SA for headline CPI and with core CPI at 0.3%. The Cleveland ‘nowcast’ is 0.4% for headline and 0.3% for core. Drivers are in my week ahead. A key one is the expectation that the seasonal adjustment factor is likely to overstate core CPI; the SA factors in each of 2020–23 have been the four strongest SA factors for like months of December in history and this reflects the recency bias in how they are calculated (chart 2). #fakeflation.
That said, what core indicates will then be married to the PPI components that relate to PCE in formulating an estimate for core PCE inflation that we get an eternity from now on January 31st; an eternity as it arrives after inauguration week, several executive orders, possible responses and retaliation, the Fed, your post-holiday credit card bill etc. Chart 3 shows that with generous rounding, the PPI components that matter to PCE should add up to 0.1 ppts to m/m PCE.
There will also be some light Fed-speak today including Kashkari (10amET), Williams (11amET), and Goolsbee (12pmET).
UK CORE INFLATION ADDS TO BOE CUT PRICING
UK core CPI may well have cemented a Bank of England rate cut on February 6th, although significant data and developments still lie ahead (jobs, wages, GDP, other UK readings, US policy actions etc). Core CPI was up by just 0.2% m/m NSA versus a 0.3% average for all like months of December. That makes December 2024 tied for the fifth lowest reading on record (chart 4). It was enough to pull the y/y core CPI reading down to 3.2% (3.5% prior, 3.4% consensus). Services inflation was also relatively weak compared to like months of December on record (chart 5).
Pricing for the February 6th BoE meeting moved up by about 6bps to 22bps, most of a quarter point cut.
BANK INDONESIA SURPRISES WITH A RATE CUT
Bank Indonesia surprised with a rate cut overnight. The reduction to 5.75% from 6% caught everyone within consensus by surprise. To date, BI has been more concerned about stability arguments including currency weakness and avoided rocking the boat. Despite intervening to support the rupiah, it still depreciated to the USD that is otherwise broadly losing ground to other crosses. The “pro-stability and growth” rationale given by Governor Perry Warjiyo didn’t work out so well on the stability part.
CANADA: TRUDEAU, LIGHT DATA
A First Ministers’ meeting will be held this morning at 11amET that will also include the FinMin, Foreign Affairs Minister, and Canadian Ambassador to the US. Media availability will be held at 3pmET. Canada’s response to potential tariffs etc is likely to be a focus.
Canada also updates an expected gain in manufacturing sales (8:30amET) and dips in existing home sales (9amET) and wholesale trade (8:30amET).
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