MNI US OPEN: EZ Inflation Sees Sticky Core Ahead of the Fed

NEWS

MNI Fed Preview: February 2023 - Downshift, With “Ongoing” Concern

The Fed will downshift its rate hike pace in February for the second consecutive meeting, to 25bp from 50bp. The dovish risks to this meeting appear at least partly priced in, including some expectations of Statement language acknowledging decelerating inflation, or a clear signal that the end of the hiking cycle is near. However, there are many ways Powell could re-emphasize the FOMC’s view that the job is not nearly done yet.

MNI ECB Preview: February 2023 - With 50bp Fully Priced for February, Focus Shifts to the March Meeting

The ECB is set to hike policy rates by 50bp at the February meeting – a position that has now been well telegraphed and fully priced by the market. There is unlikely to be any surprise policy innovation beyond some technical details on how QT will be implemented. Markets will look for any clues on the March policy rate decision and we believe it more likely than not that Lagarde will hint at a similar sized hike at that meeting.

MNI BOE Preview: February 2023 - Vote Split Could See Dovish Reaction

The MNI Markets team expects a 50bp hike at the February 2023 MPC meeting, but see around a 30% probability subjectively of a 25bp hike instead. We think there is better risk-reward to position for a dovish outcome than for a hawkish move due to our expectations that there could be a more dovish vote split than the market expects.

G7 (MNI): Japan to Host Virtual Summit On 1-Yr Anniversary of Ukraine Invasion - Kyodo

Kyodo News reporting that the Japanese gov't is planning on hosting a virtual G7 leaders' summit later in February to mark the one-year anniversary of the Russian invasion of Ukraine. The meeting will be the first opportunity for G7 national leaders and the heads of the EU Commission and Council to discuss the impact of the upcoming Feb 5 price cap on Russian oil products.

CHINA (MNI): China's Swap Connect Eyes Q1 Start to Attract Inflows

Hong Kong and mainland China regulators are set to launch Swap Connect early in the first quarter, allowing foreign access to the USD5 trillion onshore interest rate swaps market and providing investors with hedging tools at a time of heightened volatility in global bond markets, sources told MNI.

AUSTRALIA (MNI): Wage Hikes to Play Out 'A Bit further' - RBA's Kohler

Strong domestic wage growth is expected to continue over coming months, the Reserve Bank of Australia's head of economic analysis indicated Wednesday Speaking ahead of next week's release of its Statement on Monetary Policy, which will include revised economic forecasts, Marion Kohler, told a Senate select committee on the cost of living, said the peak of inflation was likely at the end of 2022 at around 8% and will begin to ease over the course of this year.

NEW ZEALAND (MNI): RBNZ 50bp Hike Odds Firm After Softer Jobs Data

The Reserve Bank of New Zealand could lean towards a 50bp hike later this month after Q4 labour data showed the tightness in the labour market may have peaked, according to StatsNZ. While the jobs market remains red-hot, the unemployment rate edged up to 3.4% from 3.3% and the underutilisation rate rose to 9.4% from 9%. However, the Labour Cost Index rose from 3.7% y/y in Q3 to 4.1% y/y - the largest annual increase since the series began in 1992.

DATA

EUROZONE DATA (MNI): Downside Surprise, Sticky Core & Uncertainty in Jan Flash CPI

• EUROZONE JAN FLASH HICP -0.4% M/M (FCST +0.1%); DEC -0.4% M/M
• EUROZONE JAN FLASH HICP +8.5% Y/Y (FCST +8.9%); DEC +9.2% Y/Y
• EUROZONE JAN FLASH CORE HICP -0.8% M/M, +5.2% Y/Y (FCST +5.1%); DEC +5.2% Y/Y

Eurozone inflation cooled by 0.7pp to +8.5% y/y in the January estimate, 0.4pp lower than consensus expectations. Prices fell by -0.4% m/m, against expectations of a +0.1% m/m rise. Annualised inflation decreased across most of the bloc, however, further upticks were recorded in Spain, France, Austria, Estonia and Latvia. Core CPI failed to edge down from +5.2% y/y in January, remaining sticky at the euro-era high recorded in December. However, the -0.8% m/m decline in core is a positive signal for easing underlying pressures, reflecting the -1.8% m/m fall in non-energy industrial goods prices and -0.2% m/m decline in services prices.

EUROZONE FINAL JAN MANUF. PMI 48.8 (= FLASH); DEC 47.8 (MNI)
EUROZONE DEC UNEMPLOYMENT RATE 6.6% (MNI)

GERMANY FINAL JAN MANUF. PMI 47.3 (FLASH 47.0); DEC 47.1 (MNI)

FRANCE FINAL JAN MANUF. PMI 50.5 (FLASH 50.8); DEC 49.2 (MNI)

ITALY JAN MANUF. PMI 50.4 (FCST 49.5); DEC 48.5 (MNI)
ITALY JAN FLASH HICP -1.3% M/M, +10.9% Y/Y (MNI)

SPAIN DATA (MNI): Jan Manufacturing PMI Signals Slower PPI & Hints at Demand Recovery

• SPAIN JAN MANUF. PMI 48.4 (FCST 48.0); DEC 46.4

Spain's manufacturing PMI signalled a shallower downturn in January, increasing two points to 48.4. The indicator has been contractionary since July '22. The decline in New Orders and Production eased substantially, as muted demand showed tentative signs of recovery. The focus will now be on whether demand begins to grow again in coming months. Improved economic outlooks allowed optimism to strengthen and employment levels to stabilise.

UK FINAL JAN MANUF. PMI 47.0 (FLASH 46.7); DEC 45.3 (MNI)
UK JAN BRC SHOP PRICES +0.7% M/M, +8% Y/Y (MNI)

JAPAN DATA (MNI): Japan's Q4 GDP To Rise 0.5% Q/Q; Annualized 1.9%

Japan's economy is expected to have expanded for the first time in two quarters over the October-December period on solid private consumption and net exports, although capital investment slowed, eight economists predicted. Economists are looking for preliminary Q4 GDP to be higher by 0.5% quarter-on-quarter, or an annualized 1.9%, following a decline of 0.2% q/q, or an annualized -0.8%, in the third quarter of 2022.

CHINA JAN CAIXIN MANUFACTURING PMI 49.2 VS 49.0 IN DEC

FOREX: Markets Respect the Range Pre-Fed

• G10 FX trades quietly, amid relatively muted ranges ahead of Wednesday's FOMC rate decision. The Fed are broadly expected to downshift to a 25bps rate hike today, with focus on any hints from the Fed chair on their views of the peak Fed Funds Rate. The USD Index is marginally lower on the day at typing, and is within range of the multi-month low printed in late January at 101.504.
• Elsewhere, the NZD has slipped modestly on the back of a poorer-than-expected jobs release for Q4 - a release that's prompted a number of sell-side analysts to moderate their calls for imminent RBNZ tightening. NZD/USD remains within range of the 50-dma support at 0.6362 - a break below which would be the first since August of last year.
• Outside of the Fed decision, final January PMI data from across Europe have drawn little attention ahead of the Eurozone CPI release for January - a much-watched figure due to the absence of the German input that was originally due Tuesday. Manufacturing ISM for January may see some interest, expected at 48.0.

BONDS: Higher Ahead of the FOMC Meeting

• Core fixed income has moved higher ahead of the FOMC decision later but has moved off its highs following EZ HICP data. The headline HICP data was lower than expected (which initially saw some spikes higher) but core inflation was a tenth higher than expected and that led Bunds to reverse all of the moves higher they had seen in European hours.
• This morning's PMI data had little impact on markets with Spanish and Italian manufacturing PMI data higher than expected with the market waiting for the inflation data.
• Now the inflation data is out the way, focus will switch back to the FOMC. The dovish risks to this meeting appear at least partly priced in, including some expectations of Statement language acknowledging decelerating inflation, or a clear signal that the end of the hiking cycle is near. However, there are many ways Powell could re-emphasize the FOMC’s view that the job is not nearly done yet. Powell will again steer attention away from the pace of hikes and toward the terminal level (which the FOMC envisages as higher than the market does), while pushing back against rate cut pricing for H2 2023. For more see the full MNI Fed Preview here.
• TY1 futures are up 0-11 today at 114-27+ with 10y UST yields down -3.6bp at 3.475% and 2y yields down -1.8bp at 4.185%.
• Bund futures are up 0.21 today at 137.03 with 10y Bund yields down -1.1bp at 2.272% and Schatz yields up 0.2bp at 2.635%.
• Gilt futures are up 0.23 today at 104.74 with 10y yields down -2.8bp at 3.302% and 2y yields down -2.7bp at 3.406%.

EQUITIES: E-Mini S&P Bounce Off Tuesday Low Looks Bullish

EUROSTOXX 50 futures are consolidating. Support lies at 4097.00, the Jan 19 low. The contract is also trading just ahead of key short-term resistance at 4206.00, the Jan 18 high. A break of this level would resume the uptrend and pave the way for a climb towards 4215.00, a Fibonacci projection. Note that the trend remains overbought. A pullback, if seen, would represent a healthy correction. A break of 4097.00 would signal the start of a S/T bear cycle. S&P E-Minis recovered from yesterday's low. The recent move down appears to be a correction and the uptrend remains intact - yesterday’s bounce reinforces bullish conditions. The recent breach of resistance resulted in a print above the 4100.00 handle and an extension higher would open 4180.00, the Dec 13 high and a bull trigger. Initial firm and key support has been defined at 3963.07, the 50-day EMA.

• Japan's NIKKEI closed higher by 19.77 pts or +0.07% at 27346.88 and the TOPIX ended 3.04 pts lower or -0.15% at 1972.23.
• Elsewhere, in China the SHANGHAI closed higher by 29.252 pts or +0.9% at 3284.921 and the HANG SENG ended 229.85 pts higher or +1.05% at 22072.18.
• Across Europe, Germany's DAX trades lower by 2.52 pts or -0.02% at 15173.93, FTSE 100 higher by 11.78 pts or +0.15% at 7796.39, CAC 40 up 3.52 pts or +0.05% at 7106.41 and Euro Stoxx 50 up 7.05 pts or +0.17% at 4183.61.
• Dow Jones mini down 116 pts or -0.34% at 34075, S&P 500 mini down 11.75 pts or -0.29% at 4082.5, NASDAQ mini down 18.25 pts or -0.15% at 12144.5.

COMMODITIES: Trend Conditions in Gold Remain Bullish Despite Tuesday's Sharp Pullback

WTI futures traded lower Monday and in the process breached support at $78.45, the Jan 19 low. The move lower undermines the recent bull theme and a continuation would signal potential for an extension towards $72.74, the Jan 5 low. On the upside, the bull trigger has been defined at $82.66, the Jan 18 high. A break of this level is required to reinstate the recent bullish theme. Yesterday’s recovery from the day low is considered corrective. Trend conditions in Gold remain bullish and the latest pullback is considered corrective. Recent cycle highs confirm an extension of the uptrend and maintain the price sequence of higher highs and higher lows. Moving average studies remain in a bull mode position - reflecting the uptrend. The focus is on $1963.0 next, a Fibonacci retracement. Initial firm support to watch lies at $1902.2, the 20-day EMA. A break would signal scope for a deeper pullback.

• WTI Crude up $0.32 or +0.41% at $79.62
• Natural Gas up $0.04 or +1.56% at $2.729
• Gold spot down $4.37 or -0.23% at $1926.4
• Copper down $5.9 or -1.4% at $418.7
• Silver down $0.28 or -1.19% at $23.504
• Platinum down $7.22 or -0.71% at $1012.1