US CPI the key focus in the coming week, with headline and core inflation set to maintain a modest downtrend
The main focus in the US this week will be the January CPI report tomorrow. Despite the easing in gasoline prices last month, as well as the ongoing downtrend in food inflation, Daiwa America’s Lawrence Werther forecasts consumer prices to have increased 0.2%M/M – in line with the Bloomberg survey consensus and the average increase in 2023 – underpinned by another firm showing in services prices reflecting continued inflationary impulses from rents and owner-occupied housing costs. Indeed, core prices are expected to have risen 0.3%M/M, although that would still leave the annual rate down 0.2ppt to 3.7%Y/Y, which would be the lowest since April 2021. Meanwhile, headline inflation is forecast to have dropped 0.5ppt to 2.9%Y/Y. Export and import prices will follow on Thursday, while producer price inflation figures are due on Friday, alongside the University of Michigan consumer survey measure of inflation expectations.

In terms of activity, January’s reports for retail sales and industrial production are due Thursday. Larry expects total retail sales to fall 0.2%M/M, reversing part of the surge in December, thanks in particular to a decline in the autos component. Indeed, excluding autos, he expects growth of 0.2%MM, half the pace of December, as retail footfall appears to have been limited by winter storms. Meanwhile, despite strong job growth in the sector at the start of the year, given a drop in the average work week, Larry expects manufacturing output to post a modest decline (-0.1%M/M). However, below average temperatures last month, energy generation could well see overall IP move sideways in January. That day will also bring the Empire Manufacturing and Philly Fed surveys as well as the NAHB housing indices for February, following on Friday by the latest housing starts figures.

UK inflation expected to report a temporary pickup in January, but focus also on labour market, GDP and retail sales figures
Like in the US, the data highlight in the UK will also be the January inflation figures (due Wednesday), where the headline CPI rate is expected to rise, not least due to the 5ppt increase in the household energy price cap. But services inflation will also probably take a significant, but temporary, step up, not least as the sharp declines in transport and hospitality prices a year earlier are unlikely to be repeated. The reweighting of the CPI basket to reflect consumption trends last year adds another element of uncertainty with this release. Overall, we forecast a modest increase in the headline rate by 0.2ppt to 4.2%Y/Y, 0.1ppt above the BoE’s projection. And despite a further moderation in non-energy industrial goods inflation, we also expect core CPI to edge up by 0.1ppt to 5.2%Y/Y. The labour market figures (due tomorrow) will be watched closely for insight into near-term inflationary impulses. Reweighted Labour Force Survey (LFS) results published last week saw the headline unemployment rate in the three months to November revised down 0.3ppt to 3.9%, some 0.4ppt below the recent peak in July. But the coming week’s data will bring significant revisions all the way back to 2011, which will allow for greater assessment of current labour market tightness. Meanwhile, having declined to a ten-month low of 6.0%3M/Y in the three months to November, regular pay growth is highly likely to have slowed further in December.

In terms of activity, the first estimate of Q4 GDP and the accompanying December output figures (Thursday) are expected to report lacklustre recovery momentum at year-end. Despite the improvement signalled by the PMIs, retail sales declined sharply in December to be down almost 1%Q/Q. Rail and NHS strikes will have also had a dampening impact on activity in the transport and healthcare sectors that month. So, overall, we expect GDP to have edged slightly lower in December (-0.1%M/M), which would leave GDP down 0.1%Q/Q in Q4 for a second successive quarter and therefore in a very mild technical recession. While retail sales in January (data due Friday) might well see some positive payback from the slump in December, surveys suggest that spending remained subdued at the start of the year amid persisting concerns about squeezed household budgets and the economic uncertainties ahead, which will limit any bounce back. We forecast growth of a little more than 1½%M/M, thus reversing roughly half of December’s drop and leaving sales still down a little less than 1.0%3M/3M.

Updated euro area Q4 GDP likely to confirm zero growth, with euro area IP in December expected to rise despite weakness in Germany
The euro area’s data flow will be relatively light in the week ahead, with an updated estimate of Q4 GDP (Wednesday) likely to confirm that the economy merely stagnated in the final quarter of last year, while December industrial production and goods trade figures (Wednesday and Thursday respectively) will provide more insight into momentum heading towards the New Year. In particular, the preliminary GDP report recorded zero growth in Q4 following a modest contraction in Q3 and therefore narrowly avoiding a technical recession. But this left output moving broadly sideways for five consecutive quarters. This notwithstanding, the latest employment figures – also included in this release – will likely point to ongoing resilience in the labour market. Indeed, figures already published from Germany and Spain showed a combined increase of 190k in Q4, albeit down from an equivalent rise of 271k in Q3.

Monthly activity data will, however, provide mixed messages on economic momentum in December. Indeed, despite a decline in Germany, strong growth in France, Italy, Ireland and the Netherlands suggests that aggregate euro area industrial production is expected to report growth of around 1½%M/M. But goods trade is likely to report a sizeable decline in exports and imports that month, in line with the findings from the German trade release. Among the national releases, Germany’s ZEW investor sentiment survey for February (tomorrow), as well as final January inflation estimates from France (Friday) and Spain (Thursday) are also due. The flash inflation estimates saw the EU-harmonised HICP rates ease in France, by 0.7ppt to a two-year low of 3.4%Y/Y, but rise in Spain, by 0.2ppt to 3.5%Y/Y.

Japanese GDP set to return to modest growth in Q4 amid boost from manufacturing, while services activity was a drag
After today’s national holiday, a key release in Japan in the week ahead will be the first estimate of Q4 GDP on Thursday. Following a surprising contraction in Q3 (-0.7%Q/Q), GDP is expected to have returned to modest growth in Q4, with Daiwa Securities forecasting a rise of 0.2%Q/Q, despite a likely drag from private consumption. December industrial production (Thursday) and tertiary activity figures (Friday) will provide further insight into recovery momentum heading into year-end. In particular, industrial output is likely to confirm the preliminary release that reported monthly growth of 1.8%M/M, to leave it up 1.4%3M/3M in Q4. But while tertiary activity is expected to have posted a modest rise in December (0.3%M/M), this would still leave it down 0.8%3M/3M in Q4. In addition, goods PPI data for January are due tomorrow.