Fed takes centre stage

Chris Scicluna
Emily Nicol

Fed expected to slow pace of tightening further to a hike of 25bps
All eyes today will be on the Fed’s latest policy decision. With policymakers likely to view recent inflation and wage developments as encouraging – including yesterday’s moderation in the employment cost index in Q4 – our colleagues in Daiwa America (in line with the consensus) expect the majority on the FOMC to favour a further slowing in the pace of tightening, with the FFR target range forecast to rise 25bps to 4.50-4.75%. While some on the Committee might well assess recent improvements in the inflation outlook to warrant a pause in the Fed’s tightening path, our colleagues think the majority will conclude that policy was still insufficiently restrictive to bring inflation back to target. That likely reflects persistent concerns about the tightness in the labour market, especially in the service sector. Indeed, Powell is likely to signal his expectation of further tightening ahead, and re-emphasise that the FOMC thinks that conditions will unlikely warrant a pivot in policy for the remainder of this year.

Euro area flash inflation estimates could go either way
The main economic release from the euro area today will be the flash inflation estimates for January. The results from those member states that have already published figures have been mixed, with inflation up in France and Spain, but down significantly in Belgium and the Netherlands, for which the data from the latter this morning showed a hefty decline of 2.6ppts to 8.4%Y. And given also the reweighting of the CPI basket, and the absence so far of the German and Italian numbers – which together account for about 45% of spending in the region – the outcome for the headline euro area HICP rate is extremely difficult to forecast with any accuracy. Moreover, given the postponement of the German figures due to technical issues associated with the basket reweighting, the precision of today’s euro area figure might well be called into question. On balance, we expect a modest easing in the headline rate, although we do not rule out a modest rise too. Meanwhile, euro area unemployment figures are expected to be consistent with ongoing tightness in the labour market.

UK shop price inflation jumps in January; house prices fall for 5th consecutive month
Despite weak demand and historically low consumer confidence, as well as some signs of easing input cost burdens, the latest BRC shop price survey suggested that retailers ramped up their prices at the start of the year as festive discounting faded. Indeed, according to the BRC, shop price inflation accelerated to a new series high of 8.0%Y/Y in January, from 7.3%Y/Y in December. Food price inflation maintained a steady upwards trend, rising 0.5ppt to 13.8%Y/Y, while prices at non-food stores were also up a record-high 5.1%Y/Y. But with households purchasing power continuing to be eroded and spending expected to remain weak, we expect to see retailers resort to renewed discounting over the near term, and price pressures to ease over coming months, not least as food prices and energy costs level off.

Certainly, the deterioration in the housing market will do nothing to ease households’ concerns about the economic outlook. Indeed, the Nationwide house price index fell for the fifth consecutive month in January (-0.6%M/M), the longest declining streak since February 2009, to leave them more than 3% below August’s peak. This left the annual rate down 1.7ppt at 1.1%Y/Y, well below the high of more than 14%Y/Y in March 2022. While mortgage rates have fallen back somewhat from their peak in October, they still remain significantly higher than before the Truss-related blow-out. And so Nationwide continued to flag persisting challenges in overall affordability conditions, with, for example, the average mortgage payment as a share of take-home pay having risen in Q4 to 39%, close to levels seen in the run up the global financial crisis. Taken together with the slump in mortgage approvals in December, we expect to see a further (perhaps significant) downwards adjustment in house prices over coming quarters too.

US manufacturing ISM, construction spending, vehicle sales and job openings data due
It will be a relatively busy day for US data too, including the release of the manufacturing ISM survey. Like other survey indicators, this is expected to remain consistent with ongoing contraction in the sector. The latest construction spending figures for December are also due, along with vehicle sales numbers for January and the JOLTS job openings figures ahead of Friday’s payrolls report.

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