From central bankers
From the US Fed, Vice Chair Lael Brainard (a voting member) agreed with the fact that rates should remain high for longer: “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis”. Bank of St. Louis President James Bullard said policy rates should be moved to above 5% “as quickly as we can”. In Europe, ECB President Lagarde said that inflation was “way too high” and that the ECB would “stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.” She even responded to talks of cuts in the future by saying that "I would advise market participants to revise their positions".
US debt ceiling
US Treasury Secretary Janet Yellen will soon activate “extraordinary” technical measures to avoid the debt ceiling (currently at $31.4trn). These technical measures are likely to last until Q3 2023¸and then only will the debt ceiling become a “problem”. Yellen, who said that extraordinary measures will begin from 19th Jan., warned that the crunch point could be as soon as June, although this will depend on tax receipts in coming months (including the crucial April 2023 tax receipts). The government budget (risk of government shutdown if budget not extended), so far it is funded until 30 September 2023.
Bank of Japan & inflation
Japanese core inflation hit 4% in Dec., but it might be the peak and is set to decline below 2% in H2 2023. On a sequential basis, core inflation came down further from the previous two months. The BoJ decided to stick to YCC after Dec.’s surprise. The probability of more policy adjustment, with the key objective to inject some flexibility in conducting monetary easing, has risen after the new governor steps in April. The new BoJ governor, together with the Kishida administration, may conduct a reassessment of the bank’s 2% inflation target and the way to achieve it.
GDP weakened further in Q4 (to 2.9% y-o-y, from 3.9% in Q3) but less than expected. This has led to a full-year expansion of the Chinese economy of 3.0% in 2022. Economic growth was largely driven by FAI ex property (Fixed Asset Investment) on strong policy support. In contrast, household consumption remained muted in Dec. and for 2022, particularly for catering services. That said, a more meaningful revival in domestic consumption is expected, possibly after the Chinese New Year (end of Jan.). The property sector remained in deep contraction, but the latest reading of some housing-related indicators shows some signs of stabilization as policies recently turned more supportive. However, the strength of the recovery in the property sector remains to be seen against increasing structural headwind amid declining population.
US economic data
Dec. retail sales were softer than expected, dropping -1.1% m-o-m, after -1.0% in Nov. It looks like the US consumer front-loaded winter season purchases in Oct. at the expense of Nov./Dec. Red flags are starting to accumulate for US consumption, including the depleted Covid19 savings, much tighter credit conditions on new borrowing and a negative wealth effect (houses prices and stocks). Regional business surveys (Empire and Philly Fed indices) showed ongoing headwinds in the manufacturing sector. Manufacturing production fell in Dec. (-1.3% m-o-m), after a sharp drop in Nov. (-1.1%). Housing sector data was mostly weak once again. Dec.’s building permits fell 1.6% m-o-m, after a 10.6% drop in Nov. Homebuilder sentiment improved slightly in Jan. but remained at a very weak level (35 vs. a 1-year average of 55).