U.S. Markets:

• On Friday, Wall Street indices closed the day with a slight upward bias, supported by lower-than-expected Producer Price Index (PPI) data for December. The data reinforced expectations that the Federal Reserve might begin interest rate cuts in March. The Nasdaq index CCO:USN was basically flat and rose by 0.02%, the NYSE composite index NYA:USY by 0.11%, the S&P 500 index SPY:USY by 0.08%, while the Dow Jones Industrial Average index DJI closed the day with a 0.31% decline.
• The Dollar index DXY, a closely watched gauge of the U.S. dollar’s performance against other major currencies, closed last week at 102.4, marking a 0.11% increase.
• The Brent crude oil closed the previous week at USD 78.3 per barrel, reflecting a 1.2% increase.
• The price of gold closed last week with a 1% increase, settling at USD 2,049 per ounce.
• The 10-year U.S. Treasury yield completed the week with a 11 basis points drop, settling at 3.94%. In October, it was almost 5% and at its highest level since 2007. The 2-year U.S. Treasury yield, particularly responsive to Federal Reserve policy rates, fell to 4.15% from 4.26% down by 10 basis points.

European Markets:

• European stocks closed the Friday session with gains, as the Stoxx Europe 600 index SXXP, up 0.84% to 476.76. The German DAX index rose 0.95% to 16,704.56, the French CAC 40 indexrose 1.05% to 7,465.14 and the FTSE 100 index UKX rose 0.64% to 7,624.93.

Asian Markets:

• Most stocks in the Asia-Pacific region rose Friday, Jan 12, the Japanese market showing a fifth day of increases. The Hang Seng index declined 0.35% to 16,244.58, while the Nikkei 225 index added 1.5% to 35,577.11. China’s Shanghai Composite index fell 0.16% to 2,881.98.
• S&P/ASX 200 Benchmark index in Australian stock market slightly weakened 0.1% to 7,489.30.

• Inflation Data: December Consumer Price Index (CPI)

Last week, the Consumer Price Index (CPI) for December 2023 was closely watched.

In December 2023, the annual inflation rate rose to 3.4%, rebounding from a five-month low of 3.1% in November, surpassing market expectations of 3.2%. This increase was driven by a slower decline in energy prices, which dropped by 2% compared to a sharper decrease of 5.4% in November. Notably, gasoline fell by 1.9%, utility (piped) gas service declined by 13.8%, and fuel oil by 14.7%.

Other categories such as food, shelter, new vehicles, apparel, medical care commodities, and transportation services experienced softer increases, while used cars and trucks continued to decline.

The annual core inflation rate excluding food and energy prices eased slightly to 3.9%, below the previous period’s 4% but above the expected 3.8%. In comparison to November, consumer prices increased by 0.3%, the most significant rise in three months and exceeding the forecast of 0.2%.

• Producer Price Index (PPI): December Data

Last Thursday, the Producer Price Index (PPI) data for December 2023 was released. The monthly headline PPI recorded a 0.1% decline, continuing its three-month consecutive decrease. The annual PPI increased from 0.8% to 1%, lower than the expected 1.3%.

The flat movement of service prices supported the ongoing decline in the headline PPI.

Notably, trade services (wholesale and retail trade) prices decreased by 0.8% monthly, and transportation and storage services prices recorded a 0.4% decline. Other service prices, excluding trade and transportation, accelerated their growth from 0.1% to 0.4%.

Excluding food and energy, the core PPI remained flat on a monthly basis, continuing its horizontal trend for the third consecutive month. On an annual basis, it decreased from 2% to 1.8%, reaching the lowest level since December 2020.

• The Statements of the Fed Presidents Regarding Interest Rate Cuts

Atlanta Fed President: Caution in Early Rate Cuts

Atlanta Fed President Raphael Bostic expressed concern that improvements in inflation might slow down further in the upcoming period. He emphasized that initiating an early rate cut could potentially lead to a resurgence in inflation.

Cleveland Fed President: March Rate Cut Premature

Cleveland Fed President Loretta Mester stated that she believes a rate cut in March would be premature. She emphasized the need for additional evidence of ongoing inflation decline before considering such a move.

Richmond Fed President: December Inflation Report Consistent with Expectations

Richmond Fed President Thomas Barkin commented on the December inflation report, noting that it was “about as expected.” While goods prices rose slowly, costs for shelter and services continued to increase more robustly. Barkin highlighted the lack of conviction about future declines in inflation, which he feels is necessary before considering a reduction in the Fed’s target interest rate.

Chicago Fed President: Positive Outlook for Inflation Reduction

Chicago Fed President Austan Goolsbee expressed optimism about the potential for reducing inflation in 2023. He stated that the Fed is currently making progress in inflation and is comfortable with its trajectory.

New York Fed President: Tight Policy Needed for Full Inflation Target

New York Fed President John Williams acknowledged that monetary policy in the U.S. is now tight enough to reach the 2% inflation target. However, he emphasized the need for further evidence before lowering interest rates, indicating that a more restrictive policy stance may be necessary to fully achieve their goals. Williams supported the idea of starting rate cuts only when there is certainty that inflation is progressing towards the target.

Dallas Fed President: Balance Between Liquidity and Rate Adjustments

Dallas Fed President Lorie Logan has cautioned that the Fed might need to resume increasing its short-term policy rate. The warning is prompted by the recent decrease in long-term bond yields, and the concern is to prevent this decline from reigniting inflation. Notably, she suggested it’s time to consider slowing the pace of shrinking the Fed’s balance sheet.

• Labor Market Data: Weekly Initial Jobless Claims and Tight Job Market

In the United States on Thursday, labor market data for the week ending January 6th was released, indicating a decline in weekly initial jobless claims from 203,000 to 202,000. Despite expectations of a slight increase (210,000), the figure marked the lowest level in the past three months, remaining consistently below historical averages. This suggests a continued tightness in the labor market.

• Trade Balance: November Data Shows Improvement

The U.S. trade balance data for November was also released last week. The monthly trade deficit decreased from $64.5 billion to $63.2 billion, reaching its lowest level in the past three months. Import, with a 1.9% decrease, fell to $316.9 billion, while exports also experienced a 1.9% decline, reaching $253.7 billion. This represents the lowest level since July.

• Consumer Expectations Survey: December 2023

The New York Fed released the Consumer Expectations Survey for December 2023. Short-term median inflation expectations for the next 12 months decreased by 0.4 points to 3%, marking the lowest level since January 2021. Medium-term median inflation expectations for the next 3 years saw a 0.4-point decrease to 2.6%, and expectations for the next 5 years, covering the medium term, experienced a 0.2-point decrease to 2.5%.

U.S. markets will be closed on Monday due to the Martin Luther King Jr. Day.

• New York Fed Empire State Manufacturing Index for January

Tuesday brings the release of the New York Fed Empire State Manufacturing Index for January, offering a signal about the state of the manufacturing sector. The index plunged from 9.1 to -14.5 in December, indicating a return to contraction after four months of growth. Expectations were for a contraction but with continued growth. The index is expected to rebound to -5 in January, maintaining its contractionary trend.

• Industrial Production and Capacity Utilization for December

On Wednesday, the U.S. will release data on industrial production and capacity utilization for December, providing insights into the trajectory of manufacturing.

Following a sharp contraction of 0.9% in October, industrial production showed a partial recovery with a 0.2% increase in November, falling below expectations.

Capacity utilization increased by 0.1 percentage points to 78.8% in November, slightly below the anticipated rise.

Expectations for December suggest a stagnant monthly industrial production, while capacity utilization is expected to decline by 0.1 percentage points to 78.7%.

• Retail Sales for December

Wednesday’s focus will also be on retail sales data for December, providing insights into domestic demand. After a 0.2% monthly decline in October, retail sales surprised with a 0.3% increase in November, signaling a recovery in domestic demand during the holiday season. Anticipations for December suggest a slight acceleration in the monthly growth rate from 0.3% to 0.4%.

• The Beige Book Report

Additionally, on Wednesday, the Beige Book report will be published, providing a compilation of economic data from the Federal Reserve’s 12 districts, offering updated assessments and future expectations for the U.S. economy.

• Housing Starts and Building Permits for December

Thursday will feature data on housing starts and building permits for December, providing insights into the state of the housing market and future construction activity.

In November 2023, housing starts surged unexpectedly by 14.8% month-over-month to an annualized 1.56 million, the highest in six months, surpassing market expectations of 1.36 million. The robust performance was driven by lower mortgage rates and limited inventory.

In November 2023, building permits declined by 2.1% to a seasonally adjusted annual rate of 1.467 million, as per revised data, marking the lowest reading in four months.

• Weekly Initial Jobless Claims

Thursday will also see the release of weekly initial jobless claims, a key indicator of the labor market’s health. Despite expectations of a slight increase, the latest figures showed a decrease from 203,000 to 202,000, reaching the lowest level in the last three months and remaining below historical averages, indicating a tight labor market.

• University of Michigan Consumer Sentiment Index (Preliminary) for January

Wrapping up the week, Friday brings the preliminary release of the University of Michigan Consumer Sentiment Index for January.

In December, the index rose from 61.3 to 69.7, reaching the highest level in the last five months due to positive trends in inflation. Further details showed improvements in both the current conditions and expectations sub-indices. Consumer expectations for inflation for the upcoming year dropped from 4.5% to 3.1%, the lowest level since March 2021, while long-term inflation expectations declined from 3.2% to 2.9%.

• Eurozone Investor Confidence and Consumer Sentiment

The Sentix investor confidence index for January in the Eurozone increased slightly from -16.8 to -15.8, maintaining its upward trend since May and indicating a fourth consecutive month of improvement. However, negative sentiments persist, influenced by expectations that the European Central Bank (ECB) will continue its restrictive monetary policy due to elevated inflation.

In December, the final consumer confidence index in the Eurozone showed a mild recovery, increasing from -15.1 to -15, reaching its highest level since February 2022 but remaining in negative territory.

• Eurozone Retail Sales and Industrial Production

In November, retail sales in the Eurozone declined by 0.3% month-on-month, following a 0.4% increase in October. Year-on-year, the decline rate increased from 0.8% to 1.1%, reflecting continued weakness in consumer demand due to high inflation and borrowing costs.

The industrial production data for November in Germany showed a 0.7% monthly decrease, extending its decline for the sixth consecutive month. The annual contraction in industrial production reached 4.8%, marking the sharpest decline in the last three years.

• Germany’s Trade and Factory Orders

In November, Germany’s monthly exports rebounded by 3.7%, surpassing expectations after two months of decline. Monthly imports also showed a recovery with a 1.9% increase.

Factory orders in Germany experienced a 0.3% monthly increase in November, falling below expectations of a 1.1% rise. The year-on-year decline rate slowed from 7.3% to 4.4%.

• UK Monthly GDP Growth

The UK’s monthly GDP in November rebounded by 0.3% after a 0.3% contraction in October, beating market forecasts of a 0.2% rise and marking the strongest growth in the last five months. The services sector and manufacturing both contributed to the growth, while the construction sector contracted by 0.2%.

• ECB December Meeting Highlights

The European Central Bank’s (ECB) December meeting minutes, set to be released on Thursday, will take center stage in European markets. The ECB maintained steady interest rates in this meeting, signaling a pause in rate hikes. They also revealed an accelerated reduction in the balance sheet, demonstrating a commitment to policy normalization.

ECB President Lagarde is committed to maintaining restrictive policy rates, relying on a data-driven approach for decision-making. Investors are closely monitoring Lagarde’s speeches this week for potential signals on the ECB’s future monetary policy.

• Eurozone Industrial Production in November

On Monday, industrial production data for November in the Eurozone was released. The industrial production in the Eurozone contracted by 0.3% month-over-month in November 2023, aligning with market expectations. This marked the third consecutive period of contraction.

Notably, durable consumer goods, capital goods, and intermediate goods experienced declines, while energy output increased by 0.9%, and non-durable consumer goods production rose by 1.2%. On a yearly basis, industrial activity shrank by 6.8% in November, surpassing the expected 5.9% fall, extending the current contraction sequence to a ninth consecutive month.

• Germany’s Annual Economic Growth in 2023

On Monday, Germany’s annual growth data for 2023 was released. The German economy contracted by 0.3% in 2023, following a downwardly revised 1.8% expansion in 2022, aligning with market expectations (-0.3%). Persistent high inflation throughout the year, coupled with rising interest rates, dampened economic activity and demand both domestically and internationally.

• Wholesale Prices in Germany for December 2023

Germany’s wholesale prices dropped by 2.6% year-on-year in December 2023, slowing from a 3.6% decrease in the prior month. This marked the ninth consecutive period of decline but showed the softest pace since May. On a monthly basis, wholesale prices fell 0.6%, marking the third straight month of contraction following a 0.2% drop previously.

• ZEW Indices for Germany

On Tuesday, Germany will release the ZEW current conditions and expectations indices for January. In December, the ZEW current conditions index showed a slight improvement from -79.8 to -77.1, reaching the highest level in the last four months but maintaining a weak trend in the negative zone. Meanwhile, the ZEW expectations index rose from 9.8 to 12.8 in December, marking the second consecutive month in positive territory and the highest level since March.

• Inflation Data Impacting ECB and BoE Policies

On Tuesday and Wednesday, Germany and the Eurozone will release the final Consumer Price Index (CPI) data for December. Additionally, on Wednesday, the UK will provide inflation data impacting the Bank of England’s (BoE) policies.

Preliminary data for Germany showed a monthly increase of 0.1% in headline CPI in December after a 0.4% decrease in November. On a yearly basis, the headline CPI in Germany rose from 3.2% in November to 3.7% in December, influenced by the government’s contribution to heating expenses.

In the Eurozone, headline CPI increased by 0.2% in December, aligning with expectations after a 0.6% decline in November. This marked the first yearly increase since April, driven by energy prices.

Meanwhile, the UK experienced a monthly decrease of 0.2% in headline CPI in November, exceeding expectations. Yearly, it dropped from 4.6% to 3.9%, the lowest level since September 2021.

• Producer Prices in Germany for December

On Friday, Germany will release the Producer Price Index (PPI) for December. In November, the PPI in Germany declined by 0.5% monthly and 7.9% yearly, continuing its downward trend. This decline was notably influenced by last year’s energy prices, affecting the base effect. In December, a further 0.4% monthly decline in PPI is expected, with a yearly decrease of 7.9%, mirroring the previous month’s trend.

• South Korea Central Bank Maintains Policy Rate Amidst Expectations

The South Korea Central Bank has, as anticipated, kept its policy interest rate steady at 3.50%, marking the eighth consecutive meeting with this level. Additionally, the bank emphasized a commitment to maintaining a restrictive policy stance for a sufficiently long period until inflation approaches the target.

• China’s Inflation Data and Monetary Policy Measures

In China last week, consumer prices declined for the third consecutive month, with a year-on-year fall of 0.3% in December 2023, the longest such drop streak since October 2009. The figures were below the market’s anticipated 0.4% decrease and showed a moderation from the steepest decline in three years observed in November (-0.5%). Notably, food prices, fell at a softer rate (-3.7% vs -4.2% in November). Non-food inflation slightly increased (0.5% vs 0.4%).

Consumer prices for the full year rose by 0.2%, while the monthly Consumer Price Index (CPI) inched up by 0.1%, signaling the first increase in three months but falling short of the consensus of a 0.2% rise.

In December 2023, China’s producer prices experienced a year-on-year contraction of 2.7%, a milder decline compared to the 3.0% drop in the previous month and slightly better than market expectations of a 2.6% decrease. This marks the 15th consecutive month of producer deflation, underscoring the persistent presence of deflationary pressures in the economy. On a monthly basis, producer prices decreased by 0.3%, maintaining the same pace observed in November.

On Monday, the People’s Bank of China injected CNY 0.995 trillion via a one-year medium-term lending facility, maintaining the interest rate at 2.50%.

• China’s Q4 GDP and December Data

Wednesday will see China’s fourth-quarter GDP growth data, providing insights into the economy’s performance.

Additionally, data on industrial production, retail sales, capacity utilization, housing sales, and fixed asset investments for December will be released.

In November, industrial production saw a robust increase of 6.6% year-on-year, retail sales rose to 10.1%, and fixed asset investment held steady at 2.9%.

Projections for December anticipate a slight uptick in industrial production, a slowdown in retail sales growth to 8%, and a consistent 2.9% increase in fixed asset investments.