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Focus this week has been on the increase in interest rates and the decline in market expectations for central bank rate cuts that were initiated by the strong US job market report late Friday last week. While the headline numbers were very strong, we stress that the underlying details were softer. Average weekly hours worked declined to the lowest level since 2010 (when excluding March 2020) in a sign that the labour market is not as tight as one could fear. Also, average weekly earnings growth was negative month-on-month. Yet, markets have scaled back interest rate cut expectations for 2024 for the Fed and ECB from almost six 25bp cuts to four and a half cuts since Friday last week. These moves were also supported by speeches from Powell and ECB’s Schnabel. Powell reiterated that the Fed would most likely not cut rates in March and backed the December dot plots of three cuts this year. Schnabel warned against the still present upside risks to euro area inflation that could cause inflation to flare up again.

The US ISM services index rose more than expected in January to 53.4 (cons: 52.0, prior: 50.6) and the prices paid subindex rose to the highest level since February 2023. The ISM services index has been very volatile and the rise in the price index contrasts the signal from PMI services. Hence, one should not put too much emphasis on a single print. However, in the big picture it is still nearly all recent US data releases that have surprised to the upside.

Chinese inflation fell more than expected in January with CPI at -0.8% y/y vs expectations of -0.5% y/y (previous was -0.3% y/y). Inflation was especially pulled lower by food prices. However, core CPI also declined to 0.4% y/y from 0.6% y/y in December. While deflation is still not widespread in core measures, the falling core inflation is clearly a symptom of a weak economy with too soft demand relative to supply.

In the euro area, retail sales fell 1.1% m/m in December in a sign that euro area consumers were still cautious about spending in December like the entire year. Given the low current consumption share, strong savings, high employment, and rising real wages there is room for private consumption to pick up in 2024. Yet, we likely still need to see a more pronounced increase in consumer confidence before private consumption picks up.

In Japan, the average wage growth for December came in at 1.0% y/y, which was stronger than in November, albeit lower than the 1.3% expected by consensus. Wage growth is key to the outlook for the Bank of Japan’s (BoJ) monetary policy and possible tightening. We expect that we will probably have to wait until spring wage negotiations for wages to start moving much higher, and thereby for BoJ tightening to start tightening monetary policy. In the UK, wage growth eased in January in a comforting sign for the BoE although the wage pressure is still strong, and the labour market remains tight.

Focus next week is on US Inflation. The January US CPI print will be key in determining whether the recent upside surprises in US macro translates into higher price pressures. Also in the US, we look out for retail sales and the University of Michigan survey. From the UK we receive the job market report and January CPI. In the euro area, focus is on industrial production and German ZEW. Finally, in Japan we look out for 2023Q4 GDP.

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