Market Outlook for the Week of 20th – 24th January

On Monday will be a slow day with the Presidential Inauguration taking center stage in the U.S. On Tuesday, key labor market data will be released in the U.K., including the claimant count change, the average earnings index 3m/y and the unemployment rate. Additionally, inflation data will be published for both Canada and New Zealand.

On Wednesday, the Bank of England will release its quarterly bulletin, while ECB President Christine Lagarde will participate in a panel discussion titled “Beyond Crisis: Unlocking Europe’s Potential” at the World Economic Forum Annual Meeting in Davos.

Thursday will see Canada reporting its retail sales figures m/m, and the U.S. will publish its unemployment claims data.

Finally, on Friday, attention will shift to the Bank of Japan’s monetary policy announcement. The day will also feature the release of flash manufacturing and services PMIs for the eurozone, the U.K., and the U.S. In addition, the U.S. will report existing home sales data.

In the U.K., the consensus for the claimant count change is 10.3K, compared to the previous 0.3K. The average earnings index 3m/y is expected to rise to 5.6%, up from the prior 5.2%, while the unemployment rate is likely to remain unchanged at 4.3%.

Wage growth exceeded expectations last month, reinforcing the BoE’s decision to keep rates unchanged in December. However, analysts argue that the reliability of the data remains a concern. Any wage growth surprises could influence the BoE’s future decisions regarding monetary policy. For now, markets are pricing in 65 bps of rate cuts for this year.

In Canada, the consensus for CPI m/m is -0.7%, compared to the previous 0.8%. Median CPI y/y is expected at 2.5%, down from 2.6%, while trimmed CPI y/y is likely to print at 2.5%, compared to the prior 2.7%. Headline y/y inflation is also expected to drop to 1.5%, from 1.9%, due to a slower rise in food prices despite increasing energy costs.

Analysts from RBC suggest that underlying inflation signals might be skewed by the GST holiday, which began mid-month and impacted a range of consumer items such as groceries, toys, and restaurant meals. One of the main drivers of total CPI and core measures, the mortgage interest costs, are expected to moderate due to the recent easing by the Bank of Canada.

The BoC Q4 Business Outlook Survey, which will be released today, will likely show that inflation expectations are moving closer to the 2% target and that there are signs of economic slowdown. Slower job openings, reduced wage growth, and easing labor and supply chain pressures point to an expanding output gap, increasing the likelihood of disinflationary pressures as the economy softens.

Regarding monetary policy, the Bank of Canada is expected to deliver a 25 bps rate cut at this month’s meeting.

In New Zealand, the consensus for CPI q/q is 0.5% vs 0.6% prior. Annual inflation is expected to print at 2.1%, down from 2.2%, which aligns with the RBNZ’s projections.

Core inflation figures are gradually aligning with the 2.0% target, signaling that inflationary pressures have eased compared to prior years. This shift suggests a more stable and balanced economic environment in New Zealand.

In Canada, the consensus for core retail sales m/m is 0.0%, compared to the prior 0.1%, and for retail sales m/m, it is 0.1% vs 0.6%. prior.

Canadian retail sales for November are expected to remain steady, with strong auto and gas station sales driven by higher prices, but weak core sales are likely to offset the growth, according to analysts from RBC.

At this week’s meeting, the BoJ is expected to deliver a 25 bps rate hike, raising the policy rate to 0.50%. This would be the third rate hike following the increases in March and July of last year.

Analysts at Wells Fargo argue that despite a less hawkish tone in December and Governor Ueda’s cautious stance on wage data, the case for further tightening remains strong. Japan’s core inflation remains above 2.0%, November labor cash earnings rose 3.0% y/y, and reports suggest the BoJ may raise its inflation forecast in January. These factors strengthen the likelihood of a rate increase in January, supporting the view of solid economic growth and persistent price pressures.

In the eurozone the December’s manufacturing PMI remained weak at 45.1, while the services PMI improved to 51.6. For January, manufacturing is expected to stay in contraction at 45.5, with services easing slightly to 51.5.

Political uncertainty in Germany and France and potential U.S. tariffs add downside risk to the consensus forecast, Wells Fargo analysts note. With slow GDP growth projected at 0.9% for 2025, the analysts anticipate the ECB to cut rates by 25 bps at each meeting through June followed by a final cut in September.

This article was written by Gina Constantin at www.forexlive.com.