Market Outlook for the Week of 27th – 31st January

On Monday, the U.S. will release the new home sales data. On Tuesday, Japan will publish the BoJ core CPI y/y, while in the U.S., durable goods orders m/m, the CB consumer confidence index, and the Richmond manufacturing index will be released.

On Wednesday, Japan will release the monetary policy meeting minutes, after which attention will shift to inflation data from Australia. Later in the day, in Canada the spotlight will be on the BoC monetary policy announcement, while the FOMC meeting will be the focus in the U.S.

On Thursday, the eurozone will get the ECB monetary policy decisions and the U.S. will release its unemployment claims and pending home sales m/m data.

On Friday, Japan will report the Tokyo core CPI y/y. In the U.S., key releases will include the core PCE price index m/m, the employment cost index q/q, personal spending m/m, and personal income m/m.

Chinese banks will remain closed throughout the week in observance of the Spring Festival.

The consensus for Australian CPI q/q is 0.3%, compared to 0.2% previously; CPI y/y is expected at 2.5%, compared to the prior 2.3%. For the trimmed mean CPI, a key measure of core inflation, expectations are for 0.6% quarterly growth, down from the previous 0.8%.

Westpac analysts anticipate a slight moderation in core inflation, with the annual pace of the trimmed mean expected to ease to 3.3% from 3.5%. The two-quarter annualized rate is projected to decline further, to 2.7%. While cost-of-living measures like energy rebates and transport subsidies may help offset some inflationary pressures, their impact on the trimmed mean is expected to be minimal. More significant is the ongoing decline in dwelling prices, which continues to play a key role in softening underlying inflation.

However, these estimates carry downside risks, with both headline CPI and core inflation potentially coming in lower than expected. Regarding monetary policy, the RBA will closely monitor this week’s data to guide its next steps, as the market anticipates a possible 25 bps rate cut in February.

At this week’s meeting, the BoC is expected to deliver a 25 bps rate cut, bringing the policy rate to 3.25%. This would place the rate at the high end of the estimated “neutral” range of 2.25% to 3.25%. As a reminder, the Bank has already implemented two prior 50 bps cuts.

Given the latest economic data, including mixed GDP growth and inflation trends, the Bank is not yet finished with rate cuts. Q4 GDP is tracking close to the BoC’s forecast of 2% growth, while inflation, excluding indirect taxes, showed a slight increase in December, analysts from RBC said.

The BoC’s business outlook survey indicated some improvement in business sentiment, but labor markets remain weak. Consequently, the Bank is expected to gradually reduce the overnight rate to 2% this year.

Additionally, concerns about potential U.S. protectionist trade policies and aggressive tariffs on Canadian imports have increased downside risks to the BoC’s growth outlook. If these risks escalate, they could further influence the Bank’s decision to continue cutting rates.

At this week’s meeting, the Fed is expected to keep rates unchanged as economic data has remained strong and inflation persists above target, a concern that continues to weigh on the Bank’s outlook.

Labor market data has shown improvement, with the unemployment rate dropping to 4.1% and non-farm payrolls surprising to the upside. For now, the market anticipates that the Fed will pause, with analysts from Wells Fargo forecasting rate cuts of 25 bps each in September and December. However, those decisions are still far off.

As a reminder, the FOMC has delivered a total of 100 bps in rate cuts since September, bringing the rates in the range of 4.25% – 4.50%.

At this week’s meeting, the ECB is expected to deliver a 25 bps rate cut, lowering the policy rate to 2.75%.

The slow economic growth in the eurozone and a rate that is above the neutral level support a rate cut decision. However, the December headline inflation of 2.4% y/y and services inflation of 4.0% suggests there are still price pressures, which means the ECB will likely take a gradual and measured approach to rate cuts.

Analysts from Wells Fargo also expect 25 bps rate reductions in March, April, June and September, bringing the rate to 1.75% at the end of 2025.

In Japan, the consensus for the Tokyo core CPI y/y is 2.5%, compared to the prior 2.4%. Analysts closely monitor the Tokyo metrics as they are considered a leading indicator for the nationwide CPI release in February, which will be the last data point before the next BoJ meeting.

Many analysts argue that inflation will remain elevated in the near future causing the BoJ to adopt a data-dependent approach. As a reminder, at last week’s meeting, the BoJ delivered a 25 bps rate hike, raising the policy rate to 0.50%. Inflation, driven by higher wages, has been on the rise, with the latest CPI excluding fresh food showing a 3.0% year-over-year increase.

Japan has revised its inflation forecasts upward, signaling the potential for further tightening. With inflation reaching more sustainable levels, markets anticipate at least one more rate hike by mid-2025, although a more aggressive pace is also possible.

In the U.S., the consensus for the core PCE price index m/m is 0.2%, compared to the prior 0.1%; for personal income m/m, the consensus is 0.4% vs 0.3% previously; and for personal spending m/m, the consensus is 0.5%, compared to the prior 0.4%.

Personal spending data for November grew by 0.4%, while real spending increased by 0.3%, reflecting a softer inflation print. However, goods spending registered one of the fastest growth rates since January 2023, likely due to holiday shopping, while services spending slowed to the weakest pace since August 2023.

According to analysts from Wells Fargo, the rise in goods spending is a concern for policymakers as it reduces deflationary pressures making the sector more vulnerable to potential price increases such as those resulting from President Trump’s planned tariffs. However, slower services growth could help ease core inflation.

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