• Blackout periods for central bankers and a near empty eco calendar (outdated US PCE deflators and spending figures after yesterday’s GDP release) allow time to contemplate on next week’s central bank gatherings. Both the Fed and the US convene for the first time this year after both of them downshifted the rate hike pace from 75 bps to 50 bps in December. The ECB is expected to deliver another 50 bps rate hike. ECB Lagarde in December swapped a 75 bps rate hike proposal for a 50 bps move in exchange for a firm commitment to keeping that pace at the first meetings of 2023. Since then, she repeatedly stressed to stay the course, in a reference to the war on terror language by US president Bush. He as well pursued a goal regardless of any obstacles or criticism. We expect the ECB to firmly stick with its inflation battle with ECB Lagarde probably trying to talk up rate markets. Reasons are plenty. First and foremost, there was the upward revisions to inflation forecasts as recently as December: 8.4%-6.3%-3.4%-2.3% for the 2022-2025 period with average core inflation still rising this year compared to last: 4.2% from 3.9%. Second, we’ve witnessed another “unwelcome” easing of financial conditions compared to December: both stocks and bonds corrected higher with credit spreads tightening. The exception to the rule was a firmer euro, but this doesn’t level the balance. Easier financial conditions add to the normalization/tightening case. In a same vein, we’ve seen investors and analysts turning less pessimistic on this year’s growth, with global economies likely to be able to dodge the recession bullet. All else equal, it suggests stickier inflation and a tighter monetary policy. It also suggests that economies can easily cope current interest levels, even if we haven’t been acquainted to them for a long time. Regarding the Fed, there’s a similar discrepancy between December Fed dots and current market pricing. Several Fed governors suggested another downshift to a 25 bps rate hike. While it’s the most likely scenario, we believe it would be more interesting from a Fed point of view to stick with 50 bps one last time, before delivering a conditional last hike (+25 bps) in March which would then be accompanied by new growth/inflation forecasts. The latter should serve to change markets’ minds on the probability of a near term (2023) rate cut.
• Economic data published in Sweden today again came out on the weaker side of market expectations. In December there were 411 000 unemployed people (seasonally adjusted and smoothed series) which translated into a rise in the unemployment rate from 7.2% to 7.3%. Comments from Swedish statistics analysis point to ‘signs of a weakening development on the labour market.’ For example, employment does not increase at its previous rate, and the decrease in unemployment appears to have stagnated. Other data also showed a 1.8% monthly decline in retail sales bringing the volume of sales in December 8% lower compared to the same month last year. Slower activity data (and an ongoing decline in house prices) combined with persistently high inflation (CPIF 10.2% in December) complicate the Riksbank’s policy. The RB will hold its first regular policy meeting of 2023 on February 09, when it is expected to raise the policy rate by 50 bps to 3%, more or less in line with RB guidance back in November. The Swedish krone remains in the defensive. EUR/SEK today rose to 11.21, holding within reach of the cycle top (low for the krone) of EURSEK 12.32
• According to data published by the ECB, lending slowed in December as the ECB raised its policy rate to tame inflation and to slow demand. Lending to consumers eased from 4.1% Y/Y in November to 3.8% in December. Net flows of credit both for consumer credit and house purchases slowed to €1bn (from €2bn in November) and €4bn (from €9bn). The credit flows to non-financial companies were again negative at minus €16bn from minus €4bn in November resulting in a slowdown of Y/Y credit growth from 8.3% to 6.3%