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As the week leading up to Christmas unfolds, market participants will likely show limited interest and engagement with economic releases and market events due to the proximity to the holiday season. However, the Bank of Japan (BoJ) remains a key focus. Earlier in the month, comments from Kazuo Ueda and a speech by Deputy Governor Ryozo Himino sparked speculation that the BoJ might be contemplating an exit from negative interest rates. The term “imminent” is used cautiously, as the timing of any potential policy changes remains uncertain.
Since taking over from Haruhiko Kuroda, Ueda has adjusted the parameters of the BoJ’s yield-curve control program twice, with the most recent tweak in October as an acknowledgment that the existing framework may be outdated. Despite discussions around the possible exit from negative rates, a rate hike at the upcoming BoJ meeting is considered more of a tail risk than a highly probable outcome. Reports suggest that the central bank does not perceive an urgent need for significant policy changes before the end of 2023.
This week will bring a wealth of housing data in the United States. The schedule starts with builder sentiment on Monday, housing starts and permits on Tuesday, existing home sales on Wednesday, and new home sales on Friday. These reports are particularly noteworthy as they cover a multi-week period marked by a substantial decline in mortgage rates. This shift comes after several months of increases that led to new 23-year highs in mortgage rates. The housing market has been experiencing a roller coaster ride, and these reports will offer insights into the effects of recent fluctuations in interest rates.
From the October highs near 8%, the 30-year fixed mortgage rate has experienced a significant drop, thanks to a remarkable rally at the long end of the US Treasury curve. Freddie Mac’s weekly update shows the six percent levels for the first time since August 10.
In the US, builder sentiment is anticipating its first monthly increase in five months, while existing home sales are expected to register another decline, marking the 20th drop in 22 months.
Other key economic indicators in the US include personal income and spending data for the world’s largest economy, along with an update on PCE (Personal Consumption Expenditures) prices. Personal spending is forecasted to show a 0.3% increase, aligning with last week’s positive surprise in retail sales.
The interpretation of good news as bad news and vice versa on the US macro front is a matter of perspective. Some see constructive data as a hawkish signal for the Fed, prompting selling, while soft data is viewed as a recession warning, also signalling a sell-off.
Considering November’s mixed CPI report and the Fed’s dovish pivot context, the PCE price updates will be closely monitored. The consensus expects a 0.2% month-on-month increase in the core PCE print.
Suppose the PCE inflation readings come in slightly higher than expected. In that case, critics of the Fed may use the opportunity to express their dissatisfaction with what they perceive as a dangerously premature policy pivot. However, the timing of the data release, scheduled for the last trading session before the long Christmas weekend, may lead to a lack of immediate market reaction, as many participants may be preoccupied with holiday festivities. I caution here as Algo’s never party and will be tuned to the inflation metrics, so given the fall off in liquidity, there could be some outsized market moves.
Additionally, the week will feature the final reading on Q3 GDP and the Conference Board consumer confidence data release. The December University of Michigan sentiment index indicated an improvement in Americans’ perceptions earlier in the month, and the final read on Michigan sentiment is expected on Friday.
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