The Week Ahead - A Dove in Hawk's Clothing?

Does your new Fed pick understand that you want him to lower interest rates? Well, I think he does, but I think he wants to anyway. I mean, if he came in and said, "I want to raise it," we should have-- If he said that, you wouldn't have gotten the job. He would not have gotten the job, no. [THEME MUSIC] Hello, and welcome to the week ahead on the Murafok Koss. I'm Dominic Bunning, head of G10 FX strategy in London, and today is Friday, the 6th of February. [THEME MUSIC] Well, it's been another whirlwind week in markets with volatility jumping across equities, currencies, and precious metals in particular. Markets have been trying to process a range of new information, including President Trump's announcement last week that he would nominate Kevin Walsh to replace Jerome Powell as Fed Chair. And as you heard in those opening comments, his view that Walsh will support rate cuts going forward. We'll discuss the implications of this with David Seafar, Chief Economist for Development Markets, as well as preview the US labour market and inflation data releases due next week. In Europe, we've had two unchanged rate decisions from the Bank of England and the ECB, but both with very different implications looking ahead. We're going to discuss this divergence with George Buckley, our Chief European Economist. And then looking ahead in Asia, we've got elections over the weekend in Japan and Thailand, both of which could have profound effects on financial markets and the local economies. So we're going to be talking this through with UK Meary and urban parisweilers. Lots to get into this week, so with no further ado, let's get stuck in. I do expect, and as I put in my own paragraph, I do think that it is likely that we will see some further move down in rates. I just want to remind you, and this will not come as a surprise, that we do not target an exchange rate. We're going to start this week in Europe, where I'm joined by our Chief Economist, the region, George Buckley, following some interesting central bank decisions. We heard there from Andrew Bailey talking about potentially getting further rate cuts down the line, and also from ECB President Lagarde, suggesting that the exchange rate isn't so much of a focus. So George, thank you very much for coming on this week. We'll kick off with the Bank of England, where we've got a little bit of a shock, actually, despite an unchanged rate decision. Can you talk us through what happened, and probably most importantly, how it's changed your thinking ahead? Well, we thought it was going to be an interesting decision, even if it was on hold. We didn't think it was going to be quite so interesting. And what made this decision fascinating was the fact that it was a much closer vote than we thought, which is a bit strange, because the December vote was close for a cut. And this vote was actually close for a hold, because four members voted in favour of a cut this time. When you look at why they've done that, a lot of them seem to have decided to go for a cut, not because the data has been weaker, because I don't think it has. I think it's largely because of the forecast. The bank really took a knife to its inflation forecast. If you start in the middle of this year, they now don't forecast a single quarter, which is above 2%. So that's much more friendly inflation forecast for them. They've taken a knife to their growth forecast as well. All of that means that there's a lot more interest in a rate cut going forward. And what we've done to mark that is to say, well, they're probably going to cut quicker. So we've brought forward our spring rate cut to March, so the next meeting. And we've added another one into the mix as well. We think they'll cut again in June. So we've now got two more cuts taking us down to 325 as a terminal rate, which we think is broadly in line with where we see a neutral interest rate. OK, brilliant. So it's like changing to your views, but you know, nothing of that bigger shift. I guess, you know, 25 basis points more in a little bit sooner. And it's been interesting. You mentioned neutral there. The ECB feels like it's been neutral for some time. And it felt like a much less exciting decision this week as well. Pretty short statement, no real new information. A bit of pushback from the president legard on the idea that a stronger currency could cause the ECB to cut rate. So I thought that was quite interesting. But you know, in terms of how you're looking at the ECB after this decision, do you think the risks are skewing in one way or the other? Or do you think things are still pretty neutral? I think that the market is probably reasonably priced in the sense of it is thinking that the risks are skewed to the downside in the near term, because I think the risk to inflation is skewed to the downside. We already found out this week that inflation is below its target. It's 1.7% so 0.3 below the 2% target. We think there are downside risk potentially because of the currency. I know Madame legard did down or tried to downplay the importance of the currency. But it's still the case that if you get a strength in currency, it will push down on import prices. So that is a potential important risk. But in the longer term, I think the risks are to the upside to inflation. And that's largely because of things like the German fiscal plan. And if inflation does come in a bit stronger, then they might need to raise interest rates. Or be it not till much further down the line. So we're not expecting them to raise interest rates until 2028. So some time yet before they need to do that. But yes, I think those are the main risks. Inflation downside in the near term, but maybe to the upside, looking further ahead. Well, I look forward to our listeners holding you to that call in the in two years time, George, when they they do start hiking into any 2028. So anyone for the one for the future there looking a little bit more closely into the near future. Is there anything next week in terms of the data that really stands out to you things that you're watching it doesn't look like a particularly busy week. But there's often things under the surface that you economists are keen to look at. Even though it's not busy, we will still talk about the data. There's still stuff coming out. It may be second tier, but it's it's stuff to watch. I think that the centric survey will be interesting because it did recover a bit in January. And also this is the first survey we get for the region for the euro area and for for Germany. It's the first survey we get of all of the surveys we get over the entire month. So it can sort of set the tone a bit for the for the month. We'll be looking at that. We're looking at GDP in the UK as well. I mean, could we have a second monthly increase after November's rise? So could December be positive as well? If it was, it'd be the first two back to back positive numbers that we've had since the start of last year. So I think that would be encouraging and a couple of inflation prints from Norway and Switzerland. So a few things to watch out for. But nothing not too, not too big a shakes next week. Really, well, we had quite a lot of excitement this week anyway. So I'm sure you need to rest after that change in Bank of England call and a pretty exciting view from the guard about the currency. So plenty still to watch in Europe, even if not on the on the immediate agenda. So I'm sure you'll be busy telling all your clients about that new Bank of England view as well next week. Thanks a lot for coming on George. Super thanks Tom. Good luck. We're going to move to the US now. I'm joined by David Ceef, our chief economist for the developer markets. David, thanks a lot for joining us. We're going to stay on the topic of central banks in the US. It's been obviously a pretty big development in the last week with the announcement that Kevin Walsh is going to be nominated as the next Fed Chair. What are your thoughts on this? Is it going to challenge the way the Fed works? Is it going to be more dovishness? You know, how are you thinking about this potential new appointment? Hey, how are you doing, Tom? Great to be back. Well, Walsh is an interesting pick. And ultimately I think the market will warm to Walsh perhaps a bit more than it has very initially. I think though that Walsh is still represents a real dovish shift on the Fed versus Powell. And that's the first thing to think about. There has been a lot of commentary focused in on some of the things that Walsh has said in the past. It seemed hawkish, both in terms of rates and in terms of balance sheet. And bottom line is I would really push back on that narrative. I think Walsh is going to be fairly dovish. Walsh is a fairly political figure as we're all of the candidates who were seriously considered for this post. And we really need to take Walsh's past comments in the context of criticism of mostly democratic party presidents. They really aren't applicable relevant to the situation today with President Trump there. So I think that first of all, our call of two cuts in 2026 under Walsh remains unchanged. We think that he'll deliver these near term cuts and that if anything perhaps risk is to him trying to push them a bit further. On top of that, we don't see him being a very big balance sheet hawk. Again, these are comments he made largely in a political context. I think that when he does opine on the balance sheet, he's likely to adopt either the talking point that Governor Miron has pushed talking about how the balance sheet of the Fed really can't contract further. Unless there is more deregulation first, something that doesn't seem likely to happen. Or perhaps, or in addition perhaps, he will talk about how the shortening of the duration of the Fed's balance sheet is really sufficient. It's not just about the sort of gross asset level. So bottom line, we don't see any change to the Fed's new policy of allowing its balance sheet to gradually expand. And just bottom line here, we should remember that that doesn't recommend Walsh among others to President Trump and President Trump picked him. And that should lead us to think that he likely has made certain commitments or at least expressed certain views to President Trump about what he's going to do and that those are probably fairly dovish views. So yes, there is a risk that once we get to 2027 or beyond and perhaps Fed policy is a little bit less salient. Walsh does behave a little bit more hawkishly than some of the other more insider candidates that Trump could have appointed. But I think that the thing that maybe is underappreciated by the market is the risk that Walsh ends up being at least as dovish as any Trump insider would have been. Okay, really interesting, David, and certainly that pushes back a little bit. I think on some of the commentary we're seeing out in the in the mainstream media is it worth. So it's curious slightly different take and I mean, one thing just that we see or seem to see a lot of this potentially idea that Walsh being a little bit maybe more of an unknown in some respects or a little bit more of an outsider could create a bit more volatility as well, just generally with how he's previously been quite critical of the Fed and various other things. There's going to be a lot to watch there and certainly at least in FX markets, it's creating a lot more action, which is good indeed. And I would just say, you know, I think Walsh a couple of strengths that he really has. He's seen as a very good operator. He has very good people skills, very, very good public speaker. He's been on the Fed for several years, for more than several years, so he sort of has some idea of how the inside of the Fed works. And that might lead him to be able to be a bit more persuasive within the Fed than others. But, you know, I would warn investors that Walsh may end up being a proverbial dove in Hawks clothing, so to speak. And I would really caution against leaving that blind spot there. Brilliant. Thanks. That's really helpful. Now, in terms of obviously the rest of the economy, you know, we're not going to get any, you know, impact on what Walsh does in the short term, maybe, but we've got some pretty key data coming up in the week ahead, both in terms of the delayed label market reports and the inflation report as well for January. I was wondering if you could give us your thoughts on both of those data releases. I know you've generally been pretty sanguine on the US economy. So is that the view that still kind of holds going into next week? Yeah, we continue to be quite bullish on the US economy. We're seeing, generally speaking, really strong signs and all sorts of cyclical indicators. Just this week, we had really strong ISM numbers, both services and manufacturing. And although the Joltz job openings were certainly lower than expected, we still see the quits rate. So the holding at the same level as before the layoffs rate remains extremely low. And so it paints a picture of a fairly resilient jobs market. And so, our view for the jobs in next week is unchanged from where it was a week ago. We're expecting NFP of 85K. We're expecting the unemployment rate to tick down to 4.3%. Both of those are a bit more bullish than consensus, but not overly so. Brilliant. And then on inflation, are we still seeing some stickiness staff? Yeah, we are seeing some stickiness there. We are forecasting a 0.4% month-over-month inflation reading for January. That, of course, won't come out until Friday due to the delay from the short government shutdown we had. There are a number of factors here. There still is a delayed materialization of tariff shots, we think. Probably some lingering effect of the longer government shutdown from 2025. So delayed data collections in November could point to a stronger reading of core inflation in January. And then we've often had positive residual seasonality in January. And all signs point to that continuing to be a factor this time. I would say that there is largely because of the long shutdown we had. There are more uncertainty and risks when it comes to this report. How is the BLA going to update seasonal adjustment factors? We really don't know how they're going to treat the October and November data, which will release if you remember in one sort of massive data. So how are they going to treat that in the process of updating seasonal adjustment factors? We're really not sure on that. And we are forced to sort of make assumptions or educated guesses here. But if we're wrong on that, that could push the core CPI on a seasonal adjusted basis in either direction. It's super interesting, quite technical as well. But so clearly a lot of investors will be watching very closely to see just how things plan out next week. So thanks as always David, for your time. And we'll speak to you soon. My pleasure. Thanks. We're going to go to Asia now where I'm joined by two of my colleagues, Musuke Meieri, who is one of our FX strategist here in London covering Japan macro as well as the broader G10 FX space. And you've been para as well as who most of you listening to this podcast will know as a host and also our chief Azian economist. And the reason we've got both on together is that this weekend we've got elections in both Japan and Thailand. So we thought it would be interesting to kind of bring them to together and sort of compare and contrast how those elections might play out on what they might mean for local market. Thanks both for coming on. I'm going to start with the music and the Japan election. And first can you just give us a sense of, you know, what are we watching in terms of the politics and the possible outcomes here. I mean, I'm the timelines around what might happen. Sure. So let me quickly explain the election for people who are not familiar with this. This will be the election for the House of Representatives or the lower house of the Japanese diet, which has 465 seats in total. And the voting will be held on Sunday, 8th February, regarding the election outcome timeline, 8 p.m. Japan time is the poll closing time in most of the constituencies. And usually we will get exit polls by local media outlets at 8 p.m. Japan time. So on that time, we are likely to get a clearer image of what the actual outcome will be. First, each constituencies will release their official announcements and that will likely to be confirmed by early time on Japan time. But most of the election outcome should be revealed roughly image. It will be revealed by 8 p.m. Japan time. The market's focus is whether the LDP can achieve a landslide victory. And so is that a landslide victory just then quickly? What sort of numbers are we talking about? LDP needs to get I think is it 233 seats to a secure single majority? Is that right? Exactly 233 is a single majority seats, but the local media outlets are kind of suggesting that LDP can win more seats, possibly like 260 seats or even 310 seats, which is 2/3 of the lower house seats. So if that's the case, that's a big win. So getting 233 or more is likely the definition of the victory of all this election. Okay, brilliant. So a little rough, rough guy there to how things are going to work. I don't know if you can give us the same in terms of Thailand, who are the main runners and riders, is it how close the race is this going to be? Yeah, thanks Don for having me. Yeah, interesting to listen to the election in Japan on the same day. Thailand is slightly complicated scenario. We've got 500 seats in parliament, up for grabs. And the latest polls are suggesting that it's a three way race. So we've got the Peoples Party, which is the opposition. And then you've got Boomjai Thai BJT, which is the incumbent under the Prime Minister Anitin. And then the Protuxin Poet Thai. And what's showing in the polls is Peoples Party has about the highest approval ratings of between 30 to 35, whereas the other two are around 20 and 15 respectively. So that's where we are. But then I would say it's still very uncertain because in the past the surveys do not really show or tally with the actual outcome. So we can still have a few surprises here. But more importantly, the other source of uncertainty here is even though let's say the Peoples Party actually win the most number of seats, there's still a question of whether they can actually be allowed to form the government. And that's exactly what we saw in 2023. It's predecessor move forward was basically silent and not able to form the government. So what we're left with is a number of smaller parties and a big opposition. And it's a very fragmented parliament, which again, that is interesting because if it stays like that, it's going to have a lot of economic implications for Thailand. Brilliant. Well, I'm glad you mentioned or touched upon the economic implications and also the market implications there. What we're just swing back to UK because I do want to talk about. Obviously what these potential results could mean for markets, you know, in Japan, we've had a lot of politics impacting markets recently. And then we've started to see potential intervention from the MOX or verbal intervention at the very least. So it's really quite quite clear that politics is impacting both the currency and JGB's. What do you think are sort of the main market implications to look out for when things open up, you know, on on early Monday morning, after these election results come out, what would you be looking at? The key question for the market will be whether the ruling coalition can exceed a two thirds of the majority and how the parties moves toward a subsequent consumption tax cut. And how that would unfold on 19th of January when Prime Minister Taka HG had a press conference, she showed her favor to cut consumption tax cuts on food items temporarily. And then we saw a yen weakness and also a rising volatility in the JGB markets. So Prime Minister Taka HG is likely to appear at the media after the election. And if she says that she is very willing to do more fiscal policies to boost the Japanese economy, then on Monday, we could see another yen weakness and also a sell off in the JGB's. However, I will like to emphasize is that among the local JGB investors, there are views that Prime Minister Taka HG may withdraw or become modest in terms of her consumption tax cut policies given that the LDP party overall may not strongly support the consumption tax cut policy. So if Prime Minister Taka HG becomes moderate about the fiscal policies, we could see a initial move of Taka HG trade, which is like yen selling, sell off new JGB's and higher stock prices. But if she becomes more modest, then we could see a little bit of retracement or reversal of the move on Monday. Okay, brilliant. So, you know, it sounds actually quite binary. So I think we just really have to watch and see and there isn't necessarily great risk of going into the election, but certainly a lot to play for coming out of it. You've been are there similar kind of a market implications in Thailand. I know the tie bar has been moving a lot. I don't know if that's the main sort of macro and market outcome or if there are other things you'll be watching as well. Yeah, kind of similar. It will definitely have some implications for markets. And again, a lot will hinge on the margins between the parties. So if they're all sort of winning kind of around the same number of seats, then the risk there is it's going to take a while for the government to be formed. There's going to be a lot of horse trading. And on the back of that, there's a risk that the budget which needs to be passed in September could be delayed. We've got the fiscal policy of is already raising the risk that it could be delayed by as much as three months. So if that's the case, growth is going to plummet. Growth is already quite weak. And if there's no government spending, that's going to be a big drag. So as a result of that, you will probably see markets starting to expect again that the BOT needs to car rates. And that's interesting because right now there's nothing priced in at the moment. And if that's where to be the case, then obviously you'll have some implications as well on the tie, but not just from an interest rate differential angle, but also from the political uncertainty. OK, thanks, Yvonne, that's really interesting as well. So I guess we're all going to be on tent trucks on Sunday, you know, staying up late in some places, maybe luckily in the UK covering the Japan election. We can do it through the morning rather than the rather late at night, but certainly a lot to watch just to move away from pure politics. Yvonne, I know there's some information or some data coming out of swing up or you wanted to touch upon. I think we've got the budget statement. So when you just run us through what you're thinking about that as well. Yeah, sure. I think it's relatively light on the data counter for Asia next week, but I would point out the budget in Singapore. The budget speech will be on Thursday. And I think that's an important Singapore is an economy has been growing very strong in 2025. And I'd say the inflation outlook is starting to look relatively hot. And so we had the MES last week seems to be teeing up for a tightening already. So I think that's interesting, given all the divergence that we've seen in terms of center banks across the globe. And the budget statement I think will be expansionary, the fiscal surplus fiscal balance will turn into a smaller surplus, which means there's going to be more support for growth, even though the economy is already doing quite well. So there'll be some short term measures trying to support targeted low income households, for example, in SMEs. But there's also going to be a lot of spending on long term measures, including adoption of AI and the like. So it will be expansionary could add to more positive growth outlook and therefore rising inflation, which means the central bank would have to adjust at some point. Brilliant. Okay, thanks, you've been so lots to watch there in terms of obviously politics, specifically, then the budget in Singapore can be another exciting week and weekend, especially in Asia. So thanks a lot, both of you and we hope to speak to you both soon. Thanks, Tom. Thank you, Tom. Well, that's it for this week. 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