The Week Ahead – It's One Battle After Another

This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether, instead, monetary policy will be directed by political pressure or intimidation. Hello, and welcome to the week ahead on Nomura Podcasts. My name is Rubin Parquelez, Chief Southeast Asia Economist at Nomura Base in Singapore. And today is Friday, the 16th of January. Global financial markets continue to battle several issues, which are unfolding one after another in early 2026. In the US, the week started with news that the Department of Justice served the Fed with grand jury subpoenas related to the renovation project, prompting Chair Powell to release a video statement as you heard there. And then we have ongoing geopolitical headlines on Greenland and Iran, while we're still awaiting the Supreme Court ruling on Trump's tariffs. In Japan, Prime Minister Takaichi is reportedly considering snap election soon, and the yen has weakened, raising questions about effects intervention prospects ahead of the next POJ policy rate decision in the coming week. China is also signaling some easing measures which may be on the cards. We discuss all of these issues and their implications with David Ceefe, our Chief Economist for Developed Markets, Yuchiro Nozaki from our Economist team in Tokyo, Jingwang, our China Economist in Hong Kong, and Zumut in Momoklu, who is our Turkey Economist based in London. We also preview key data releases such as the US Corps PCE, UK CPI, and China GDP, as well as Central Bank Decisions from the POJ, Norway's Bank, CBRT in Turkey, Bank in Indonesia, and Bank in Gara Malaysia. We've got plenty to cover, so let's dive in. All right, let's kick off with the US where several things are happening this week. So I'm very glad that David is joining us today. Hey, David, thank you very much for being here. Wonderful to be back. Great to see you, Ben. Yes, so let's start with what's in store for the week ahead, which I guess is shortened by the public holiday on Monday, but in terms of the data, we have the core PCE on tap. I know this is for the month of October and November, but if you could also give some thoughts on what do you expect for December, and maybe also the any implications to our Fed call. Absolutely. Well, first of all, it is still a matter of playing catch up on the US data following last year's government shutdown. And so next week, very delayed, we will get the October and November PCE's, and then the December PCE will not come out until February 20th, so we got a while to wait there. But we do have a lot of the inputs for all of those, and so we have estimates for all of them. And despite the fact that the CPI this week was definitely a surprise to the downside, is actually a net, it has been a relatively hawkish week for price data. So the first thing is that when we look at the CPI, which was sort of December, because of the differences in weightings between that and the PCE, that actually had no double simplifications whatsoever for the December core PCE. And when we then look at the PPI data that came out this week, which was for October and November, those were a little bit hot, at least the portions of them that feed into to core PCE. And so that leads us with a forecast of 0.24 and 0.20 for October and November's core PCE respectively next week. Now we probably won't get them separated out in the same way. We didn't get the October and November CPI separated out. And then beyond that, when we look ahead to next month and we finally get the December PCE, we have 0.38 as our estimate for core PCE then. So a couple of numbers that round to 0.2, a number that rounds to 0.4, certainly not anything that is all that doubles there. I'd say that when it comes to the Fed, probably the most important piece of data to come out was actually last week's employment report. When we saw the unemployment rate fall to 4.4%, and a low 4.4 to almost round to 4.3%. And I think that really pushes back against some of the fears that were out there that the unemployment rate was just going to keep rising. In fact, we think that this is going to keep falling throughout the year. We have an out-of-consensus view that it will be 4.0%, the unemployment rate at the end of this year. And therefore, we stick with our call of no additional rate cuts under the Powell Fed, meaning the next three meetings. And then two cuts under a new chair, although largely based on the fact that that new chair will likely be significantly more diverse than chair Powell. Okay. Yeah, all very clear. Thank you very much. Speaking of the Powell Fed, this week, of course, the shock was the headlines about the Justice Department investigating the Fed, and Powell issued this response in that video release. What do you make of all of that? Well, it was certainly a remarkable weekend, remarkable because although the Trump administration has certainly gone outside of many norms when it comes to the Fed, a criminal investigation against the chair took that up a level. And then also remarkable because Powell, who has generally tried to avoid conflict, certainly took another very opposite tactic this time and really released a very defiant and direct video pushing back against this. I would say that by and large just seems to have backfired against the administration. Not just because of Powell's response, but by and large because of the response of other members of the Fed and by politicians, including Republican politicians, with Republican senators credibly stating that they will block any Fed appointees, be it Powell's replacement or other governors, until this investigation concludes, which then means it really needs to conclude in the next couple of months or so if not before. So we have pushed as a theme a real risk of Fed independence loss over the later in this year, Post Powell. And I think that that is still a very real and perhaps underappreciated risk out there. But that said, I think that the defiant response from Powell increases the chance that he will stay on as a governor through the end of his gubernatorial term, which is in January 2028. And that would give Trump one fewer governorship to fill on the Fed and therefore does somewhat decrease the risk to the Fed of loss of independence, even though we do still think that that risk is quite high. Yeah, I've got it. And of course, we've had global central banks ensuring a statement in support of Powell and I guess trying to assert the importance of central bank independence. Shifting gears a little bit, David, we've also had a lot of headlines on geopolitics, whether it's in Iran or in Greenland, any quick thoughts and any implications of these things. Yeah, well, there's been a lot of pushback from politicians across the spectrum on Greenland. I think that this is simply a case where eventually cooler heads will prevail and there will be some face-saving agreement made on both whereby the U.S. gets some rights to Greenland but does not take control of it. I think perhaps more interesting is the situation in Iran which looked as though it could have imminent U.S. airstrikes, but that seems to have been pulled back now. But I doubt that this issue is over. Iran has suppressed the protest by and large at an enormous civilian death toll, but I think the threats of U.S. airstrikes in the future still remain. And this is an issue that is not over. It's just a temporary pause right now. But I certainly would not at all be surprised to see more protests in Iran given how poorly the economy has done following the 12-day conflict with Israel. And I'd say more broadly, the two-plus-year conflict that Iranian proxies have had against Israel and other Western countries. Yeah, great, yeah, I guess another risk factor to watch for markets this year. Yeah, let's leave it here. Excellent David, as always. Thanks very much. My pleasure. Now let's shift to Asia starting with Japan where a lot of things are also unfolding at the start of the new year. So I'm very happy that you and your son from Tokyo could join us today. Thanks, your region son. Welcome back to the podcast. Thank you. So the highlight next week would be the BOJ, which will be on the 23rd, that's the Friday. The last time you were here in the program, we were talking about the possibility of BOJ hiking in December. And that actually happened. So this will be the first meeting after that hike. I guess BOJ will be in the spotlight a little bit because of recent yen weakness and how might that influence their thinking on the inflation outlook in particular. So what do you expect on the policy rate and importantly on any communication on the forward guidance? We expect the policy laid to the hell didn't change. The bank raised rates in December and it is now assessing how it affects the economy and prices. A poll is the market consensus, so attention will center on the Q3 Outrug report and government will express confidence. The outrug report will present GDP and CPI for get through fiscal 2027, compared with October, two macro difference stands out. First, a further awakening of the end and second, the passage of economic stimulus packages and approval of the 2026 initial budget. For GDP growth, the stimulus and easing of tariff concerns should lead to upward revisions. For CPI inflation, yen weakness and fiscal report push up inflation while price relief measures pour it down. So we expect a small downward revision in 2026. On the other hand, we think that the BOJ views that underlying inflation will continue to rise towards 2% will be unchanged. For the last press conference, the yen weakened during the session, so weather will be careful to avoid appearing dovish. But same as before, providing concrete guidance on the future pace of rate hikes or time and rate will be difficult. So a firmarton of caution on the end depreciation is a likely communication tool. Okay, great. Yeah, firmarton with regards to the currency. And of course this week, we had a lot of headlines on the possibility on the political front that Takahichi-san is considering dissolving the lower house, which could pay the way for its nap election soon. How are you thinking about that and the possible implication? Prime Minister Takahichi has not yet announced officially, but the media report that she is considering dissolving the lower house. More expected future schedule, she will hold a press conference on 19th, explaining about a snap election, and dissolve the diet on January 23rd, with boarding on February 8th. Two points mother for the likely outcome. First, the Takahichi cabinet approval rating is high at around 70%. But support for the LDP as a party is only near 30%. Second, CDP and Commodore, the largest opposition party and third-land party, consider forming a new party, not merely cooperating for election. This may potentially affect the result of the election, especially on tight single-seat races. That means the LDP may not win as its leaders' approval rating suggests. Its have already reacted to the news with higher equities, rising yields and a week again. However, actual post-election fiscal policy will depend on the election result. Nomura's view is that a decisive LDP victory would reduce the need for short-term household progress handled as an election tool, allowing Takahichi to pivot towards measures to boost medium to long-term potential growth. In that scenario, fiscal policy could become more stable, compulsory and now LDP win or defeat would likely post Takahichi to pass a commodity fiscal measure, so prolonging short-term expassionary policies. Okay, great. So, still very much consequential in terms of the actual outcome and also the margins which could be impactful for markets, even though we've seen already some moves this week. Finally, a huge sun with all of these latest developments. What are you seeing now as sort of the main risks to the views that we laid out when we published our 2026 outlook with respect to, for example, the economic recovery path that we're still expecting and also the BOJ? We think that economic recovery is unchanged here at two points. First, I think an acceleration of rate hikes is possible as the yen weakness persists. Markets have already priced in up to 1.7 times rate hike by the year end. If fiscal expansion continues as well, policy could move beyond simple normalization of monetary policy, tourists and tightening. Second, a downside risk to the economy is deterioration in Japan and China relations. Last week, the Chinese government has announced tougher export control on their use items. How strict these measures will largely depend on the governments? So it is difficult to quantify the impact at the moment. However, if exports of layer art were to fall sharply and the restriction were prolonged, production activity could be substantially depressed. Okay, great. Yeah, that's a good reminder of this geopolitical risk that seems to be happening across the globe as well, including, of course, as you said, Japan and China relations. Yeah, excellent. Let's see here. Thanks very much, Yutichan. And then speak again soon. Thanks, Yutichan. Okay, now we'll go to China and the rest of Asia. And I'm joined by my colleague in Hong Kong, Jingwan. Hey, Jing, thanks again for being here. Next question, we have a slew of Tier 1 data out of China on Monday, on the 19th. So, first of all, what do you expect from the Q4 GDP number? Yeah, thanks, Yubing, I'm glad to be back here again. Yeah, so next Monday, we will have a slew of data to be released for Q4 GDP, our forecast for the real GDP growth is 4.3% year-on-year. That is low, the 4.8% in Q3, and also the market consensus of 4.5%. Compared to markets, we expect a shopper growth slowdown in Q4, your front Q3. Or we also expect a GDP deflator to remain unactive, but it might be less than unactive compared to the Q3 if we consider this on the modest rise in both the PPI and the PPI in Q4. Okay, great. And what about the monthly numbers on IP retail sales and the fixed asset investment? And I guess it would be interesting to get your thoughts on what the overall picture in terms of the growth momentum based on these numbers. So this week, we already had the December trade data already released, and the export growth came about a market consensus at 6.6% a year in the USD terms. And that's above the market consensus of about 3%. So this upside, you know, surprise, my impulse on upside risk to our forecast of industrial production growth, you know, in December, our forecast for IP growth is 4%, a year-on-year, but a consensus forecast is 5%. And so this exports could be the major driver for this upside risk. So that means we are still seeing a strength on external demand and also the supply side. But we do expect the domestic demand continue to show a weakness. We expect the retail sales grows to deep further to 1.1% a year in December from 1.3% in no member, already in no lumber, and because of the payback effects from this durable goods trading program, we are having, we already have no then December passenger car retail sales down 14% a year. And in the first 11 days of January this year is also down 33%. And on the investment, due to the anti-involution campaign and also the property decline, we expect FI gross to drop further to minus 3% a year-on-year to date in December from minus 2.6% in no member. Overall, we just continue to see this imbalance between external demand and also the domestic demand. Okay. So sounds like domestic demand remains the drag for the Chinese economy. Yeah. Speaking of that, in terms of policy responses, you know, we've had the memo from the State Council recently, and that suggests that they're considering some easing measures and that might be coming soon. So what do you expect? And by when? Yeah. So last week, the State Council meeting announced they will have a new round of policy easing measures to lower the financing cost of households and the companies. And the focus is going to be on the interest of subsidy program. So that is more on the fiscal site. Actually, yesterday, you know, the Ministry of Finance already hosted a national video conference, you know, with various government departments, implementations of this policy measures. So that means the Ministry of Finance is going to be leading this round of policy package. And the implementation might have already started. So the focus of this latest round of policy package is more on the interest of subsidy program and the cover by more fiscal spending. And it's impact on, you know, the domestic demand is still made to see because the largest the drag on the economy is still on the property side. Okay. Got it. That's interesting. Yeah. Thanks, Jing. And maybe just to wrap it up for the rest of Asia. Next week, we have a couple of center banks bank Indonesia and Banking Garden Malaysia, which we both expect to keep the policy rate unchanged. But we think the tone and the signal might be divergent a little bit. So for BI, the current weakness in the idea probably inhibits them from resuming rate cuts. But I think they'll continue to say that they have scope to cut later in the year, given that inflation is still pretty benign and there's a need to support the economy. So a dovish pause, if you will, in contrast, from Banking Garden Malaysia, we think the tone is going to be a bit more neutral because the economy is doing well. And in fact, that's supporting our view that by Q4 this year, we think B&M will hike the policy rate by 25 basis points to 3%, which is going to be the more neutral stance. Finally, you want to flag, Jing, we have our Asian conference in Kuala Lumpur next week. You will also be speaking with some of our external experts as well on a variety of topics, impact of Trump policies and our outlooks on 2026 across economics and equity rates and effects markets. So yeah, I'll see you there. Thank you, Yuba. See you soon. All right, let's swing over to London and focus a little bit on Turkey. And I'm very glad that Zoom Root is able to join us today. Zoom Root, I believe this is your first time in the week ahead podcast. So welcome in. Thanks very much for joining. Thank you very much for the invitation. It's my pleasure. Yeah, and it's the right time, of course, because we've got the Turkish Center Bank, the CBRT coming up next week on Thursday. So yeah, could you walk us through your expectations on the policy rate and where you are versus consensus and also importantly, what do you expect to be the tone and the four guidance from the CBRT? Yes, we're expecting 108 50 basis point cuts. This is in line with market expectation, although market pricing has decreased a little bit over the last two weeks from around 146 basis points to now lower towards 120. This is because in the first weeks of the December of January, sorry, food inflation seems to be a little bit on the high side. So this is putting some upside risk on our inflation forecast of 3.5% for January. We see risk that now it could be closer to maybe 4%. And last year, it was 5% month on month. Of course, these are high levels, but if it is only food prices, putting the risk that is pushing the headline on the upside, then central bank would still be encouraged to cut 150 basis points. Because what they really care about is the trend inflation, especially in services, because that's the part that has been very sticky and resistant in the last two years. And the central bank governor was in London this week and he was talking about these upside risk in food prices, but the message he gave was that this is volatility. So I think trend matters more and of course we will not see the official January prints while they are deciding. And if you look at the trend in December, it was much lower at 1.8% compared to over 2% through the year. So the summary inflation is encouraging. There are some upside risk on January inflation, but we think that central bank will give a cautious message in the statement, but can still cut 150 basis points. Right. So just a quick follow up and say a cautious message, is that a little bit more to the hawkish side? Oh, yes. Yes, of course. We think that the central bank is not on an automatic cutting cycle. So every meeting, they look at the data recent data, especially the trend inflation, developments, and decide the month-on-month basis. That's the message that they are giving every time we speak to them as well. And we really think this is the case, because if you look at the how many cuts they have done in the past, the step size has always been adjusted in all ways every meeting. Right. We've seen step sizes as high as 300 basis points and as low as 100 basis points. And they are very reactive to recent data. So we really have to watch closely the inflation path and the data this year to see whether they will cut in every meeting or not, because there are eight meetings in the year. We're expecting 1,000 basis points cuts in our baseline from them, but it's not automatic. Okay. Got it. Well, 1,000 basis points. That sounds a lot. But as you said, it's a meeting by meeting basis. Yeah. Next question, I guess, Zoom with, and this is very topical, and maybe shifting gears a little bit. Do you have any thoughts on the sort of the latest situation now in Iran? It's been in the headlines, how is it evolving? What are the potential implications that you're watching from this development? Yes, we are watching very carefully. Of course, Turkey is in the region. We have a border with Iran, and the geopolitics of the region has been reshaping since the events of October 7, of course, as Israel has fought many wars in many fronts. So as Ensyria now, there's a new situation in Syria, as you know, and Turkey has a process, this process with its Kurdish population, where PKK is expected to lay down their arms. So all these geopolitical movements are very much connected to each other. And Turkey is taking a cautious stance in the conflict. But what we are seeing is President Trump having warned Iran many times that if the reaction to the process are violent, he said he would help the people in Iran, but now the latest messaging was that he sees that the events are now calmer and there won't be an execution. So it sounded like we have seen the peak in this episode. But the situation is better than we're still watching it very carefully. And I think it will be one of the things on our agenda to watch for during the whole year, not just now, in these weeks. Okay. Yeah. So, yeah. A recurring risk, I guess, throughout the 2026. And maybe just to round up a little bit, that we have one other center back decision in Europe. And that's not just bank. Our expectation is for the policy rate to be left and changed at 4%. Inflation remains high or too high for another cut. So the committee is likely to judge that the restricted policy is so needed. Looking ahead, however, we have inflation also gradually coming down and we still expect an order just bank to cut the policy rate in June and in December of 2026. So the rate cutting cycle is still not over. Yeah. Again, thanks very much, Zumerat. And yeah, please come back soon in the podcast. Thank you, my pleasure. Well, that's it for now. And thank you again for listening to our podcast, edited and produced by John Dalton. Please like and subscribe to Numerat's podcast on Apple, Spotify and SoundCloud or your usual podcast provider. We'd love to hear your feedback, so please feel free to write a review and share this podcast to anyone you think might be interested. You can check out NumeratConnects.com for more of our research and updates. Have a great week ahead. In a complex and unpredictable world, where a sunset in one market means a sunrise in another, one investment bank always looks beyond the horizon. 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