The Bank of Canada could take the lead for policymakers in pausing rates at its meeting on Wednesday. This may point the way for those other central banks nearing peak rates. Governor Macklem is expected to hike for potentially a final time, taking the terminal rate to 4.5%. The red hot job market remains, but elevated core inflation continues to hurt the hard-pressed consumer. The loonie may be volatile as forward guidance by the bank will determine price action. If the bank is considering whether the policy interest rate needs to rise further, the CAD could move sharply, with it struggling for most of this year already.

Soft US economic data this week brought a setback to the soft-landing narrative and beginning-of-the-year risk rally in stock markets. US retail sales have fallen by 1% or more in the last two months while both manufacturing and services sector ISM indices are in contraction territory. Investors will be nervously awaiting the first PMI readings of 2023 to get a handle on how much of an economic slowdown we might see in the months ahead. The global activity surveys are expected to continue showing weak demand, following on from the bad end to last year.

The first release of fourth quarter 2022 US GDP will also grab the headlines. Estimates for the data are relatively upbeat at around 3% q/q annualised. Consumer spending is expected to remain a key driver given the strong performance in October. But the labour market may take a hit in the next few months with more high-profile job cuts being announced recently, by Google and Microsoft in the last week alone.

The latter release their Q4 earnings this week along with IBM and Tesla next week. In fact, 26% of the benchmark S&P 500 index report over the next five sessions. There will also be a growing buzz about the first week in February, when the other megacap tech titans like Apple and Amazon report their results. That week is building up to a big one for potential volatility with the FOMC, ECB and the Bank of England all meeting and making rate decisions within 24 hours of each other. Of course, we are closer to the end of the tightening cycle, so really the focus is now on possible rate cuts later this year.

Major risk events of the week

24 January 2023, Tuesday:

-Eurozone PMIs: These widely watched surveys are an important gauge for the health of the region’s economy. Manufacturing PMI is forecast to move higher to 48.5 from 47.8 in December. The Services PMI is predicted to tick two-tenths higher to 50.0. Warmer weather and lower gas prices are helping both sectors, but the outlook remains uncertain. Any positive beats could propel the euro to new highs above 1.09.

25 January 2023, Wednesday:

-IFO German Business Climate: Morale in the eurozone’s biggest economy is set to improve to 90.6 from 88.6 in December. Favourable winter conditions, falling gas prices and easing supply chain issues are pointing to a potentially milder slowdown. Last month’s current conditions indicator rose for the first time in six months.

-Bank of Canada Meeting: Markets are favouring a 25bp rate hike (65% chance) which would take the overnight rate to 4.5%. Analysts sees this as near the top of the tightening cycle. Lower headline inflation contrasted with resilient core prices this week, while recent blowout jobs data means the labour market remains hot. USD/CAD is trapped in a range between 1.3350 and 1.35.

26 January 2023, Thursday:

-US GDP: Q4 GDP is expected to print at 2.8% q/q. Remember this is a lagging indicator and we have had numerous disappointing data releases more recently. The dollar could move if activity is much better than expected as momentum may be stronger than expected going into the new year.

27 January 2023, Friday:

-US Core PCE Deflator: The Fed’s favoured inflation measure is seen at 0.2%, unchanged from November. Easing PCE inflation is a key dynamic for the Fed as it tracks this data for its 2% target. There are no scheduled Fed speakers due to the blackout period ahead of the FOMC meeting on 1 February where a 25bp rate hike is expected.