Markets to Watch: Key Clues on the DM Cutting Cycle

Summary

• In the US, we see an upside surprise in retail sales and think import prices could show the impact of higher shipping costs. We still expect a 50bp cut at the March FOMC.
• UK inflation could see a near-term MoM uptick in core goods, which may provide a good entry to be long the UK front end.
• ECB speakers should resist near-term cuts, but the last inflation print may prompt dovish comments.
• In $-bloc and the rest of G10 Europe, Australian LFS should prove deceivingly strong, Canada’s inflation should keep normalizing, and Riksbank speakers could provide important clues on the policy outlook.
• In EM, Saturday saw the Taiwan election result, and Bank Indonesia will likely leave rates unchanged on Wednesday.

US: A 50bp Cut in March Is Still On, Just About

Last week’s CPI lowered but did not rule out Dominique’s expectation for a 50bp cut in March. It showed energy prices are falling and driving core inflation. Fed speakers last week were generally noncommittal on a March rate cut, but this week sees several more. Waller’s speech will be most important – the first since his November comment that cuts could start if inflation kept cooling ‘for several months’.

Key data by order of importance includes:

• December retail sales (Tuesday): we may see a positive surprise to the control group forecast of 0.3%, since the CPI implies zero real retail sales growth. This would be inconsistent with strong employment and a low savings rate.
• December import price ex-oil (Wednesday): increased shipping costs suggest import price inflation acceleration (e.g., 0.3% compared with 0.2% in November).
• Residential real estate market indicators (Wednesday, Thursday, and Friday): the consensus is lower numbers. Over the next few months, we should the 1.4ppt decline in mortgage rates since October impact existing home sales.

We also expect manufacturing data to show a continued decoupling of the hard and soft data, a small decline in the University of Michigan’s consumer confidence survey, and continued low jobless claims.

Markets We Are Watching

• Given the likely importance of Waller’s discussion at Brookings, we will monitor SFRH4 (3-month March 24 SOFR futures) for signs of how the market is taking his comments. The STIR market is currently pricing a 70% chance of a 25bp cut in March.
• In equities, we watch for JB Hunt’s performance following its earnings release. The market will be looking for further evidence that the freight recession is all but over in the US.
• More broadly, we’re looking at the relative performance of small caps vs the S&P 500. Both the Russell and S&P small caps have underperformed since the start of the year, following a strong run since November.

Europe & UK: Will the BoE Beat the ECB to Cuts?

This week sees important data for both the ECB and BoE outlook. In the UK, we get labour market data, average weekly earnings (AWE), and the CPI midweek. We have long expected the BoE’s first cut will come in May, with the market now close to pricing the same. In the eurozone, final inflation numbers will come alongside a slew of ECB speakers. We think the ECB can wait until June before cutting and would fade the 30bp of cuts priced for April.

• The UK jobs data will reveal the extent of labour market loosening. Henry expects this to show MPR forecasts for labour market loosening are too hawkish.
• UK inflation could see a near-term MoM uptick in core goods if sample timing affects November’s release. Henry would not take this as hawkish unless wage-intensive services inflation also overshoots.
• ECB speakers will likely continue to resist near-term cuts, but we could hear dovish comments after the last inflation print.

Elsewhere, we expect Wednesday’s final EZ inflation numbers to show detail on sectoral drivers and Thursday’s minutes from the December meeting to offer key insights into the PEPP wind-down discussion.

Markets We Are Watching

• Given the deluge of bond supply in coming months, we expect French and Spanish bonds will outperform Germany and Italy. Therefore, this week we watch semi-core EGBs vs core and periphery.
• Given our view that USD will likely rise vs both GBP and EUR, we watch Cable this week to attractive entry points on the short side.

$-Bloc and Rest of G10 Europe: Clues, But No Conclusions

Important data this week includes the Australian LFS, the Bank of Canada’s Business Outlook Survey and CPI, and labour market data in New Zealand. Riksbank speakers could provide insight into their policy outlook, with NOK/SEK needing a dovish turn from the bank to climb through parity.

• The Australian LFS could prove deceivingly strong. We think the underlying details can continue to show the labour market is standing on loose ground.
• Expect continued normalization in the BoC BOS and CPI outturns. Is it fast enough for the BoC to cut as the market has priced, though?

Emerging Markets: Taiwan Elections to Impact TWD/USD?

Taiwan took centre stage in emerging markets over the weekend, with presidential and legislative elections on Saturday. This week, the PBoC and Bank Indonesia have policy meetings, growth data is due in Brazil and Mexico, inflation data is due in Poland.

• Bank Indonesia will likely leave rates unchanged at 6% (Wednesday). Hikes so far have targeted currency stability, not cooling demand-pull price pressures. We think BI will wait until Q2 to cut – until the Fed’s trajectory becomes clear.
• We think Polish inflation data should confirm slower disinflation in core versus elsewhere in CEE. But with the NBP on hold, politics will continue to dominate headlines.

Markets We Are Watching

• Following the Taiwan election, we’re watching for the reaction of TWD/USD, particularly when the US comes back after MLK day.
• Chinese equities continue to be offered without remorse. This morning, Baidu’s shares fell by more than 10% after a report linked its Ernie AI to the Chinese military. This could make it harder for the company to acquire the chips it needs to further advance its capabilities.

Key Market Movers From Last Week

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)