Summary
- In the US, this week will be all about how Fed speakers react to the hot inflation print. We think September is now the earliest they can cut rates.
- The UK and Europe will get inflation figures this week. For both the BoE and ECB, we expect June remains the most likely time for the first cut.
- New Zealand gets non-tradables CPI on Tuesday, while Australia sees data on Thursday that should confirm labour market loosening.
- South Africa and Poland get inflation prints, with local prints across EM pointing to broader monetary policy divergence between countries.
US: Inflation No Longer a ‘Bump in the Road’
The latest inflation data has dashed hopes of a rate cut in June, deferring potential easing to September or beyond. Both headline and core inflation beat consensus – something Fed speakers must react to this week given they have so far characterized the hot numbers as a ‘bump in the road’. That narrative is now clearly dead in the water.
What will the new story be? We expect Logan, Daly, Jefferson, Mester, Bowman, Williams, Bostic and Goolsbee to say there is less urgency to cut rates and that both monetary policy and financial conditions are less restrictive than assumed. On the data this week:
- Retail sales (Monday):We agree with the The February retail sales report was weak. We stick with our view that growth in Q1 will remain above 2% q/q, saar.
- Industrial production (Tuesday):Expect a pickup, in line with consensus. In February, industrial production improved little.
- Housing data, housing starts and building permits (Tuesday):We agree with consensus. February US housing data saw activity rebound after the weather-affected weak January weak data.
Markets We Are Watching
- USD/JPY is at a crucial juncture as now as it rises to 154. We think MoF could intervene around 156 but will be keen to ensure they get the most bang for their buck. Until then, strong US data will keep USD supported.
- S&P 500 has eased off in the last couple of weeks and is currently at its 50-day moving average of 5,210. We think further downside is possible if the geopolitical situation deteriorates following the weekend’s events, while the pressure from higher rates is also building.
Europe & UK: ECB Still on Track for June
Unlike expectations for the Fed, those for the ECB remain largely stable. The ECB gave little new at their April meeting, except that some members already favour a cut. Our view since last December has been that June is the earliest they can ease – it will remain so unless the data really surprises.
On that, Wednesday’s final EZ inflation print looks likely to confirm our expectation that the Easter effect was limited and the jump in services inflation largely core driven. This is modestly hawkish for the ECB and should offset some of the positivity taken from the weaker core and headline readings.
In the UK, inflation and labour market data are the main releases. We expect +3.9% in core, +3.2% in headline, and +5.8% in services. This is due to continued high rental inflation, Easter seasonal support in transport and a drop in accommodation inflation. The labour market data should show private regular pay growth continues to undershoot BoE expectations. In sum, we are still on for a June BoE cut.
Markets We Are Watching
- UK rates moved materially last week, led first by US rate beta, but also as Megan Greene’s hawkish comments resulted in a 5bps increase in 2-year Gilts. UK data has been poor, and we like receiving 2-year SONIA vs. ECB ESTR and US SOFR. 2-year Gilts are now trading at c. 4.4%, and we think further upside should be limited in the near term.
Rest of G10: Another Aussie Labour Market Surprise?
The RBNZ meeting went largely as expected last week, failing to provide a dovish shift. For that, policymakers need better inflation figures – and they may not get them this week. Markets expect Tuesday’s non-tradables CPI to increase +1.3% QoQ, 0.2pp above RBNZ forecasts.
In Australia, seasonality surprised everybody in February with a bumper crop of people returning to the labour market. Markets expect a reversal this month. The March LFS numbers (Thursday) should see unemployment increase to 3.7% (+0.2pp) with a much milder (and likely part-time dominated) 10,000 increase in employment. This would align with broader data showing a loosening labour market.
Markets We Are Watching
- We also have Canada inflation data out tomorrow. With market pricing for a June rate cut currently at 60%, a dovish surprise could move both CORRA futures and USD/CAD materially. Recent data has leaned dovish, in stark contrast to what we’ve seen in the US. So far, CAD hasn’t strengthened with oil, so if oil falls in lower geopolitical risks, will CAD fall further?
EM: Will Local Inflation Hint at Monetary Policy Divergence?
Markets are re-assessing the rate path in EM given the same in the US. But local inflation data points at divergence between countries.
In Poland, final inflation data for March will likely confirm the below-target 1.9% YoY flash release. This will mark the low in inflation given the reinstating of the 5% VAT on food from April, which is set to add 0.9pp to headline CPI. However, NBP have made it clear that rates will remain on hold, particularly given the uncertainty over household energy prices.
South Africa, meanwhile, should see disinflation resume. A favourable base effect should mean February’s 5.6% YoY CPI print marked the peak in inflation. With the next SARB meeting not until 30 May, the March inflation print alone will not impact the policy outlook.
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.