Markets to Watch: PCE to Push Fed Into 50bp in March?

Summary

• In the US, we expect core PCE at 15bp on Friday. That would drop the figure below the Fed’s 2% target and increase ‘lowflation’ risks. Dominique still expects a 50bp Fed cut in March.
• The ECB should leave rates unchanged on Thursday. We see the first cut in June.
• In the $-bloc, the NAB Business Survey will likely show weakening demand on Tuesday, while the BoC will prove cautious at Wednesday’s policy meeting.
• EM sees several central bank policy meetings. We expect MAS, SARB and BNM to stay on hold.

US: Will PCE Push the Fed Towards 50bp in March?

Fed speakers continue to jawbone markets away from pricing too many rate cuts. Last week, Governor Waller focused on data to contain market expectations while discussing overtightening risks for the first time. He also indicated that forthcoming CPI revisions (9 February) would drive his rates view.

Dominique thinks this hints at a March cut and retains her view that 50bp is a 50% probability. The Fed blackout is now underway, but key data includes:

• December core PCE (Friday): based on CPI and PPI, the unrounded MoM core print should be about 15bp, roughly in line with the consensus estimate of 0.2%. If so, the six-month average core PCE would fall further below the Fed’s 2% target.
• December personal income and spending (Friday): at 0.4% and 0.3%, the consensus seems reasonable. It would leave the savings rate near current, historically low levels.
• Q4 GDP (Thursday): the consensus estimate at 2% QoQ SAAR is below the Atlanta Fed’s 2.4% and on the low side of Dominique’s expectations for slightly above trend.

Elsewhere, we agree with consensus estimates for December new home sales (Thursday), January PMIs (Tuesday, Thursday), and jobless claims (Thursday).

Markets We Are Watching

• Since the start of 2024, the 10y treasury yield has risen 22bps and now sits above 4%. We’re watching the 10y this week as it pushes up against the 50dma.
• The USD outperformed most major currencies last week driven by a more relaxed but hawkish Waller and booming retail sales data. Given the continued outperformance of the US economy, we watch USD for further upside.
• Given the production and refinery outages in North Dakota, and Texas, we watch WTI for signs of squeezes. However, it might not arrive until the refineries are back up and running.

Europe & UK: ECB to Hold Rates and Resist Priced Cuts

Like the Fed, the ECB is resisting market pricing of cuts, with the Davos conference last week offering the perfect stage. Minutes from the December meeting reveal their key concern: ‘sharp market repricing threatened to loosen financial conditions excessively, which could derail the disinflationary process.’ We think this concern will keep them from accommodating market expectations in future communication. The key events this week:

• The ECB policy meeting (Thursday): Henry expects the policy rate to remain unchanged. We think the ECB can afford to wait for a full picture of Q1 data before cutting – making the June meeting the earliest candidate.
• European PMIs (Wednesday): the data is expected to trend upwards. We watch manufacturing for signs the passthrough of input cost deflation continues to slow and, in services, whether the passthrough of wages keeps building.
• UK public finance data (Tuesday): this should provide insights into the headroom the chancellor will have at the March statement.

Markets We Are Watching

• ECB market pricing moved in our favour last week as the probability of an April cut continued to be priced out. Given the PMIs this Thursday, signs of stabilisation in activity should further reduce ESTR in our favour.
• We are also watching container freight markets for signs of further disruption following the Houthi attacks in the Red Sea. Europe is most vulnerable to supply chain issues as the Red Sea is a vital trade route for goods from China, as well as diesel from India.

$-Bloc and Rest of G10 Europe: A Cautious BoC

The week ahead is a busy one for $-bloc and the rest of G10 Europe. Australia’s NAB Business survey will likely show weakening demand, while the BoC should prove cautious at their meeting. Here are our key reads:

• The NAB Business Survey (Tuesday): we expect a continued indication of waning demand, price expectations to reverse last month’s increase, and confidence and conditions to keep declining.
• The BoC meeting (Wednesday): the bank is widely expected to keep the policy rate at 5.0%. We agree. However, it will be the guidance and digestion of recent data the market analyses.
• New Zealand CPI (Tuesday): non-tradables inflation should be the focus – it will be the RBNZ’s focus, too. Consensus has non-tradables inflation increasing by +0.8% QoQ, below the RBNZ’s forecast.

Elsewhere, Norges Bank meets (Thursday), and we expect them to repeat the December message: positive signs in core, but risks remain. And Sweden’s labour market report on Friday should show a loosening labour market.

Markets We Are Watching

• AUD/CAD has fallen as we expected, and we are currently targeting a level of 0.87. A stronger oil price, and weaker NAV data as Ben expects, should see further upside for CAD.

Emerging Markets: Many Policy Meetings, Few Changes

Policy meetings come thick and fast this week in EM, while we get inflation data in South Africa, Brazil and Mexico.

• MAS meeting (date not yet announced): We expect the MAS to keep all basket parameters unchanged. Any downward revisions to CPI forecast for 2024, however, will indicate a higher chance of easing at the April meeting.
• BNM meets (Wednesday): Malaysia’s central bank is expected to keep rates on hold at 3%. Even with data softening and current inflation falling, we think the bar for BNM to cut is high.
• SARB meets (Thursday): CPI still well above the SARB’s preferred 4.5% will mean the SARB remains firmly on hold at 8.25% on Thursday. And with January’s ZAR weakness, we expect the hawkish tone from 2023 will continue.

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.)