Markets to Watch This Week: Inflation Details and PMI Updates to Drive Moves

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves Over the Past Week

Over the past week, Federal Reserve (Fed) speakers were hawkish. Fed Mester and Bullard (hawks, non-voters) revealed that they advocated for a 50bp hike at the February FOMC meeting. Fed Williams (voter, dove), Logan (voter, dove) and Barkin (voter, hawk) said the Fed may need to hike by more than it expected. US two-year yields rose 10bps over the past week with USD strengthening (Charts 1, 2 and 3). In Dominique’s view, a 25 or 50bp increase in the terminal Fed funds rate in the March Summary of Economic Projection is likely. In addition, continued strong prints at the next round of CPI and NFP releases may lead to a 50bp March hike.

Turning to politics, the US Congressional Budget Office (CBO) projected the deficit to remain around 5.5% of GDP in FY2023, similar to FY2022. The CBO further indicated that the Treasury could run out of cash sometime in July-September (Q4 of FY2023), contrasting the Treasury’s early June prediction.

And in the UK, last week’s data largely aligned with Henry’s expectation that there is insufficient evidence to justify further hikes. However, while Chief Economist Pill’s following comments stressed the risk of overtightening and the likelihood of slowing, they tacked less dovishly than he expected. Ultimately, he expects the Bank of England (BoE) will pause in March, but a 25bp hike is possible.

Lastly, Bitcoin returned to a touch below $25,000, leaving the cryptocurrency ripe for a short-term correction. Robin sees a risk of falling back to the 38% Fibonacci support 21,510 regions, while he cannot rule out a deeper setback to $19,000-20,000.

What to Watch

This week sees updated inflation prints for the Fed and the European Central Bank (ECB) alongside a fresh round of global PMIs.

In the US, Dominique agrees with consensus expectations of 0.4% MoM for core PCE (Friday). She looks for a recovery in the median price PCE, similar to the January median price CPI. The print will come alongside the latest Fed minutes. She expects them to echo the concerns of this week’s speakers. Notably, inflation could have greater inertia while growth could have more upside than the FOMC originally expected.

Another 150 of the Russell 1000 universe will report earnings. Most notably, major retailers enter the fray with more comprehensive reports on the past holiday season and how business is shaping up this year.

And in Europe, this week will provide a more granular picture on inflation, which Henry expects will support his thesis. There may be room for an upward revision to the core reading on this front. That would support his expectation of a 50bp hike in March and May.

Meanwhile, in the UK, watch comments from Monetary Policy Committee speakers, in the context of last week. We will hear from BoE Mann (arch-hawk) and Cunliffe (neutral) on Thursday and Tenreyro (arch-dove) on Friday. Henry do not expect Tenreyro will have changed her view at all. Cunliffe will be the most important to watch, although he may say little on monetary policy given his talk is on cross-border payments. Otherwise, understanding whether Mann’s conviction for front-loading has changed will be important. I expect not and that she will play up the risk of inflation de-anchoring.

Turning to PMIs, February Eurozone PMIs are expected to continue the recent trend of strength. This is largely baked in, so it is unlikely to boost ECB expectations without a significant beat. For the UK, hopes are positive, but the outturn is likely to remain relatively depressed. That, too, is unlikely to affect central bank expectations.

Elsewhere, we expect the Reserve Bank of New Zealand to hike the OCR by 50bp to 4.75% on Wednesday. Since the November meeting, New Zealand data has proven softer than forecasted; inflation has printed below forecast, inflation expectations have begun to retreat, and the labour market has shown its first cracks. Adding to the mix, household leverage has the RBNZ worried. In short, the forecasted 5.5% terminal rate bodes poorly for Kiwis.

Watch Henry and Dominique discuss the upcoming CPI details, Dominique’s discussion of the latest hawkish Fed comments, Lael Brainard’s departure and the process of approving the replacement, getting the growth back on track for 2024 as well as much, much more!

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.