04 March 2024 Emerging Markets | Equities | Europe | FX | Rates | UK | US

Markets to Watch: Watch Out For ‘More Good’ Jobs Data

By Bilal Hafeez and Viresh Kanabar

Summary

In the US, Powell’s congressional testimony (Wednesday) will likely stress the need for more good inflation data before the Fed can cut.
Nonfarm payrolls and wages (Friday) are likely to surprise on the upside.
In Europe, the ECB should keep rates steady on Thursday but revise forecasts. We still expect a June cut at the earliest.
Wednesday brings a Bank of Canada rate meeting. They are unlikely to switch to a cutting bias due to lack of data.
China’s ‘two sessions’ starts today. It could see a major change in the government’s growth strategy.

US: Data Holds Key to Fed Cut

Fed speakers still insist they need more confidence that inflation is falling to 2% before they can cut rates. Powell will likely reiterate that message at his congressional testimony on Wednesday. This aligns with the bump in January inflation and, possibly, with the rise in short-term breakevens. Notably, though, Goolsbee recently cautioned against reading too much into a single print.

NFP (Friday): wage growth is more important to the Fed than the headline because it needs the former to slow for supercore inflation to slow also. Consensus expects 0.2% wage growth, but Dominique thinks that is too optimistic given labour market strength. Consensus expects 188,000 on the headline (too low, to us).
ISM services (Tuesday): we agree with the consensus that sees the survey moving sideways, though the PMIs have decoupled from GDP since the pandemic.
JOLTS (Wednesday): we expect a continued increase in actual hires relative to job openings and a decrease in openings per unemployed as well as limited changes in hiring, quits, and layoff rates.

Markets We Are Watching

We watch the US 2s10s curve this week following the 10bps rise last week. What is curious is that despite US economic strength, the US curve bull steepened last week, perhaps led by worries around NYCB. Our bias has been for higher US rates and a bear steepener rather than the price action we saw last week.
In equities, we watch the equal-weight S&P, which is closing in on all-time highs. While the market cap S&P already passed this benchmark towards the end of January, the equal-weight index has lagged. Given recent price action, we favour additional upside and perhaps equal weight outperformance.

Europe & UK: ECB to Revise Forecasts, June Still Likely Cut Date

As we expected, last week saw February Eurozone core inflation at +3.1% YoY beat consensus of +2.9%. Headline of +2.6% also beat consensus, and services inflation was strong at +3.9%. These outturns will worry the ECB. Meanwhile, the BoE will probably be unconcerned about the UK Spring Budget on Wednesday.

The ECB’s policy meeting (Thursday) will see revisions to forecasts, but on balance probably messaging in line with our expectation for a June cut at the earliest. Top of mind will be that momentum across headline, services and core CPI have all bounced strongly since the year began to levels inconsistent with the 2% target.
The UK Spring Budget (Wednesday) will be all about the (likely 2024) election and what the Tories can do to claw back support – perhaps via income tax or national insurance cuts. Hunt probably only has enough capacity for one-off giveaways despite the deficit undershooting OBR estimates. We expect little impact on BoE sentiment.

Markets We Are Watching

Despite our bullish view on the dollar, EUR strength has been noticeable. We continued to see PMIs signal a recovery in the industrial sector, which tends to be dollar bearish over the medium term while ISM PMI in the US came out below expectations. We think 1.09 will be a key level for the US to stay below if our view is to be correct, so will be watching it closely.
While the German DAX continues to rise to new highs, it continues to be cheap on a forward P/E basis at 12x earnings. If European growth is rebounding, this multiple likely has further room to expand to around 14x, which is where we saw the DAX trade during most of 2017. That would represent further upside of 12% from these levels.
Lastly, given the ECB’s policy meeting this Thursday, we watch European semi-core and periphery bond yields. Both Spanish and Italian bond yields have risen this year, although more recently this momentum has stalled. A more hawkish ECB, however, could shake things out.

$-Bloc and Rest of Europe: Bank of Canada to Avoid Cutting Bias

The two key events this week in the $-bloc and G10 outskirts are the Bank of Canada policy meeting and an inflation print in Switzerland this morning.

Bank of Canada rate decision (Wednesday): the bank want more progress on core inflation, a looser labour market, and weaker wage growth and inflation expectations. They have had none. Therefore, we do not expect them to shift to a cutting bias at the meeting.
Swiss CPI (Monday): the print was marginally stronger than the consensus expected. However, it sits 0.63pp below the SNB’s latest forecast! Moreover, core disinflation has room to run. We still like long EUR/CHF.

Emerging Markets: Major Changes at China’s Two Sessions?

The main event in EM this week is China’s ‘two sessions’, the annual meetings of the legislative body. Expect headlines to emerge early this week. Elsewhere, we get a rate decision from Bank Negara Malaysia and the Polish National Bank and an inflation print in Hungary.

China’s two sessions (starts Monday). The market expects a headline growth target for 2024 of 5%, like last year. However, the focus will really be on policies to support consumer demand. We think a government-sponsored and PBoC-financed large-scale ‘cash for clunkers’ program, targeting the areas with the most severe supply-demand imbalance, will be a major instrument to boost growth.
BNM policy meeting (Thursday): We expect BNM to maintain its overnight policy rate at 3%, in line with market consensus. Inflation is stable, and the price outlook is favourable despite reduced fiscal support and potential global demand weakness, particularly from China.
NBP policy decision (Wednesday): we expect rates firmly on hold given Glapinski’s comments at the last meeting. New forecasts will very likely show a V-shaped inflation profile for this year but come with significant uncertainty.
Hungary CPI. January’s sharp drop in YoY CPI is unlikely to be repeated this month.

Markets We Are Watching

In EM, we remain focused on EUR/PLN. We have favoured this cross to rise since the start of the year but have so far been wrong. The reasons for this are reduced political risks, the passing of the 2024 budget, EU funds release and rate differentials. As a result, we will likely change our mind should PLN fall below 4.295.