Markets to Watch: What Does the Fed Need to Start Cutting?

Summary

• In the US, minutes from the last Fed meeting should indicate the requirements for a cut.
• Europe sees wage data and final inflation figures for January – undershoots may prompt more dovishness from the ECB.
• In the $-bloc, Australian PMIs will confirm whether the recent uptick in services can continue, while Canada gets inflation data this week.
• Central banks in Turkey, Indonesia, and Korea set rates this week – holds are expected all around.

US: Fed Minutes to Reveal Cut Requirements

Last week, policymakers continued calling for more ‘good’ data before the Fed can cut. Goolsbee said a few months of ‘a bit higher’ inflation was still consistent with a return to 2%, aligning with our view that the US has entered a slower last mile of disinflation. Speakers this week will likely reiterate the need for better data.

This is a data light week, with Monday a federal holiday:

• FOMC minutes (Wednesday): expect them to reiterate the Fed’s move to an easing bias, but also its need for lower inflation figures before it can cut. The minutes may outline the key risks for the Fed: e.g., goods deflation, housing disinflation and supercore PCE.
• S&P PMIs and existing home sales (Thursday):expect a recovery in the latter. Sales are likely to be troughing, in line with the decline in mortgage rates.

We also get the Chicago Fed National Activity Index (Wednesday), the Leading Index (Tuesday) and jobless claims (Thursday). We agree with consensus on them all.

Markets We Are Watching

• EUR/USD looks to be at the top of its channel after a slight bounce from Friday. We still think there could be room for EUR/USD to fall further to 1.055, so we would like to see evidence that our bearish view is not running out of steam.
• In STIR markets, SFRZ4 is back to trading where it was around November when Waller gave his speech discussing how inflation had fallen faster than expected. We think strong data should allow the 10 and 30-year yields to rise further driven by term premia, but this may not mean much for STIR. A further decline in SFRZ4 from here will mean the market is now priced more hawkishly than the Fed’s SEP.
• In equity markets, it’s really all about Nvidia, which reports earnings on Wednesday. The options implied move is 11% in either direction, which could mean it is a good time to sell vol.

Europe & UK: Dovish Shift From the ECB?

The week brings much information for the ECB to digest, with Q4 negotiated wages (Tuesday) and final Jan CPI (Thursday) the main draws. We will also hear from several ECB speakers and get the minutes for the ECB’s last meeting. We currently expect the first cut in June as the ECB will want the full Q1 inflation and wage picture before moving.

• European Q3 negotiated wage data (Tuesday): recent wage momentum data has been mixed. At Q3, negotiated wages were at +4.7% YoY – a similarly high rate in Q4 would be hawkish, while a sharp decline would probably give the ECB comfort they can ease sooner.
• UK January public sector finances (Wednesday) will indicate how much the OBR has overestimated borrowing requirements for 23/24. It could provide more good news for gilts, although our calculations suggest strong duration supply this year.
• European preliminary February PMIs (Thursday): the details will indicate whether the passthrough of wage rises (services costs) to final prices has continued.

Markets We Are Watching

• EUR/GBP has been stubbornly rangebound in recent weeks. We’re looking for a break above 0.858 to signal that our bullish view is working, however, Bailey’s speech on Tuesday, as well as European wage data will be key.
• DAX recently broke out of its recent trading range and has begun making new highs despite weak data out of Germany. If the European economy is really bottoming, we could see more momentum in European stocks as well as German stocks potentially outperforming French.
• Elsewhere, we’re also watching the Lo-spread. Italy vs. Germany bond yields have fallen to 1.49%, the lowest since April 2022. Italy’s economy continues to meander along but has outperformed Germany. This is in stark contrast to what we’ve seen before the Covid period.

$-Bloc and Rest of G10: Stubborn BoC Draws Line in the Sand

Australia sees several releases this week, including the RBA minutes, Q4 WPI, and preliminary February PMIs. We think only the last will be important. Meanwhile, Sweden has already had an inflation print today, and Canada gets one tomorrow.

• Australian PMIs (Wednesday): We watch to see if the pick-up in Services PMI can continue alongside the rest of Asia or if it is just noise and will return to underperforming, in line with the downwards progression in manufacturing.
• Canadian CPI (Tuesday): The BoC struggled with hawkish surprises in wage and inflation data last month. It is adamant it needs further progress on both to cut, but this week’s inflation data may disappoint them.

Emerging Markets: Holding Pattern

The week ahead brings three central bank rate decisions in Indonesia, Korea and Turkey. We also get CPI data in Singapore on Friday and minutes from the Banxico meeting on Thursday.

• Bank Indonesia sets policy (Wednesday): we expect them to hold rates at 6%. With risks to inflation tilted to the upside and the IDR still on the weak side of the trading range, we think BI will continue to sound neutral to hawkish.
• Bank of Korea policy meeting (Thursday): we expect a hold at 3.5% given Governor Rhee has warned about the risks of cutting too early. At the last policy meeting, he said he wanted rates on hold for at least another six months.
• Central Bank of Turkey rate decision (Thursday): CBRT is likely to keep the 1-week repo rate unchanged at 45%, while providing hawkish guidance. At the last policy decision when they hiked 250bps, CBRT signalled its intentions to stay on hold.

Markets We Are Watching

• USD/IDR recently bounced off its 50-day moving average at 15,579. This is the level we’re watching following Bank Indonesia’s rate decision on Wednesday. Can it hold?
• As China comes back following the LNY, all eyes will be back on the Chinese equity market. Chinese authorities announced several measures prior to the holiday to support the market. The question is, will they last?

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.)