Markets to Watch: Will the Fed React to CPI Revisions?

Summary

• In the US, Friday brings seasonal factor revisions to the CPI. These could impact the path of the FFR. Currently Powell seems set on no rate cut in March.
• Europe and the UK hear from central bank policymakers and see several key surveys updated, including the services PMIs.
• Elsewhere, a slew of central bank meetings will give key reads on the EM cutting cycle ­– covering India, Thailand, Poland, Czechia, and Mexico.

US: Underinflation Not a Fed Concern

Last week’s FOMC meeting saw Chair Powell signal the bank’s move to an easing bias. However, he ruled out a March cut, claiming he was unconcerned by risks of inflation undershooting. We also saw a bumper NFP report demonstrate the labour market is firing on all cylinders. The week ahead sees several Fed speakers, including Kugler’s maiden speech as board governor on Wednesday. The key data is as follows:

• 2018-23 CPI seasonal factor revisions (Friday): Markets will follow these closely as they could impact the path of the FFR.
• February ISM services (Monday): The consensus of 52.1 seems reasonable. This print will also garner strong market attention even though PMIs and GDP have diverged since the pandemic.
• Consumer credit: December (Fed Board) and Q4 (NY Fed): Consensus shows a smaller increase in the monthly data in December. I agree and look for a recovery in residential mortgage borrowings in the quarterly data.

Elsewhere, Wednesday sees the December trade balance and Thursday the jobless claims report.

Markets We Are Watching

• Both Waller and Chair Powell have called out the importance of the seasonal revisions this week. We watch US forward 1y1y OIS to best read how the market is interpreting these revisions.
• Elsewhere, we stay bullish on the dollar. There are two important bond auctions this week, first for US 10s then US 30s. A tailing auction could put further upside pressure on the dollar.
• In stocks, we noticed consumer staples have outperformed both discretionary and industrials over the past couple of weeks. This typically happens when the market begins to price in slower growth or risk-off. So we watch for the continued outperformance of staples this week to confirm the signal.
• Finally, we saw regional banks decline last week as they continue to be under pressure from CRE risks. While the broader market seems to have ignored these risks so far, we keep an eye on regional banks for signs things are deteriorating to the downside.

Europe & UK: Is Inflation Passthrough Building?

Last week’s BoE meeting told us the data is yet to support a cut, with policymakers focused most on wage growth, labour market tightness and services inflation. As such, today’s updated labour force survey (LFS) data is key to the BoE outlook. We also hear from ECB and BoE speakers and get an update on closely watched surveys:

• ECB speakers: hawks Wunsch (Thursday) and Nagel (Friday) will probably reiterate the likelihood of waiting until summer to cut (our base case). But board members Lane (neutral, Thursday) and Cipollone (likely dove, Friday) could indicate room for cutting before they have the full Q1 wage negotiation picture.
• BoE speakers Mann (arch hawk, voted for a hike, Thursday) and Breeden (probably neutral, voted rates unchanged, Wednesday) will speak. Learning why Mann voted for a hike again is key.
• ECB consumer expectations (Tuesday): will probably show inflation expectations remain de-anchored from the long-term trend.
• UK jobs data (throughout) will likely show a more dovish picture of the labour market.

Markets We Are Watching

• Given we think the first ECB hike will be in June, we remain laser-focused on April ESTR where the market continues to assign a probability of an early cut.
• In the UK, the FT recently reported that both Lloyds and Santander Bank were used by Iran to evade sanctions. Therefore, we watch for the market’s perception of risks to these banks considering potential fines ahead.

Emerging Markets: Five Central Banks Set Rates

We have a central bank bonanza in store this week in emerging markets. India, Thailand, Poland, Czechia, and Mexico all see policy updates. Meanwhile, China releases inflation and credit data amid its ongoing market woes. Here are our key reads:

• Reserve Bank of India (Thursday): Expect rates on hold at 6.25% with a possible shift from a tightening to neutral stance.
• Bank of Thailand (Wednesday): Rates will probably remain at 2.5% despite negative headline inflation and core below target.
• China inflation and credit data (Wednesday, Friday) may offer little respite. We expect headline deflation to persist and aggregate social financing to accelerate MoM on seasonals.

Elsewhere, another rates-on-hold decision is expected in Poland, the CNB will likely remain cautious with another 25bp rate cut, Hungary’s January CPI release will determine the likelihood of accelerated rate cuts, and Banxico will stay on hold and may signal cuts from March.

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.)