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Jump to: US | Europe | $-Bloc | Emerging Markets
US
Summary
- January services PMI to show increase relative to December.
- Household credit data to show recovery in mortgage borrowing.
Market Implications
- After Fed Chair Jerome Powell stated that a March cut was not his base case, I no longer expect a cut.
Fed
As I expected, Powell signalled a move to an easing bias. Contrary to my expectations, he ruled out a March cut, claiming that he was unconcerned by risks of inflation undershooting and listing a series of long-term upside risks to inflation.
The Fed will release the SLOOS next week. I expect it will continue to show the number of banks reporting tighter credit standards and weaker demand for lending is falling.
Speakers next week include Bostic, Mester, Kashkari, Collins, Harker, Kugler, Barkin, Bowman. It will be Kugler’s maiden speech as Board Governor.
Data
NFP surprised on the upside, as Sam’s model predicted. The Atlanta Fed Q1 GDP estimate is 4.2%. The Citi economic surprise index rose to 30.7 from 27.3 a week ago. WTIC spot fell to $77.25/barrel from $78.01/barrel a week ago.
Key data by order of importance includes:
2018-23 CPI seasonal factors 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, since the pandemic, PMIs and GDP have been diverging.
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.
December trade balance (Wednesday): I agree with the consensus.
Jobless claims (Thursday): I expect continued low claims along with consensus.
Events/Political Developments
The first official Democratic primaries are on 3 February in South Carolina. The Nevada GOP and Democratic primaries are on 6 February. In addition, Nevada will hold a GOP caucus on 6 and 8 February, respectively. President Joe Biden and former president Donald Trump are expected to win by wide margins.
Europe
Key Points
- Updated UK LFS data will be key in determining whether the BoE can cut rates in line with our expectations.
- There will be some good opportunities to hear from ECB and BoE speakers.
Updated UK Labour Force Survey Data Key to BoE Decisions
The key takeaways from last week’s BoE meeting were that:
- The data is not yet supporting a cut.
- The data they are most focused on is wage growth, labour market tightness and services inflation.
On this account, the release of the long overdue correction of the labour force survey this week (from August 2022 to November 2023) will be key.
LFS data had suffered from falling response rates from September 2022, at which time it tended to diverge from alternative survey data. Based on the survey data, the level of employment is expected to be revised higher (in line with the growth in PAYE employment figures, and other survey data).
The situation in unemployment is more uncertain. Across the period that is being corrected for (post-July 2022), the rise in unemployment has appeared relatively flat in the surveys, which would suggest an undershoot versus the last LFS data. However, extending this back to mid-2020 suggests that LFS data over that entire period may be about right in terms of unemployment.
An additional uncertainty is whether the change in focus of the LFS (towards younger people and more disadvantaged areas) will lead to a rise in unemployment, given the typical attributes of the demographic.
Signs in the detail that the labour market is loosening faster than the BoE is assuming would be dovish, while confirmation that the labour force has remained very tight would lead us to re-think our more dovish view.
Wage growth data will also be important. For now the BoE’s assumption seems to be based on wage growth reaccelerating in H1. If this is not the case, then they will need to revise down their expectations in May.
Central Bank Speakers
The week offers strong opportunities to hear from ECB and BoE speakers and get an update on some of the closely watched surveys:
- We will watch the final Services PMIs for signs that inflation pass-through is building – that is what the BoE and ECB will be worried about.
- ECB hawks Nagel and Wunsch will likely reiterate the likelihood of waiting until Summer to cut (our base case). But Board members Lane (neutral) and Cipollone (likely dove) may be of more interest for whether they see room for cutting before they have the full Q1 wage negotiation picture.
- BoE speakers Mann (arch hawk, voted for a hike) and Breeden (probably neutral-ish, voted to leave rates unchanged) will speak. Learning why Mann again voted for a hike is key.
- ECB Consumer CPI expectations are likely to show that expectations for inflation remain de-anchored from the long term trend.
- UK’s S&P/KPMG/REC jobs data is likely to show a more dovish picture of the labour market.
$-Bloc and Rest of G10 Europe
Emerging Markets
Key Points
- Reserve Bank of India (RBI) to stay on hold, may ditch tightening stance.
- Bank of Thailand (BoT) to stay on hold on Wednesday.
- China inflation and credit data may offer little respite.
- Another rates on hold decision expected in Poland.
- CNB likely to remain cautious with another 25bps rate cut.
- Hungary’s January CPI release to determine the likelihood of accelerated rate cuts.
- Banxico to stay on hold and may signal cuts from March.
Market Implications
- We hold several FX trades: short 3m USD/TWD NDF, long EUR/PLN, sell 3m PHP/IDR, long 6m EUR/TRY digital put, long EUR/CZK.
- In rates, we hold a 5y10y MXN TIIE steepener and receive BRL DI F27.
RBI on Hold, May Shift Stance
Reserve Bank of India is likely to keep rates on hold at 6.25% on Thursday, but we see a reasonable chance they officially shift to a neutral policy stance, like the Fed did this week. We recognize RBI disappointed market expectations of a shift in stance at the December meeting. However, since then, the government has announced a more fiscally conservative interim Union budget, and the US Fed has shifted to a neutral stance. Core CPI has also fallen below 4%, and some MPC members acknowledged at the last meeting that policy could become overly restrictive if policy rates stay high relative to inflation. On the other hand, high food inflation has kept the headline CPI rate elevated, and RBI may not want to jump the gun when a geopolitically driven spike in oil prices is possible.
BoT to Remain on Hold With Unchanged Neutral Stance
Bank of Thailand is likely to keep rates on hold at 2.5% on Wednesday. Headline inflation remains negative and core below target. However, the level of nominal yields is already very low, so BoT is keen to preserve policy space and let fiscal policy do most of the heavy lifting.
China to Print Inflation Data Wednesday and Social Financing Possibly Friday
We expect headline deflation to persist and agree with consensus estimates of a sharp (seasonal) MoM acceleration of aggregate financing to RMB5-6tn in January. Due to the seasonality and base-year mismatch of timing of Lunar New Year holidays, we would discount January data until March when January-February combined data would be available.
NBP to Remain Firmly on Hold
With no flash CPI print released for January, the NBP will leave the policy rate at 5.75%. New forecasts released next month will mean the March meeting is live in terms of a potential rate cut. Although ongoing uncertainty over administered price hikes later in the year will still mean an uncertain inflation trajectory. Wednesday’s statement is likely to remain little changed from last month, while the press conference should confirm the focus on the March meeting.
CNB to Continue Modest Easing
December CPI at a still high 6.9%, and core in line with forecast at 3.6% points to another 25bps rate cut this week. Two of the more dovish board members have raised the possibility of acceleration in rate cuts given the forthcoming drop in CPI close to target. We expect consensus for a larger cut will be reached only at the March meeting, once the CNB have the data on January and February CPI. Updated forecasts are a risk with any material decline in inflation projections leaving the possibility of a 50bp cut.
Disinflation to Continue in Hungary
Another favourable base effect this month means a further decline in YoY comparisons. But with fuel prices up (4.7% for petrol and 6.6% for diesel) on top of the usual January repricing, inflation momentum is set to rise. The NBH’s 4% projection equates to 0.7% MoM while consensus is higher at 4.4%. Given the split in the MPC over larger rate cuts, any upside surprise on inflation will mean shifting back to 100bp cuts is increasingly unlikely.
Banxico to Hold, but Cut Cycle Nears
Banxico meets on Thursday and is likely to keep rates on hold at 11.25%. We expect the central bank to strengthen its guidance on slow rate cuts to start soon. The US Fed dropped its tightening bias this week, which should lessen Banxico’s reluctance about cutting. We now expect the central bank to cut by 25bps at the March meeting and follow with another 25bps per meeting in the next three meetings.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.
Ben Ford is a Researcher at Macro Hive. Benjamin 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.
Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
Mirza Baig is a Senior Macro Strategist at Macro Hive, specializing in EM research. He has been researching and trading global FX & rates products for over 19 years, boasting affiliations with Morgan Stanley, BNP Paribas, Deutsche Bank, and Point 72.