Key Events: Could an EU Wage Data Miss Spark a Dovish ECB Reaction?

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US

Summary

• Federal Reserve (Fed) minutes to detail Fed requirements for a cut.
• Fed Vice Chair Philip Jefferson to give first speech since November.

Market Implications

• I still see a June cut as more likely than a May cut, in line with market pricing.

Fed

Fed speakers this week continued calling for more ‘good’ data before the Fed was comfortable cutting. Goolsbee said a few months of ‘a bit higher’ inflation was still consistent with inflation returning to 2%, which aligns with my expectations that the US has entered the slower last disinflation mile.

The minutes will be released on Wednesday. I expect them to repeat the key messages of the presser, namely that the Fed has moved to an easing bias but needs more good inflation data before it starts cutting. The minutes could provide more colour on the key risks the Fed is focusing on, including that goods deflation may end, uncertainty on the timing and scope of housing disinflation, and need for continued slowdown in supercore PCE.

Speakers next week include Bostic, Jefferson, Harker, Cook, and Kashkari. Jefferson will speak at the PIIE, but the topic has not been announced yet. I suspect it will echo the ‘we need more good data’ theme. It will be Jefferson’s first speech since his discussion of uncertainty last November.

Data

The Atlanta Fed’s Q1 GDP estimate slowed to 3.4% from 3.5% a week ago. The Citi economic surprise index rose to 45.8 from 44 a week ago. WTIC spot fell to $76.6/barrel from $76.8/barrel a week ago.

This is a data light week, with Monday a federal holiday. I agree with consensus on the key data, which by order of importance includes:

• 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.
• Chicago Fed National Activity Index (Wednesday).
• Leading index (Tuesday). Post-pandemic the index has decoupled from GDP.
• Jobless claims (Thursday). Expect continued low claims.

Events/Political Developments

The South Carolina Republican primary is on Saturday and former president Donald Trump is expected to win by a wide margin.

The Supreme Court has heard arguments on whether Trump could remain on the Colorado ballot and is expected to rule in his favour.

Europe

Summary

• The week brings much information to digest for the ECB, 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.
• In the UK, January public sector finances (Wednesday) will indicate how much the OBR has overestimated borrowing requirement for 23/24. It could provide more good news for gilts, although our calculations suggest strong duration supply this year.

Market Implications

• We shifted our expectation for the first BoE cut to June (from May) on the back of recent labour market beats.
• We still like receiving 2Y GBP vs 2Y EURand being long EUR/GBP.

European Q3 Negotiated Wage Data

The ECB is focused on wage growth. Inflation is falling quickly – they will probably need to lower their forecasts at the next revision. However, I still think they will (unless forced) prefer to wait until they have the full Q1 inflation and wage picture before cutting. That leaves June as the most likely time.

This week will be important though on that front. First, Tuesday brings the Q4 negotiated wage data. Recent wage momentum data has been mixed. At Q3, the negotiated wages were at +4.7% YoY – a similarly high rate in Q4 would be hawkish, while a sharp decline would probably provide the ECB comfort they can ease sooner (Chart 1).

The market is pricing around 13bp of cuts into April, so more dovishness is possible on a miss. However, for now the market seems to be waiting for the data to confirm the ECB can ease soon, and there is very little expectation that wage momentum may have further to rise. As such, there could be a more violent reaction if the negotiated wage data surprises on the upside. We still like paying 2Y EUR vs 2Y GBP and being long EUR/GBP.

Otherwise, we watch ECB comments and minutes from the last meeting (Thursday). And the final CPI release (Thursday) will reveal the exact details of the January beat.

January UK Borrowing to Set Out Fiscal Headroom

January is an important release for UK public sector finance numbers as it sees a big chunk of income tax receipts. As such, it will have a big role in determining by how much the OBR has overestimated the 23/23 budget deficit. Currently, we see gilt duration supply as being a headwind to UK sovereign bond performance.

However, recent headlines around the Spring Budget (saying tax cuts will be offset by spending cuts) and the possible Labour fiscal policy (walking back their flagship £28bn green fund) have been positive for UK bonds (if not the nation’s medium-term prospects). Strong January receipts, and consequently less need for debt issuance, would add to this.

PMIs

Preliminary February PMIs are out on Thursday. The details will indicate whether the passthrough of wage rises (services costs) to final prices has continued.

$-Bloc and Rest of G10 Europe

Summary

• Australia: PMIs will prove most important as RBA minutes and Q4 WPI will likely deliver already known information.
• Canada: Downside to core inflation momentum remains key to starting a cutting cycle.
• Sweden: We see risk of an upside surprise in core inflation.

Market Implications

• There is risk of near-term NOK/SEK downside.

Only PMIs to Prove Interesting in Australia

RBA minutes (Tuesday), Q4 WPI (Wednesday), and preliminary February PMIs (Wednesday) are due next week. They all sound like important events. However, we are unlikely to get much new in the RBA minutes, given the latest decision had a SoMP attached, or the QPI measure, given it is likely to confirm that public wage agreement pressures have peaked, and we are seeing progress in private wages. So, that means PMIs will prove the only interesting release. We are watching 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 (Charts 3 and 4).

Canadian CPI Momentum Remains Key

The BoC remains adamant. They need further progress from core inflation momentum and lower wages to ease the policy rate. It did not help then that last month saw hawkish surprises in both. The BoC are due January inflation numbers next week. However, it is hard to forecast what numbers we will have to play with as both favoured core measures have a changing make-up each month. Our inkling is for further stubbornness in the readings, in line with a stronger US core outturn, and on the breadth of the inflation reading (Chart 5 and 6).

Risk of a Swedish Inflation Surprise?

It is a big data week in Sweden, January inflation will be released at 7AM UKT on Monday. A quick start to the week for Scandi traders then. As it stands, analysts expect the same inflation undershoot narrative to continue; consensus forecasts have settled at +4.4% YoY for the core CPIF measure. That is 0.1pp below the Riksbank’s forecast, setting up a June cut. However, we have warned that there is a risk that core inflation is stronger than expected.

Emerging Markets

Summary

• PBoC to hold MLF on Sunday but could cut LPR on Tuesday.
• Bank Indonesia to hold at 6% on 21 February.
• Bank of Korea to hold at 3.5% on 22 February.
• Singapore January CPI on 23 February.
• Banxico minutes on 22 February to provide more detail on timing of rate cuts.
• Central Bank of Turkey to stay on hold at 45% on 22 February.

Market Implications

• Even with market pricing for Fed rate cuts pushed back, the timeline for EM rate cuts remains largely intact.

PBoC MLF Decision on Sunday, LPR on Monday

We expect the PBoC to maintain the MLF rate on Sunday (a working day next week). Some analysts are expecting a 10bps cut, but we think the strength of the TSF numbers last week suggests the existing policies of PSL and liquidity injections may be getting some traction. And continued concerns about the exchange rate may also encourage the PBoC to play it safe. However, we think there is a larger than even chance of an LPR cut on Tuesday. Typically, banks set the LPR in line with MLF, but their lending margins have expanded recently, and there may be pressure from regulators to pass on the cheaper funding costs to customers.

Bank Indonesia on Hold

We expect BI to keep rates unchanged at 6% on 21 February, in line with consensus. Inflation has remained subdued, and the elections have passed without a large volatility spillover to rupiah. With risks to inflation tilted to the upside and the IDR still on the weak side of trading range, we think BI will continue to sound neutral to hawkish. BI has had ample room to cut due to domestic factors, but rupiah stability is one of their mandates, making it difficult for them to diverge from the Fed.

Bank of Korea on Hold but Cuts Draw Close

We expect BoK to keep rates unchanged at 3.5% in line with consensus. While the BoK has signalled that rates have peaked, Governor Rhee has often warned about the risks of cutting rates too early, including re-inflating housing and the impact on the exchange rate. At the last policy meeting on 10 January, he also said he would prefer to keep rates on hold for at least another six months. Little has happened since then to fundamentally alter the BoK’s stance, though CPI has continued to soften, with core CPI on a sequential basis (3m/3m) now below 2%. We think the first rate cut could occur in May.

Central Bank of Turkey on Hold

CBRT is likely to keep the 1-week repo rate unchanged at 45% on 22 February, while providing hawkish guidance. At the last policy decision when they hiked by 250bps, CBRT signalled its intentions to stay on hold.  We also expect further steps to tighten bank regulations and excess liquidity to keep overall conditions relatively tight.

Bank of Mexico MPC Minutes

We will look for hints on future policy from board members’ comments. Banxico has opened the door for cuts, and the minutes will likely shed light on how each member is thinking about the outlook.

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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.

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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.

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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.

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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.

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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.

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(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.)