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China | Europe | Global | Monetary Policy & Inflation | US
China | Europe | Global | Monetary Policy & Inflation | US
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US – Europe – $-Bloc and Scandies – China/Japan
Fed and MMF data continued to point at banking stabilization: despite $66bn inflows into MMF, likely to be matched by an equivalent decrease in bank deposits, overall Fed lending to banks fell.
Regional Fed presidents who spoke this week highlighted the need to remain focused on inflation.
Barr’s Congress testimony suggested large banks could be asked to pay for the FDIC cost of the recent resolutions, as well as regulatory tightening for mid-size banks. The latter could include: tougher capital and liquidity requirements as well as beefed up stress tests. Any regulatory tightening requiring Congressional approval is unlikely to get passed since the Democrats do not control the House.
Next week Fed speakers as of this writing include Cook, Mester and Bullard. I expect Mester and Bullard to highlight that economic momentum and inflation risks remain strong.
The Atlanta Fed GDP nowcast for Q1 fell to 2.5% qoq saar from 3.2% a week ago. The revision was due mainly to the third Q4 GDP estimate that saw Q4 consumption lowered to 1.4% qoq saar. On the other hand real estate investment was revised to -7% qoq saar from previously -28% qoq saar, which is consistent with higher frequency data showing residential market stabilization.
The Citi economic surprise index fell to 57 from 61.2 a week ago. Core PCE mom was 0.3%, 10 bp lower than expected
The data this week is likely to show continued bank stabilization and strong growth.
Releases include by order of importance:
Former President Trump has been indicted of braking election funding rules and is to be arraigned on Tuesday. Even if he is found guilty, the indictment won’t have legal consequences on his run for the presidency. On the other hand, the indictment has galvanized his supporters.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
At the last meeting, the RBA laid their plan out for us. We were to concentrate on four datapoints (providing nothing goes pear shaped – oops). Going into the past week, the NAB Business Survey and labour force survey continued to suggest the need for another hike. This week gave us the final two data points.
Retail sales (inc., & exc. food) rose +0.2% MoM through February. While this continues to suggest retail sales moving sideways over the past quarter (on a volume basis), with momentum falling, they remain elevated; retail sales are 18.5% above their all-time trend and 6.2% above the trend of the past decade. For us, we think it (marginally) adds to the case to hike rather than cut, if we had to pick a side.
Turning to February CPI, while it slowed to 6.8% YoY from 7.4%, we were always focused on the services components. And while recreation (-6.0% MoM) dragged the reading lower, the remainder of services appeared strong; education, finance & insurance, and communication were all stronger than they have typically been. Momentum remains elevated in the first two categories while the third is picking back up. Looking forward, the March print is typically the second strongest in the year with strong seasonalities across the above-mentioned categories, while the downside effects of recreation should considerably ease.
We place a 60:40 bias for a 25bp hike next week. Even if they choose to pause, we think (and we’re talking with a strategist hat on, thinking about the risk/reward of the event) that AUD could find strength following the event. Markets are priced for no more hikes and then cuts, albeit immaterial sized reductions by historical standards. So, any inclination that hikes remain a possibility, something we think is very possible, would prove bullish for AUD. We favour being long AUD/NZD through the RBA and RBNZ meetings, though there is room for the trade elsewhere in G10 if you are less convinced.
Further afield, we think AUD/NZD heads lower. In principle, Australian’s are due for a larger shock to their balance sheets than those in New Zealand (at least through the summer months). This is based on Australian’s facing a faster, and more sudden, roll onto newer and higher mortgage rates. As it stands, on 45% of hikes has been passed onto mortgage payers. New Zealanders will face the shock later in the year.
Little came our way this week. A talk on market liquidity from Deputy Governor Toni Gravelle was the only real point of interest. Main takeaways:
Attention is turning to cuts in Canada. We published a piece back in February that stated cuts were underpriced, and we still think they’re probably not priced just right, historically speaking. We warn though, don’t take this as us ringing a bell that cuts are due imminently, we don’t think they’ll get started as soon as market are pricing, or some clients have asked about (this summer!).
Data next week is one reason why the BoC will have a tough time cutting ASAP. The Business Outlook Survey and Canadian Survey of Consumer Expectations (Monday) have elevated inflation and wage expectations, while employment expectations are only recently moderating with labour shortages remaining an issue. Investment intentions remain positive, too.
The labour force update (Thursday) has failed to materially weaken. The BoC have long told us they are looking at a range of indicators (40+), and we have been tracking them. With momentum yet to fully flag in the labour force, it is hard to claim it is time to cut, just yet.
This week’s ANZ Survey meant more than usual. It put Cyclone Gabrielle into context before the official data comes forward. However, reading through the data you’d be hard done by if you concluded no disaster hit New Zealand. Most headline categories sit a distance (albeit still in a negative stance) above all-time lows. Even the sectors most likely to be negatively affected (such as retail and manu) saw improving activity outlooks.
Going into next week’s meeting, we think there is even less reason to be hawkish. At the last meeting, we thought there was enough evidence to revise the project OCR path lower. They didn’t. However, we don’t see them being able to do that this time around. GDP missed the mark (big time), our employment index has turned positive (a sign that the unemployment rate is set to rise soon) while we have little to concern us regarding responses packages. If they were to be hawkish, they would have to rely on inflation uncertainty – a hard task given global disinflation – and/or elevated inflation expectations.
Overall, we expect it will be a dovish 25bp hike from the RBNZ. We agree with markets on a 5.25% peak.
At their last meeting, Norges stepped up their hawkishness, as we had expected. However, delivering such requires data to align with their ambitions. Retail says did just that. Printing positive (+0.2% MoM) through February, some distance above expectations (-0.8% MoM), retail sales remained buoyant (Table 3). We warn, however, overall strength in the prints is dwindling.
Looking to the week ahead, we have the March PMI (Wednesday). We are looking for a broad continuation of prices coming in lower alongside easing demand and any potential retracement of employment strength (which helped signal stronger unemployment on Friday; Table 4). Moreover, we’ll be watching for a continued weakening in new orders, which are signalling a weaker economy (versus potential) than forecasted (Chart 1).
Sweden’s disastrous downturn many, including us, are expecting is yet to arrive. The Riksbank are in major danger of hiking way too far. The March update showed minor improvement in business responses with the manufacturing remaining net-positive (Table 5). According to responses, the order book is yet to sour. And, as such, business responses indicate increasing production volume!
We, as strategists, however, are little fooled by the outturn. We have long liked SEK/Sweden weakness. Trading versus the EUR had been easy. However, not anymore. Going forward, we see EUR/SEK in three regimes:
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