Key Events: Fed Asleep at the Wheel… What Now?

US – Europe – $-Bloc and Scandies – China/Japan

US

Summary

• NFP to show pre-SVB labour market strength.
• Bullard, Mester to highlight still high inflation risks.

Fed

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.

Data 

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:    

• Fed balance sheet and MMF assets (Wednesday): I am looking for stable or somewhat lower Fed lending to banks as a sign of stabilization.  I expect the inflows into MMF to continue due to the difference between bank deposits and MMF interest rates.

• Commercial banks balance sheets (Friday):  I am expecting continued decline/increase in small/large banks deposits.

• NFP (Friday): I agree with the consensus of 240k.  The data was collected the week of March 12^th, right after the SVB failure and is unlikely to reflect the impact of the failure, if any.  A positive surprise on participation, which the consensus expects unchanged, is possible.  The recovery in the savings rate reflects that a growing number of households are running out of the pandemic transfers and consequently going back to work.

• ISM manufacturing (Monday) and services PMIs (Wednesday): I agree with the consensus that expects both surveys to move sideways.

• JOLTS: the consensus expects a small decline and I agree.  I will be focusing on the quits and lay off rates, which I expect to remain above/below pre-pandemic levels.

• Factory orders (Tuesday):  I agree with the consensus.

• Jobless claims (Thursday):  I agree with the consensus.

Events/Political Developments 

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

Europe and UK

$-Bloc and Scandies

Australia

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.

Canada

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:

• Going to reduce the balance sheet to somewhere between $20-60bn (roughly 1-2% of Canadian GDP).
• As a result, QT should end ‘around the end of 2024 or the first half of 2025’.
• ‘At that point, the Bank would start buying assets again as part of our regular balance sheet management process.’

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.

New Zealand

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.

Norway

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

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:

1. EUR/SEK rangebound for a while. The ECB will want to hike, as will the Riksbank while the latter is likely to pull off a final 50bp hike. It means spreads can move in favour for either currency for the next few months. Elsewhere, with rate spreads converging, it would be far from unsurprising to see bouts of risk on/off work for/against SEK and keep it bouncing vigorously within a range.
2. The recession comes, EUR/SEK flies higher. Large recessions have forced SEK depreciations (Chart 2). Dominique believes the Fed will have no choice but to hike past further (albeit restarting later in the year) while the clock is ticking for the Swedish economy.
3. Cuts are needed, EUR/SEK shoots lower. The next question on your mind was: ‘well, when can I fade the move and make some money being long SEK?’. Historically speaking, EUR/SEK has turned once the cuts are done (Chart 3).

China/Japan

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 Researcher at Macro Hive. Ben 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.

Photo Credit: depositphotos.com

(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.)