Key Events: Fed to Prepare Market for March Cut

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US

Summary 

• Fed to prepare markets for March rate cut. 
• NFP to show continued labour market tightness. 

Market Implications 

• Higher than I expected core PCE makes a 25bp cut marginally more likely than a 50bp cut at the March FOMC (my revised probabilities are 45% 50bp, 50% 25bp, and 5% no cut). 

Fed  

The data remained consistent with a March cut, with continued strong growth and disinflation. 

I expect the Fed to prepare markets for a March cut by removing the reference to further hikes from the statement and conveying greater confidence on inflation returning to 2% in a sustainable manner. 

Data   

Q4 GDP surprised on the upside, and core PCE was in line with consensus but above my expectations. The Citi economic surprise index rose to 25.3 from 13.5 a week ago. WTIC spot rose to $77.5/barrel from $73.4/barrel a week ago. 

Key data by order of importance includes: 

January NFP (Friday): I agree with the consensus of 185k. The more important parts of the release from the Fed’s perspective will be data on the supply/demand balance, especially unemployment and wages. I also agree with the consensus that sees unemployment unchanged and slower wage growth. 

Q4 ECI (Wednesday): This is the Fed’s preferred measure of wage growth because it takes into account changes in the composition of employment. I agree with the consensus 1% QoQ sa that is in line with the Atlanta Fed monthly median wage. 

December JOLTS (Tuesday): I agree with consensus showing a decrease in job openings and expect quit and hire rates to move sideways.   

January PMIs: Dallas Fed (Monday), MNI Chicago (Wednesday), ISM manufacturing (Thursday): I agree with the consensus that sees the surveys moving sideways. 

January CB Consumer confidence (Monday): I agree with the consensus that sees an improvement, which would be consistent with the U Mich survey and with the strong labour market. 

November Home prices, FHFA and CoreLogic (Tuesday): I expect stronger MoM growth based on falling mortgage rates. 

Q4 Non-Farm Productivity (Thursday): The consensus forecast is 1.6% but following the positive GDP surprise I expect either the consensus to move higher or a positive surprise. 

Jobless claims (Thursday): I agree with the consensus that sees continued low claims. 

Events/Political Developments   

Former-president Donald Trump’s victory in the New Hampshire primaries further confirms his front runner status.   

Europe

Key Points

• I expect the BoE to hold rates unchanged – with a more dovish profile in the near term.
• Votes for a hike are likely to reduce. There is a strong risk that Mann is left alone backing it as Haskel and Greene shift to pause. I expect Dhingra, alone, to vote for a cut.
• The more serious dovish shift will probably come in May, once updated unemployment data is available. The BoE, however, is not afraid to surprise markets.
• Eurozone January CPI is the main release of the week. I think the ECB can wait until June to cut, but my lean this week is for a downside surprise in the inflation data. If we get that, the details will be important.

Market Implications

• I continue to like to position for more BoE dovishness than currently priced.
• If we see a downside surprise in EZ inflation data, it could create a good entry point to further fade relative ECB dovishness.

BoE Likely to Pause, With a Dovish Shift in Forecasts

The BoE will announce policy on Thursday and update its forecasts. I expect they will vote to keep rates stable, but it will be interesting to see how much the tone shifts dovish on the back of the updated forecasts. The voter pattern will also be interesting – I expect the hawks to shift more towards a pause. On this, Haskel and perhaps Greene shifting to vote for no hike seems reasonable. If Mann (the arch hawk) was to shift too, that could drive some real market reassessment. Such an outcome is not beyond the pale given recent data, and I would be cautious reading too much into it alone. Expect that Dhingra alone will vote for a cut.

In the monetary policy report (MPR) forecasts, wage expectations and inflation will need to be revised downwards in the near term on the back of recent misses (Charts 1 and 2). The numbers alone do not tell us everything (we know the BoE will fudge them when they need to, and trend back to 2% is almost guaranteed). However, it may be hard for them to sound too hawkish when near-term inflation looks likely to touch 2% before the summer.

The medium-term inflation outlook will probably still be supported on account of lower market pricing for cuts: currently at 200bp over the next two years (Chart 3). Hawkish assumptions on the unemployment rate will also help keep it elevated. Recent experimental numbers look artificially subdued (Chart 4). This low and flat unemployment rate will probably allow the assumption of wage inflation to remain hawkish, with probably a flattish profile forecast into mid-2024.

It is on this basis that I expect we will only get the more serious dovish tone (and the cut) at the May MPR, once the corrected labour market data (scheduled for February, could well be delayed again) have been released.

For now we continue to see value being long SONIA futures, positioning for a May cut.

Risk of Downside Surprises in Eurozone CPI

Eurozone CPI will be the other major release of the week. The number could be very volatile given that reweighting of the index will affect aggregate readings, and the end of energy subsidy payments will also have an impact. The market is looking for +2.7% headline and +3.2% core. My lean is to the downside on this (+2.6% and +3.0%), but given the volatility my conviction is relatively low.

For now we continue to expect that the ECB can wait until June to cut, and see good value in paying April 2024 ESTR. We are also considering the value of paying EUR 2Y swaps vs GBP 2Y. Given the risk of a near-term downside surprise in inflation, we hold off for now, but would look to enter in our model portfolio if we do get that outcome.

$-Bloc and Rest of G10 Europe

Key Points

• Australian CPI is likely to undershoot RBA forecasts and could even print below consensus This should allow the RBA to shift to a more neutral stance.
• New Zealand Q4 CPI could allow the RBNZ to retain their stubbornly hawkish stance instead of moving more neutral, despite details proving promising. If this is to play out, Chief Economist Conway will confirm so on Monday night.
• We expect the Riksbank to rotate their language. In their first no-forecast meeting, they are likely to express their happiness regarding SEK strength and core CPI progress, while saying no more hikes are likely needed. There is a risk (albeit small) that they talk about future easing.

Market Implications

• We remain short AUD/CAD (target: 0.8700; stop loss: 0.8990).

Core CPI to Undershoot RBA Forecasts

The Q4 CPI outcome will be the focus this week. The RBA have forecasted a +1.0% QoQ outcome in the trimmed measure while consensus sits at +0.9% QoQ. The main argument for a weaker outcome stems from the fact that increased rental assistance will slow the rate of rents inflation while goods disinflation is expected to play catch-up versus the RoW after lagging in the previous quarter.

However, consensus is perhaps the wrong word here – analysts are split between +0.8% QoQ and +0.9% QoQ. Even the top forecasters are split with the best forecaster favouring +0.8% while the third and fourth best favouring +0.9% (second best are yet to release at the time of writing).

Either outcome helps make our point though: the RBA will have to switch their stance from defensively hawkish – having increased CPI forecasts in the last SoMP – to something more neutral – what we have seen other CBs do this year. We remain short AUD/CAD (target: 0.8700; stop loss: 0.8990).

Watch Chief Economist Conway on RBNZ’s Digestion of Q4 CPI

Q4 CPI out this week will give the RBNZ the opportunity to keep a hawkish tilt for even longer, enabling financial conditions to remain restrictive. That is because non-tradables was stronger than they had forecasted (Chart 5).

However, the details paint a less hawkish picture. Non-tradables inflation is largely driven by three categories: 1) Housing and Household Utilities; 2) Food; 3) Alcoholic Beverages and Tobacco, but the Q4 beat was not (Chart 6). Instead, Q4 was beaten by a large jump in out-patient services prices alongside stickiness in insurance prices.

When reverting to the more persistent inflation picture, there is greater promise for RBNZ cuts. Namely, food disinflation continued across all four subcategories, which leaves it far below its usual QoQ average (Chart 7). Meanwhile, alcoholic beverages and tobacco is likely to see a smaller Q1 increase in 2024 than 2023 as the tax increase on cigarettes for 2024 was smaller than previous years – this is part of New Zealand’s attempt to reduce the number of people smoking by 2025 (Chart 8). The only area of worry is housing, where disinflation is proving slow, especially in rents (Chart 9).

Our first clue on if the RBNZ will use this to fuel hawkish stubbornness comes on Monday evening. Chief Economist Conway is talking on the global economy since the pandemic begun. He is likely to give the RBNZ’s view on the latest inflation outturn. This is our guide into future policy decisions.

Will the Riksbank Stick to Script?

The Riksbank are due for the first time in 2024 on Thursday. It is also the first meeting in their new eight meeting system. So, that means no new forecasts. Instead, what it should come with is a concentration on language.

We already know a lot about stance changes from the Riksbank; three board members (Thedeen, Breman, and Jansson) have publicly expressed their happiness with SEK strength and core inflation progress, alongside taking away the need to hike again. A similar message should be given at the meeting on Thursday. We think they will stop short of talking about cuts, thinking they would favour announcing that with renewed forecasts. And while it certainly is a risk, we think it will be Jansson that makes the first claim of the kind – which he could possibly do around the next CPI outturn.

Emerging Markets

Key Points

• MAS (Singapore) to remain on hold.
• NBH (Hungary) to deliver a 100bps rate cut.
• BCB (Brazil) to cut rates by 50bps.

Market Implications

• We recently took profit in long SGD/THB for a +3.4% gain and cut our loss (-1%) on short CNH after reviewing our EM trades.
• We have also gone long TWD now Taiwanese election risk is over and surging chip demand bolsters the exports outlook. We trade this against the dollar.

MAS to Keep Slope/Band Unchanged

We were expecting the MAS meeting to occur 24-26 January. But as it turns out, the announced date falls on 28 January. Overall, our expectations are unchanged. We expect the MAS to keep all basket parameters unchanged, as per market consensus. Any downward revisions to CPI forecast for 2024, however, will indicate a higher chance of easing at the April meeting, which is against our current expectation.

NBH to Accelerate Easing

Deputy Governor Virag’s recent comments that there is now more scope to cut rates by 100bps suggests accelerated easing. The MPC discussed a 100bp cut at the end-December meeting but instead stuck with 75bps, in line with their earlier guidance. December’s 5.5% CPI print is the main rationale for a larger cut. Weak growth is another. Recent forint weakness leaves some risk of a smaller cut. But assuming EURHUF stays below 390, a cut to 9.75% remains our base case.

BCB on Track for 50bp Cut

We agree with market consensus of a 50bp cut to 11.25% on 31 January. The 50bp cut would be in line with the guidance given by the committee at the last meeting and in recent speeches. Going forward, we expect the BCB to deliver another cut in March and then possibly step down to a series of 25bp cuts from the May meeting, on the likely revision of fiscal targets for 2024 on 22 March. The statement may hint at slower easing as well.

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.

(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.)