Key Events: Growth, Inflation to Remain Too Hot for Fed

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US

Summary

• PCE to confirm January inflation bump.
• Q4 GDP second estimate to show growth remains too hot for the Fed.

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 to signal cuts are not imminent.

The minutes were noticeably more hawkish than the 31 January presser, conveying greater uncertainty on the path of disinflation.

Speakers this week include Schmid (non-voter, hawk), Bostic (voter, dove), Collins (non-voter, dove), Williams (voter, dove), Goolsbee, (non-voter, dove), Mester (voter, hawk), and Daly (voter, dove). Schmid, who took over from Esther George last year as KC City Fed president, will give his inaugural speech.

Data

The Atlanta fed Q1 GDP was unchanged at 2.9% from a week ago. The Citi economic surprise index rose to 43.8 from 40.4 a week ago. WTIC spot fell to $79 /barrel from $79.2/barrel a week ago.

This is a data-heavy week. Key data by order of importance includes:

Jan. PCE (Thursday): I agree with the consensus that already prices in the latest CPI and PPI. Additional information on inflation trend from the PCE is likely to be limited.

Q4 GDP, second estimate (Thursday): expect growth unchanged, i.e., still too hot for the Fed. The first estimate of Q4 corporate profits will be released, which will be a key indicator of risks of overheating or recession.

Jan. personal income and spending (Thursday): in line with retail sales, the consensus expects slower consumption, which seems reasonable. I will be looking for continued acceleration of real income growth and a recovery in the savings rate, since I think the post-pandemic decline reflects unanticipated inflation and real income decline.

Feb. manufacturing PMIs: Dallas Fed (Monday), Richmond Fed (Tuesday), MNI Chicago PMI (Thursday), KC Fed survey (Thursday), March ISM manufacturing (Friday): I agree with the consensus.

Real estate: New home sales (Monday), house prices (Tuesday), construction spending (Friday): The higher sales both I and consensus are expecting would signal a continued recovery in residential investment.

Jobless claims (Thursday): I expect continued low claims.

Other key data include construction spending (Friday), durable goods orders (Tuesday), and the goods trade balance (Wednesday).

Events/Political Developments

Michigan’s Democratic primary on Tuesday will provide a first assessment of how President Biden’s Middle East involvement impacts his electoral chances. Michigan, a key swing state, is home to a large Arab-American population.

Europe

Summary

• We will hear from many ECB and BoE speakers this week. BoE speakers could be the more interesting – we are waiting for signs of more dovishness.
• EZ CPI (Thursday) will be the main release of the week. The release is likely to undershoot ECB expectations, but there could be upside risk versus consensus.

Market Implications

• Our base case is that both the ECB and BoE cut in June.
• We continue to see value in paying April-dated ESTR.
• We see room for less dovishness in ECB pricing and more in BoE (hence we like paying 2Y EUR vs receiving 2Y GBP).

Hearing From BoE and ECB Speakers

The week provides a good chance to hear from both BoE and ECB speakers.

From the BoE, we will hear from Breeden (Mon), Ramsden (Tue), Mann (Wed) and Pill (Fri). This should provide a decent range of views. We heard from Dhingra, Greene and Bailey last week (at the Treasury Select Committee and in speeches). The tone from Greene seemed to be that if services and wages continue to undershoot, she would shift her view towards a cut.

Bailey’s comments at the TSC last week seemed to be taken as dovish (on the back of comments that it is understandable that the market is pricing cuts). But he was careful not to give too much away. On balance, this does not seem like much of a shift.

Meanwhile, for the ECB, we will hear from Vujcic (moderate hawk), Stournaras (dove), Muller (hawk) and Holzmann (uber-hawk). Expect little new.

The Trades

We continue to see value in paying April-dated ESTR on the fundamental likelihood that the ECB will not cut until at least June. We stand by this view, and the trade has performed well (we raised the stop loss last week). However, note that for now, ECB (and BoE) pricing is being almost entirely driven by that of the Fed (Chart 1).

This will only change when the discussion of the timing of cuts becomes more serious, or the cuts start. We see room for less dovishness in ECB pricing and more in BoE (hence our seeing value in paying 2Y EUR vs receiving 2Y GBP).

The main data release will be EZ February preliminary CPI. The market is expecting a decline in core CPI from +3.3% to +2.9%, although there is upside risk to this. The ECB’s estimates are for 3.1% in Q1. While the risks right now are skewed towards this needing to be revised down, March tends to see big price rises.

$-Bloc and Rest of G10 Europe

Summary

• Australia: Without inflation details, the RBA will remain stubbornly hawkish.
• Canada: GDP numbers will reveal if the consumer has held on, while CFIB details could indicate further labour market tightness.
• New Zealand: We continue to expect a hawkish pause from the RBNZ.
• Sweden: Thedeen is unlikely to provide new information, while we watch to see whether ETS can sustain bounce.

Market Implications

• We remain long EUR/CHF.
• We are considering short EUR/NOK.

The Devil Is in the Details (Which We Will Not Get…)

Can the RBA remain on a stubbornly hawkish track? That is our expectation, but it rides on continued stronger outturns in core and services inflation. The monthly indicator restricts us from compiling a clear takeaway. Therefore, eyes will be on the core CPI monthly release and its now-increasing momentum.

Will the Canadian Consumer Hold On, Again?

We have GDP and the CFIB survey to watch this week. GDP is expected to pick up to +1.6% YoY from 1.1% YoY, in line with the stronger monthly outturns we have been seeing in the indicator, which suggest we could see an upside surprise to the forecast (Chart 2). Still, the question will remain; ‘how much of this strength is being driven by resolute FCE?’ (Chart 3).

The CFIB index remains useful. It is telling us the overall direction of the goods half of the economy (Chart 4). Meanwhile, it is providing a leading insight on the labour market – there was a shoot-up in labour shortages through January, while wage progression continued to stagnate (Chart 5).

Another Hawkish Pause From the RBNZ

Markets are pricing a quarter chance of an RBNZ February hike. Meanwhile, ANZ and TD are pushing for a hike – the only two of 21 on BBG making such a call. The call for a hike is not without evidence either; core inflation was stronger than expected, as was the labour market. However, we argue both come with nuances, as does language that has been present since their releases.

For many, the main takeaway from Q4 CPI was that non-tradables inflation was higher than forecasted. And that is true (Chart 6). However, the composition is irregular. A large portion of this beat was driven by one-offs (Chart 7) – notably, health inflation grew +0.14% QoQ. That is the strongest on record and a sharp bounce from the -0.23% QoQ seen in Q3. However, the groups that had been holding up non-tradables disinflation progress continued to show disinflationary progress. Overall, the beat could force RBNZ forecasts higher, but it cannot give them the courage to tighten policy in February.

Then came the Q4 labour market update. Employment grew by more than expected, wage increases were larger than forecasted, and the unemployment only inched higher. Sounds like a strong reason to hike, right? We think there are two very good reasons it does not:

1. The RBNZ had employment axed from their mandate. So, while employment plays a role in the overall inflationary picture, it has a lesser role in the final decision.
2. The labour market is no longer beyond maximum sustainable employment, according to the RBNZ’s framework (Chart 8). So, despite being stronger than expected, it is no longer considered to be adding inflationary pressures to the economy.

Lastly, there is the language from Chief Economist Paul Conway and Governor Adrian Orr. While the former addressed the higher-than-estimated non-tradables inflation, the latter did little to commit to further tightening. Governor Orr had every opportunity to walk us into a February hike, but did not, either. We think this reflects two things:

1. The RBNZ debate internally and convey a symmetric message, which in this case is a hawkish stance without committing to hiking.
2. The RBNZ would wait to tighten again, if This lines up with their previous communication that employed a cautious approach.

Was the Bounce in the ETS Temporary?

We are unlikely to get much new from Thedeen given lots of talk over the past week. As a result, much of the focus will sit on the ETS, the household consumption contribution of GDP, while retail sales will matter too.

Importantly, the ETS survey is a guide for investors in GDP. It bounced from 84.7 in December to 90.5 in January – its highest since September 2022!

Emerging Markets

Summary

• With no central bank meetings in Asia, focus will be on Korea exports and China PMI
• BoI to continue easing on rapid disinflation.
• NBH to step up easing with FX stability and inflation within range.
• Brazil CPI and Banxico quarterly inflation report in focus.

Market Implications

• Markets may react more to an upside surprise in China PMI than a downside surprise. Korean exports and trade surplus may support KRW.
• We would fade a sell-off in BRL rates if a jump in Brazil IPCA-15 (inflation) data is mainly headline-driven with softer core services.

China PMI and Korea exports

We expect China’s PMIs to pull back on 29 February, with the manufacturing PMI staying in contraction and the services PMI showing a slower expansion. While LNY holidays are distorting the high-frequency data, the overall composite PMI appears too high relative to some measures of high-frequency activity, and payback might be due. Any upside surprise, however, will be market moving as sentiment towards China is already very low.

Korea is the earliest reporter for trade figures for February. The LNY holidays and base year comparison will likely cause volatility in YoY comparison, but early data show exports rose 9.9% per day in the first 20 days of the month. Chip shipments surged 39.1% year on year. The trade surplus will likely jump to a surplus over USD2bn, which should support KRW.

Sharp Disinflation to Prompt Another BoI Rate Cut

Sharp disinflation in recent months should see the BoI continue its easing cycle with another 25bp rate cut. Financial stability concerns have eased, and USD/ILS is now back below 3.70, leaving the bank scope to support the economy through lower rates. Uncertainties over a possible escalation in the war with Hamas and indications from the BoI that easing would proceed at a measured pace nevertheless leave risks that the policy rate remains on hold at 4.25%.

NBH to Accelerate Easing

January inflation back within the NBH target range at 3.8% YoY opens the door for an acceleration in rate cuts this month. So does the relative currency stability in recent weeks, particularly versus the runup to the January meeting. The January decision was 7:2 in favour of another 75bps cut, with the unfavourable domestic risk environment calling for a careful and stability-orientated approach to policy, according to the minutes.

Deputy Governor Virga has said both another 75bp cut and a larger 100bps are options this month. Assuming no significant FX weakness before the meeting, we see a 100bps cut to 9%.

Brazil CPI

The market is expecting a high print of +0.8% for the MoM CPI on 27 February. The increase is likely due to annual adjustment in school tuition. El Niño and unfavourable seasonality continue to weigh on food inflation as well. We would focus more on the core services component, which is tracked by the central bank. If this measure shows comfortable decline from January’s +0.76% MoM print, we will look through the headline CPI jump. However, upside surprise in this category will make us reconsider receivers in DI curve.

Banxico Quarterly Inflation Report

The minutes from the 8 February meeting suggested most of the board favours rate cuts, albeit with a cautious tone. Overall, we expect Banxico to cut by 25bp in the March meeting and follow with another three 25bp reductions in subsequent meetings.

The 2023 Q4 inflation report will be released on Wednesday. We watch for any changes to growth and inflation forecasts. The related press conference will also bring nuances on how board members are thinking about the policy path.

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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.)