Emerging Markets | Europe | UK | US
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Skip to: US, Europe, Rest of G10, EM
US
With Dominique away, this week’s US section is covered by Macro Hive strategist Antonio Del Favero.
Summary
- Inflation is no longer consistent with a June cut. I expect that only a recession can push inflation back down to target and below.
- Fed speakers will give their take on yet another warm inflation print.
Market Implications
- Unless the data weakens materially, the Fed is unlikely to cut before September at the earliest.
Fed
Currently, speakers include Logan, Daly, Jefferson, Mester, Bowman, Williams, Bostic and Goolsbee. They will no doubt give their take on the recent warm inflation print. Inflation is still the most important data point for the Fed to determine when it is time to cut rates.
The last inflation print closed the doors to a June cut, postponing it at least to September if not later. We will see how they modify their prevailing narrative, which describes the higher inflation prints in January and February as a ‘bump in the road’.
The prevailing narrative depended on labour market rebalancing. Were it to continue, the Fed could cut on low inflation prints, despite growth being above Fed’s estimate of potential. Watch comments on this point.
The Fed cannot ignore the third higher-than-expected inflation print. I expect them to react by saying that there is less urgency to cut rates, that current financial conditions are likely to be less restrictive than previously assumed, and that monetary policy could be less restrictive than previously thought.
Data
Retail sales (Monday): I agree with the consensus. The February retail sales report was weak. I will stick with my view that growth in Q1 will remain above 2% q/q, saar.
Industrial production (Tuesday): Expect a pickup, in line with consensus. In February, industrial production improved little.
Housing data, housing starts and building permits (Tuesday): I agree with the consensus. February US housing data showed the expected rebound in activity after the January weak data affected by weather.
Jobless claims (Thursday): I expect continued low claims.
Business surveys: Empire Manufacturing (Monday), Philly Fed and Leading Index (Thursday): in line or a bit stronger than consensus.
Europe
Summary
- UK inflation and labour market data are the main releases. We expect core inflation will continue to undershoot MPR expectations ahead, allowing for a June cut.
- EZ final inflation looks likely to show that core services momentum was indeed strong in March. We expect the ECB can cut in June but would be wary pricing this 100% until we have all the data.
Market Implications
- We have turned short EUR vs a basket of USD (39%), JPY (17%), GBP (28%), CHF (9%) and SEK (7%).
- We continue to see value positioning for UK 2s10s steepening vs US – with the recent US CPI print providing good entry point.
Fade Relative BoE Hawkishness
Next week’s UK inflation print will be important. I am pencilling in +3.9% in core, +3.2% in headline, and +5.8% in services, based on these assumptions:
- Continued high rental inflation.
- Some Easter’s timing support in transport services.
- A drop back in accommodation inflation.
Meanwhile, I expect the labour market data will show that the private regular pay growth continues to undershoot BoE expectations. The unemployment rate is less important given the unreliability of the data.
There are several BoE speakers out on the week, including Bailey and Greene (again). I expect the tone from Bailey will be less hawkish than the recent comments by Greene, and that the data in the week should help support my conclusion that the BoE can begin to cut rates in June.
The recent US CPI beat provides a good entry point to fade relative BoE hawkishness via the 2s10s UK/US box trade, which is now close to our entry level again. We continue to targe 44bp (Chart 1).
Our box trade reflects both our central bank view and the outlook for supply. While US supply will remain heavy ahead, and we see upward pressure in UST long-end yields, the duration picture looks worse in the UK on account of active BoE sales.
ECB React
The ECB gave little new at their April meeting, except that some members already favour a cut. Our view since last December has been that the earliest they can cut is June, and that remains our base case unless the data really surprises.
My main conclusions at this stage are:
- The ECB will not just follow the Fed. I discussed this on our recent webinar and have written on it previously.
- There are still data risks to a June cut.
Next week’s final EZ inflation print looks likely to confirm my expectation that the Easter effect was limited and the jump in services inflation largely core driven. This is modestly hawkish for the ECB and should offset some of the positivity taken from the weaker core and headline readings.
Until we have the Q1 wage negotiation data (end-May), there is a risk that data will not allow a June cut – in the meantime, I continue to see value fading 100% pricing of such.
ECB speakers are numerous next week. I expect they will beat the comparatively dovish drum, particularly around being independent of the Fed’s policy, and the possibility that they will need to do more easing if the Fed was to fail to loosen policy.
Rest of G10
Summary
- New Zealand: Non-tradables expected to print above RBNZ forecast, but it will be a reversal of one-offs that matters more in the Q1 CPI data (Tuesday).
- Australia: March labour market data (Thursday) are likely to confirm a loosening labour market.
Market Implications
RBNZ Demand Confirmation Before Dovish Shift
The RBNZ went much as expected this week, failing to provide any dovish shift. They noted ‘that recent monthly Selected Price Indices (SPI) imply some upside risk to the March 2024 quarter Consumers Price Index (CPI).’ That would knock some of their dovish narrative back a good couple steps.
Luckily for them, with a sticky US CPI having just passed, it is their turn to get some data. Watch non-tradables CPI (Tuesday) – markets expect it to increase +1.3% QoQ, 0.2pp above RBNZ forecast. This will help retain some of the narrative that cuts are likely to happen later rather than sooner. However, the details matter most. They will want to see ‘Other’ core categories reverse their recent increase, a continued deceleration in housing, and food have increased less than in Q1 2023 (Chart 2).
Is the Australia Labour Market a One Trick Pony?
The labour market surprised nearly everybody last month. Instead of some returning to the labour market in February (a new seasonality has appeared over the past few years in which people accept job offers in January, wait to start them, and then start them in February), it appears many returned. Trend unemployment left itself a good distance below forecast, while employment trended in the right direction (Charts 3 and 4).
Markets are expecting a reversal of some of the strength seen last month. The March LFS numbers (Thursday) should see unemployment increased to 3.7% (+0.2pp) with a much milder (and likely part-time dominated) 10k increase in employment. This would align with recent history being part-time dominated and a wider set of data showing a loosening labour market (Charts 5 and 6).
Emerging Markets
Summary
- PBoC to keep MLF rate unchanged on Monday.
- Inflation prints in South Africa and Poland.
- Brazil fiscal targets for 2025.
Market Implications
- Markets are re-assessing the rate path in Emerging Markets given the same in US. But local inflation data points at divergence between countries.
PBoC to Stay on Hold
We expect the PBoC to keep the 1Y MLF rate unchanged at 2.5% on 15 April. The central bank is operating in a constrained environment, where domestic deflation and household balance sheets warrant lower interest rates, but the contrast with higher-for-longer rates in the US and their reluctance to let RMB fall are limiting their options. PBoC officials have indicated the exchange rate is an important consideration in policy.
Polish Inflation at the Low
Final inflation data for March will likely confirm the below-target 1.9% YoY flash release. This will mark the low in Polish inflation given the reinstating of the 5% VAT on food from April, which is set to add 0.9pp to headline CPI. Core inflation will also fall versus the 5.4% for February but is set to remaining higher than headline inflation given the current momentum in services prices. NBP have made it clear that rates are set to remain on hold, particularly given the uncertainty over household energy prices.
South African Disinflation to Resume
A favourable base effect should mean February’s 5.6% YoY CPI print marked the peak in inflation (the February annual survey of medical aid costs also added to inflation last month). Higher petrol prices through March leave upside risks to this month’s reading, but overall YoY inflation is set for a modest decline. With the next SARB meeting not until 30 May, the March inflation print alone will not impact the policy outlook.
Brazil Fiscal Targets in Spotlight
The 2025 budget guidelines will be the main highlight, as the Lula administration will send its guidelines to Congress on 15 April. We believe the revisions will show a small surplus or flat primary balance for 2025 (vs. 0.5% of GDP surplus currently). We think the market is already prepared for that, so retaining the current 2025 target might come as a positive surprise.
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Antonio Del Favero is a macro strategist at Macro Hive, focusing mainly on US economy and markets and G5 FX. Formerly, he worked at Tudor and Maniyar Capital, Rubrics Asset Management, Brevan Howard, Credit Suisse and UBS.
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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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