Emerging Markets | Europe | UK | US
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Note: Due to the upcoming holidays, this week’s Key Events covers an extended period, from 25 March to 5 April.
Skip to: US, Europe, Rest of G10, EM
US
Summary
- February core PCE to support Fed narrative.
- NFP to show cooling wage growth but strong employment.
Market Implications
- I expect the Fed to start cutting in June.
Fed
The Fed stuck to a positive view on disinflation and three 2024 cuts, as I expected. At the same time the meeting was more dovish than I expected, which adds to my conviction for a June first cut.
Post FOMC, speakers are likely to socialize Powell’s view that disinflation is continuing if on a slower, bumpier path. Speakers currently include Bostic, Cook, Waller, Powell, Mester, Daly, and Goolsbee.
Data
Existing home sales surprised on the high side, suggesting inventories of properties for sale are likely to rise, lift vacancies and eventually slow rent inflation. The Atlanta Fed Q1 GDP nowcast fell to 2.1% from 2.3% a week ago. The Citi economic surprise index rose to 31.6 from 24.6 a week ago. WTIC spot rose to $81.5/barrel from $81/barrel a week ago.
The next two weeks are data heavy. Key data by order of importance includes:
February Core PCE (29 March): Chair Powell has indicated that the Fed has a MoM estimate well below 30bp. If so, this will support the Fed view that January high inflation was a bump in the disinflation road.
March NFP (5 April): as Chair Powell explained, what is important is the balance between demand and supply rather than demand. So the key parts of the release are wages and unemployment. The consensus expects unemployment at 3.8% and wage growth at 0.3% (I agree), which are consistent with the Fed narrative. I am also looking for real wage bill growth above 3% YoY as a signal of strong growth momentum.
February income and spending (29 March): I am looking for a stable savings rate around 3.75% as a signal that strong consumption growth is continuing. A large increase in the savings rate, not my expectation, could signal that rising consumer credit delinquencies are starting to impact growth.
February JOLTS (2 April): I am looking for no change in the spread between hires and separation rates as a sign the labour market remains tight.
Jobless claims (Thursdays): I expect continued low claims.
Q4 GDP, third estimate (28 March): corporate profits will be released, and I will be looking for stable to rising profits per worker as a sign of continued economic momentum.
March Conference Board consumer confidence (26 March): the consensus has the survey moving sideways, which makes sense to me based on the slowly normalizing labour market.
Residential real estate data: March new home sales (25 March), house prices (26 March), construction spending (1 April): a string of large positive surprises would signal that the residential recovery is accelerating, which could tip the economy into overheating. That is not my expectation, largely because mortgage rates have fallen little.
March business surveys: Dallas Fed manu. (25 March), Richmond Fed manu. (26 March), KC Fed manu. (28 March), ISM manu. (1 April), ISM services (3 April): I agree with the consensus showing continued manufacturing contraction, which is consistent with the hard manufacturing data. I also agree with the consensus on the ISM services PMI moving sideways.
Events/Political Developments
The House is poised to approve government funding until the end of FY2024 (30 September 2024).
While former president Trump maintains a lead in nationwide polls, his lead in most swing states is shrinking and President Biden has caught up with him in betting markets.
Europe
Summary
- Preliminary March Eurozone inflation will be the main release over the next fortnight. I have pencilled in a conservative +3.0% YoY in the core outturn, but with upside risk.
- This would still constitute a modest overshoot versus ECB expectations. Important to watch will be the momentum in services inflation.
Market Implications
- We remain dovish on the BoE and hawkish on the ECB.
- For now, we hold off on positioning for outright UKT steepening in our model portfolio, content with our exposures in the form of our 2s10s box vs USTs and our 2Y GBP receiver vs 2Y EUR payer.
A Quieter Couple of Weeks in Europe and the UK
Last week’s UK inflation and BoE was a dovish surprise due to the comments within the statement and the minutes, and also those from Governor Bailey the day after. GBP weakened, and the curve bull steepened, although it re-flattened again on Friday.
We think it is a little too soon to start positioning for gilts steepening outright – instead I continue to favour the trade boxed vs UST flattening.
Broadly, I think the BoE is shifting towards cutting. But within that, I am looking to pre-empt the market from shifting to pricing significant easing (recall: that it is the 3-5Y swap rate that has the most impact on mortgage rates and policy transmission).
On this, my base case remains that the data will force the BoE to cut in June, and that May will present an opportunity to be more dovish in the forecasts.
The risk at this stage is that they may cut earlier. We had been looking for a May cut all the way from December until mid-February, when the updated ONS labour force survey data came out much stronger than expected. However, Bailey’s most recent comments suggest that they will look through labour market strength if inflation continues to decline, which could re-open the door to a May cut.
There is little by way of data likely to shift things in the coming weeks, although the DMP survey on Thursday 4 April will provide updated insights into price setting (expect it continues to normalise). Mann’s comments on 25 March could be interesting, she surprised by shifting to a pause at the last minute, although I would read little into what she does. I expect she will provide some hawkish caveats to the shift.
Eurozone March Inflation
The most important release in the next fortnight will probably be the preliminary March Eurozone inflation. We start to receive that at the national level next week with Spain, Italy and France, with the Eurozone aggregate out on Wednesday 3 April.
I am currently conservatively penciling in EZ core inflation at +3.0% YoY, but with upside risk. Such an outturn would constitute +1.15% MoM, pretty typical for March, but even that would be to the topside of ECB forecasts (Chart 1).
As such, I continue to see risk that the market comes to further pare the possibility of an ECB June cut. The most important element to watch will be the trend in services inflation, which has been ticking up lately (Chart 2).
Link to Europe Key Events Table
Rest of G10
Summary
- Australia: Services details in focus in the February CPI outturn.
- Sweden: Dovishness likely priced for the Riksbank.
Market Implications
Services Details Matter in Australia CPI
Over the next two weeks, CPI will be the biggest data release. While just a monthly print, it has a significant role. The first monthly print is goods focused, containing a sliver of the services basket, while the second monthly print of the quarter is more heavily services focused. It means the RBA will have their first real breakdown of where inflation is going, having notably kept their options open at the last meeting, noting that while goods disinflation has continued, services disinflation is taking a lot longer.
Hard for Riksbank to Be Surprisingly Dovish
We have had the dovish surprise from the SNB, Norges hold hawkish, and now we have the Riksbank. The Riksbank have largely been the most dovish G10 central, touting that they could cut the policy rate as soon as May (or June). And this claim became even more credible when inflation inched below forecasts. Now, at the upcoming meeting, a dovish surprise is hard with middle of the road Floden even stating that a ‘possible risk of setbacks’ remains. It means the rest of the board are unlikely to have changed their view.
Link to Rest of G10 Key Events
Emerging Markets
Summary
- Regional PMIs and Korea export figures.
- Singapore CPI to set the tone for MAS meeting.
- RBI (India) to hold again on 5 April.
- NBH to decelerate the pace of rate cuts.
- Another hawkish hold likely from the SARB.
- NBP firmly on hold.
- Brazil – BCB minutes and CPI.
Market Implications
- Divergence in EM central bank actions will continue, thanks to the air cover provided by a dovish Fed.
Asian PMIs and Korean Exports for March
Global PMIs drop next week. As usual, there will be special attention paid to manufacturing cycle leaders Korea, Taiwan and China. Korea will also release its full month export figures for March, with the partial data having trailed market expectations. The data will provide an update on whether the global manufacturing recovery seen of late has extended.
Singapore: Last CPI Print Before MAS
The CPI print in Singapore on 25 March will be the last before the MAS meeting in mid-April. The January-February numbers were distorted by a GST hike and LNY seasonality effects. This will be a ‘clean’ print and provide information on whether disinflation remains in line with the MAS’ core CPI forecast for 2024 of 2.5-3.5% or, excluding GST, 1.5%-2.5%. The Authority does not have an explicit target, but its comfort zone is below 2%.
RBI on Hold Again
We expect RBI to keep rates unchanged at 6.5% at its MPC meeting on 5 April. The central bank has repeatedly surprised market by sticking to its hawkish bias. Those expecting a shift note high real rates and a reduction in the weight of food component of CPI, based on the latest household expenditure survey, based on which headline CPI appears ~50bps below the latest reported figure of 5.2%. While a shift in stance to neutral is drawing close, we do not expect that at the April policy meeting.
Forint Weakness Points to Reduced NBH Easing
Continued forint depreciation leaves uncertainty over the size of this month’s rate cut. After four consecutive 75bps rate cuts, the MPC accelerated easing last month with a 100bps cut, taking the policy rate into single digits (9%). Deputy Governor Virag has repeatedly discussed a 6-7% policy rate by June, and the updated inflation forecasts will probably determine how close we get to it this month. February’s 3.7% YoY reading on CPI is below the December forecasts, but core inflation remains elevated and services inflation in double digits. EUR/HUF traded very close to 400 in mid-March. While the currency has since pulled back, another 100bps cut is unlikely at these levels. We expect a shift back to 75bps, taking the policy rate to 8.25%.
SARB to Remain Hawkish
Inflation and inflation expectations suggest another hawkish SARB hold. Inflation is at a four-month high (5.6% YoY), and the latest inflation expectations survey shows CPI expected to remain above the target’s mid-point several years ahead. The governor is likely to repeat that the fight against inflation continues and that upside risks remains from food prices, domestic constraints on energy and logistics and the recent water shortages. The 29 May general election is another risk leaving rate cuts unlikely before H2. We expect rates on hold at 8.25%.
NBP Firmly on Hold Despite March Disinflation
March is set to mark the last month of disinflation in Poland with a favourable base effect still in play. But a further drop in CPI towards target will not matter for the early April NBP policy meeting. VAT on food will be reimposed at 5% from April, adding 0.9pp to headline CPI. And a likely gradual phasing out of household energy subsidies in H2 leaves Poland with a V-shaped inflation profile. Glapinski said previously that that rate path remains ‘clear’ until June, pointing to a firm rates-on-hold decision leaving the policy rate at 5.75%.
Brazil – BCB minutes and CPI in Focus
BCB cut rates last week by 50bps, but changed the forward guidance. Policymakers now signal a 50bp cut in May meeting, while leaving the June onwards schedule flexible. Therefore, it is important to follow the BCB minutes (Tuesday) and the 1Q24 inflation report (Thursday). The higher frequency IPCA-15 measure of CPI will be out on Tuesday, and it will be key to see how core services behave as this measure has been closely watched by the BCB.
Link to EM Key Data and Events
Appendix 1: US Key Data and Events
Appendix 2: Europe Key Data and Events
Appendix 3: Rest of G10 Key Data and Events
Appendix 4: EM Key Data and Events
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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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