Economics & Growth | Emerging Markets | Europe | FX | Monetary Policy & Inflation | Rates | US
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US
Summary
- Powell’s testimony to Congress is likely to stress the need for more good inflation data before the Fed can cut.
- Both NFP and wages are likely to surprise on the upside.
Market Implications
- A June cut is still my base case.
Fed
Fed speakers this week continued to stress that cuts would require greater confidence on their part that inflation is on a sustainable path to 2%. This aligns with the bump in January inflation and, possibly, with the rise in short-term breakevens. At the same time, Goolsbee stressed that one should be careful before extrapolating a single month of inflation data.
This week, Chair Powell will give his semi-annual testimony to Congress. I expect him to repeat that the Fed needs more ‘good data’ to feel confident that disinflation is continuing and sustainable.
The Fed will also release its Beige book. That will provide the usual, highly nuanced picture of the US economy.
Speakers this week include Harker (non-voter, dove), Daly (voter, dove), Kashkari (non-voter, hawk), Williams (voter, dove), and Mester (voter, hawk).
Data
The Atlanta Fed Q1 GDP rose to 3% from 2.9% a week ago. The Citi economic surprise index fell to 40.6 from 43.8 a week ago. WTIC spot rose to $78.5/barrel, from $77.5/barrel a week ago.
Key data by order of importance includes:
Feb. NFP (Friday): For the Fed, wage growth is more important than the headline number. This is because to cut, the Fed wants to see supercore inflation slow, which it believes requires slower wage growth. The consensus on wage growth (0.2%, no doubt based on high-frequency wage indicators) seems too optimistic to me given job market strength. The headline NFP number is less important than wage growth, though the Fed will likely see it in part as a proxy for growth, which it wants slower. The consensus on headline, 188,000, seems too low to me, although I expect the January outlier number to be revised down.
Feb. ISM services (Tuesday): I agree with the consensus that sees the survey moving sideways, though the PMIs have decoupled from GDP since the pandemic.
Jan. JOLTS (Wednesday): I expect a continued increase in actual hires relative to job openings and a decrease in openings per unemployed as well as limited changes in hiring, quits, and layoffs rates.
Jobless claims (Thursday): I expect continued low claims.
Events/Political Developments
Super Tuesday – 5 March – is upon us. The outcome is not in doubt: both Trump and Biden will consolidate their positions as presumptive nominee. For Biden, though, low participation or more uncommitted ballots could signal a difficult November election.
On 7 March, Biden will deliver his last State of the Union Speech before the elections.
Europe
Summary
- The ECB’s policy announcement will see revisions to forecasts, but on balance probably messaging in line with our expectation for a June cut at the earliest.
- The UK Spring Budget will likely see the Chancellor try and max out tax cuts within his fiscal headroom, but that headroom may not be very large. This should not greatly affect the BoE outlook.
Market Implications
- We have seen value in paying April-dated ESTR since the start of the year. This is now close to our target.
ECB Outlook
In line with our expectation, last week saw February Eurozone core inflation beat consensus at +3.1% YoY (consensus: +2.9%). Headline, too, beat consensus at +2.6% and services inflation came out strong at +3.9%.
Together, these outturns present a concerning picture for the ECB in their battle against inflation. Momentum across headline, services and core CPI have all bounced strongly since the start of the year to levels inconsistent with target 2% (Chart 1).
The UK Spring Budget
The UK Spring Budget (Wednesday) will be all about the (likely 2024) election, and what the Tories can do to claw back support. Rumours abound as to what form that might take. Income tax or national insurance cuts will win points with voters, and given current polling there is little reason for them not to give as much as possible.
The issue is that the Chancellor probably has little spare capacity. The deficit undershoot vs OBR estimates (on track to be c.£11bn in 2023/24) is a positive, but will only afford one-off giveaways.
Uplifted GDP figures and lower interest costs will provide sustained headroom, and it is likely the Chancellor will want to use it all.
But on balance, this is not likely to be much (around the equivalent of just 1-2p reduction in basic income tax). This is not much offset to the record high tax burden the Tories have overseen. Reports suggest the Chancellor may supplement headroom via additional tax tweaks (scrapping non-dom status) and promising future spending cuts.
On net, this will probably fail to shift BoE sentiment around the economy (with limited net deficit increase). But at the same time from a realist’s perspective, it will probably mean higher gilt issuance into the next few years (it is hard to see Labour standing by real spending cuts). This would support our belief that gilt duration supply will remain strong ahead.
$-Bloc and Rest of G10 Europe
Summary
- Canada: BoC is unlikely to see sufficient data to switch to a cutting bias at the March meeting.
- Switzerland: Swiss CPI is likely to help EUR/CHF upside.
Market Implications
Little Reason for the BoC to Change Tack
Following the January meeting, the BoC made it clear they were looking for further progress in core inflation, a looser labour market, and weaker wage growth and inflation expectations. We have had none of this. Core inflation momentum inched lower, the labour market is tighter than it was at the January meeting, while wages remain in their uber-high range (Charts 2 and 3). Therefore, the BoC are unlikely to rotate to a cutting bias at the March meeting.
Swiss CPI Could See Continued EUR/CHF Upside
Finally, the next update of Swiss CPI is due. After the strong miss last time out, we think core disinflation is likely to continue. That is because a subgroup has lagged the remainder, keeping core inflation elevated (Chart 4). However, momentum has normalised, meaning its contribution should decline, too (Chart 5).
Emerging Markets
Summary
- China’s NPC starts on Monday. It could see a major change in the government’s growth strategy.
- BNM is to stay on hold at 3%.
- NBP is to remain on hold for a fourth consecutive month.
- Hungary CPI is to remain below NBH forecasts.
Market Implications
- Chinese equities may extend gains if the ‘two sessions’ can convince the market that government is serious about boosting consumption.
China’s ‘Two Sessions’
The ‘two sessions’ refers to the annual meetings of China’s legislature – the National People’s Congress (NPC) – and the political advisory body – the Chinese People’s Political Consultative Conference (CPPCC). While the meetings can last for several days, the key headlines will likely spill out early in the week.
The market is expecting a headline growth target for 2024 of 5%, similar to last year. However, the focus will not be on that number but details of any policies to support consumer demand.
We think a government-sponsored and PBoC-financed large-scale ‘cash for clunkers’ program, targeting the areas with the most severe supply-demand imbalance, will be a major instrument to boost growth. For more details, see our note on this.
Bank Negara Malaysia to Hold
We expect BNM to maintain its overnight policy rate at 3% on 7 March, in line with market consensus. Inflation is stable, and the price outlook is favourable despite reduced fiscal support and potential global demand weakness, particularly from China. However, FX weakness has triggered some official concern, with the second finance minister commenting that the government was prepared to defend the ringgit to ‘restrict excess weakness’. Since Malaysia has low FX reserve adequacy, the burden falls on BNM to at least wait for the Fed before cutting rates.
NBP’s New Forecasts to Justify Rates on Hold
Glapinski’s comments at the last policy meeting that rate cuts are unlikely this year points to rates firmly on hold this week. New forecasts will very likely show a V-shaped inflation profile for this year. But this comes with significant uncertainty given the forthcoming announcements on VAT on food and the current freeze in household energy prices. And while headline inflation dropped to 3.9% in January, core remains elevated. Expect commentary to remain hawkish with fiscal risks a key rationale for the MPC.
Hungarian Disinflation to Stall
January’s sharp drop in YoY CPI is unlikely to be repeated this month. Fuel prices are higher and base effects less favourable. Recent forint weakness does not help either. But with January CPI 1pp below the NBH forecast, February is still set to come in below the earlier 4.4% projection, and still within the central bank’s buffer. Rather than the February CPI reading, the size of near-term rate cuts will be determined by forint performance and, by extension, the outcome of the current tensions between the NBH and government over central bank independence.
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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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