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Jump to: US | Europe | Rest of G10 | Emerging Markets
US
Summary
- Fed to keep three 2024 cuts.
- Residential real estate data to show continued recovery.
Market Implications
- A June cut is still my base case scenario.
Fed
I expect the Fed to stick to its narrative of continued if slower disinflation and three rate cuts in 2024. This is because recent data indicates January was a one-off inflation increase not the start of an upward trend.
The Fed could lift its growth forecast, but this would not impact the Federal Funds Rate (FFR) trajectory as recent data shows the regime of disinflation with strong growth continues.
The Fed is likely to hint at a June cut based on continued sequential decreases in core Personal Consumption Expenditure (PCE), faster services disinflation, and continued labour market rebalancing.
The Fed is also likely to communicate the broad contours of quantitative tightening (QT) tapering, including which indicator of reserves ampleness to use and the long-term composition of its securities portfolio.
Data
Inflation data surprised on the upside and demand data on the downside. The Atlanta Fed Q1 GDP nowcast fell to 2.3% from 3.2% a week ago. The Citi economic surprise index rose to 29.2 from 24.9 a week ago. WTIC spot rose to $81.3/barrel from $78/barrel a week ago.
This is a data-light week. Key data includes:
Housing market (Monday, Tuesday, Thursday): I agree with the consensus that generally sees improvements. I expect stronger construction activity and sales to support higher vacancies and in turn lower housing inflation.
Business surveys (Thursday): Expect manufacturing surveys to contract or move sideways. This aligns with manufacturing production contracting since late 2022. I expect the services PMI to move sideways.
Feb. PPI (Thursday): I agree with the consensus. Medical and financial costs will be key drivers of PCE.
Q4 current account balance (Thursday): Expect a stable balance relative to GDP, a sign that the economy is not overheating.
February leading index (Thursday): the consensus sees a somewhat better index, though the indicator has decoupled from GDP since the pandemic.
Jobless claims (Thursday): I expect continued low claims.
January TIC flows (Tuesday): I agree with the consensus.
Events/Political Developments
President Biden and former President Trump have now gained enough delegates to be their parties’ nominees, freeing them to concentrate on each other.
Following the resignation of GOP Representative Buck, the GOP now controls only 218 seats out of 435. More Republicans are said to be considering resigning due to their unhappiness over the selection of Trump as the Republican candidate. This suggests no significant legislation is likely to get passed before the election.
The government is partially funded until the end of the fiscal year (30 September 2024). A set of agencies currently funded by a CR that expires on 22 March are also expected to get funded under the end of FY2024 under a bipartisan agreement.
Europe
Summary
- The BoE is the main event of the week. We expect no change in policy, but the tone will be dictated by February’s CPI outturn.
- We see downside risk to February UK core CPI, with +4.4% YoY possible (cons: +4.6%). However, a large unknown is how catering and hotel prices change.
- We expect final EZ February CPI to confirm the uptick in services inflation momentum seen in the preliminary and national numbers.
Market Implications
- We continue to like to pay 2Y EUR vs receiving 2Y GBP.
- We still see value in UK 2s10s steepeners vs US flatteners. If UK core CPI undershoots, then an outright UK 2s10s steepener could be good value.
BoE – Expect No Change in Policy, Tone Dictated by CPI
The BoE will announce policy next Thursday. Yet without an update in forecasts or presser, the event may be uninteresting. Consensus is for no change in policy – we agree.
The voting pattern, however, could be of interest. The market seems to be mostly looking for an unchanged voting pattern from last time (1-6-2 for a cut-pause-hike). We think the risk is skewed towards Haskel choosing to back a pause. Next week’s inflation print will be the determining factor of this, though.
If we were to see a further undershoot versus February’s MPR in core and services (more info below), Mann might even shift to a pause – but this is not our base case given her recent hawkish comments.
Downside Skew in February UK CPI
Wednesday’s UK CPI could have a large impact on the BoE’s tone. The MPC will have already seen the release (as per letters with ONS). The market is looking for +3.5% in the headline, and +4.6% in core. My lean is to the downside, with my bottom-up model for core suggesting +4.4% is possible.
A big unknown will be restaurant and accommodation inflation, which together tend to see large February rises and look likely to have driven the EZ February services bounce. Catering, saw a weak January in 2023 but then a very large tick up in February. We are conscious that this is a risk. Meanwhile, accommodation discounting hit in January (as we had expected), but this again could mean a more pronounced February bounce-back. Our base case, however, is a continued normalization of the inflation rates in both segments.
The BoE’s November MPR forecast +3.5% headline, +4.9% core, and +6.1% in services in February. As such, it seems likely that actual outturns will undershoot in core (and possibly services). The degree of the miss is unlikely to drive too significant a dovish turn just yet (Charts 1 and 2).
Final February EZ Inflation
Despite the relative dovishness exhibited by ECB policymakers in their recent comments, the most important element to watch will be the data. Preliminary February Eurozone core CPI came in line with my expectation. For the detail, I expect wage-intensive services sector momentum to have continued to rise, led by hotel/accommodation price rebounds.
Rest of G10
Summary
- Australia: A hawkish week due.
- Canada: Core inflation momentum expected to increase.
- Japan: BoJ to end negative rates, consensus underestimating Japan core CPI.
- Norway: Norges Bank due a dovish detail.
- Switzerland: SNB unlikely to shock market.
Market Implications
- We remain long EUR/CHF, but levels to take profit are fast approaching.
A Hawkish Week in Australia
Next week brings three important days in Australia with the RBA (Tuesday), labour force survey (Thursday) and financial stability review (Friday).
On the RBA, we continue to expect a hawkish pause from the Australian central bank with forward guidance likely to remain unchanged. Moreover, we think this stubbornness will be backed up just two days later as a relatively new seasonality plays out in the February labour force data (people wait in January to begin work in February) – hence the expected decline in unemployment with a strong increase in employment.
Lastly, the financial stability review will be key as it will detail the RBA’s take on household balance sheets, where large uncertainty remains.
Canadian Core CPI Back in Focus
Focus on Canadian core inflation has returned. Hard to forecast due to changing compositions, expectations are tilted to ever increasing core inflation momentum; current median and trim forecasts an average +0.11pp increase in momentum (Chart 3). As a result, we will turn to the number of categories growing above 3% for potential dovish signs the BoC could use to make claims that core inflation momentum will ease (Chart 4).
BoJ to End Negative Rates
All eyes turn to the BoJ. We expect the BoJ to end negative rates following the strongest Shunto since the early 90s – something we have expected since early February (Chart 5). However, if tightening does occur, we make two important points:
- This is not the start of an aggressive BoJ tightening cycle. Instead, this reflects a necessity to leave negative rates; inflationary pressures have not strayed from target while labour cash earnings have normalised, and the economy is faring okay.
- We do not think this translates into JPY strength. Instead, US fundamentals remain in the driving seat.
Elsewhere, we expect core inflation could print 0.1pp above forecast:
- CPI: MH forecast +2.9% vs consensus at +2.9%.
- CPI exc. fresh food: MH forecast +2.9% vs consensus at +2.8%.
- CPI exc. fresh food and energy: MH forecast at +3.4% vs consensus at +3.3%.
Norges Bank Due a Dovish Detail
Over the past week, core inflation proved that consensus had embedded stickiness into their forecasts, overestimating the outturn for several consecutive months, including this time. The real question now becomes: will Norges Bank use this to set up more dovish language? We think so.
In January, core inflation printed below the Norges Bank forecast but was combined with still high core inflation momentum. This time, momentum has declined, allowing for CPI forecasts to be revised lower. Meanwhile, unemployment could need revising higher. It means the policy rate forecast is likely to need revising, too – this time, in a dovish direction.
Jordan Unlikely to Surprise Markets
Swiss inflation has shocked the SNB, 0.63pp below forecast, with room to run in the core disinflation story. However, we do not think the SNB will cut rates at this meeting as it conflict with Jordan’s stance to avoid shocking markets just weeks after his announcement to step down at the end of September 2024. They could, however, announce the already priced June cut.
At the same time, given exporters remain displeased with the strength of the currency, we think Jordan could further ease language surrounding FX intervention, potentially noting that CHF sales could return. Overall, the meeting should help EUR/CHF head towards 0.9700.
Emerging Markets
Summary
- China activity data set to disappoint.
- CBC (Taiwan) to stay on hold, shift back to neutral tone.
- BI (Indonesia) to stay on hold.
- CNB likely to cut by another 50bps.
- SA inflation set to rise again.
- CBRT expected to remain on hold.
- BCB (Brazil) to cut rates by 50bps.
- Banxico (Mexico) to cut rates by 25bps.
Market Implications
- Weak China data may increase pressure on authorities to act.
- A drop in guidance from BCB may cause a selloff in DI curve.
- The long-awaited cut cycle from Banxico will start with baby steps.
China Activity Data to Disappoint
We estimate the decline in aggregate demand has accelerated in the last two weeks, driven by declines in car sales and fixed assets investment. Exports are a bright spot. We forecast a negative January-February YoY retail sales growth rate (vs consensus +5.5%), mainly due to a decline in car sales, fuel prices, and mobility in Tier 1 cities. IP and FAI are likely to slow sequentially as well.
Weak economic data may increase urgency for the government to take additional actions to support consumer demand.
CBC (Taiwan) to Stay on Hold
We expect CBC to keep rates unchanged at 1.875%, in line with consensus, on 21 March. While the CBC hinted at a shift to an easing bias at its previous meeting, CPI inflation has remained high (January-February +2.4% YoY vs the central bank’s target of 0-2%). Electricity price hikes in April also pose upside risks to CPI. As such, we expect the CBC to return to a neutral tone at this meeting.
Bank Indonesia to Stay on Hold
We expect BI to keep its policy rate unchanged at 6% on 20 March, in line with consensus. Inflation picked up to 2.8% YoY in February though remains within BI’s target range of 1.5%-3.5%. IDR has also remained stable. Given uncertainty over the Fed’s path, and reaccelerating inflation, we expect BI to keep a wait and see approach and leave the policy rate unchanged.
CNB to Remain Cautious
A 4.9pp drop in YoY inflation since the last policy meeting will not mean accelerated rate cuts from the CNB. Although headline inflation is back at target, core remains elevated, as does services inflation, FX weakness is doing some of the work to loosen monetary conditions, and the CNB see neutral rates as higher than before the pandemic. The cautious stance is likely to continue with another 50bps cut, taking the policy rate to 5.75%.
South African Inflation, Inflation Expectations Key Ahead of SARB Meeting
Higher fuel prices, still-elevated food prices and the annual survey on medical health insurance all leave upside risks for February CPI on Wednesday. And despite a more favourable base effect than last month, YoY CPI is expected to rise again, heading towards the top end of the SARB’s 3-6% target.
Tuesday’s quarterly BER inflation expectations survey will also be closely watched by the SARB. Expectations rose in Q4, reversing the improvement in Q3, and any further worsening alongside accelerating inflation will mean the SARB’s very hawkish rhetoric is here to stay for a while.
BCB (Brazil) to Cut 50bps, May Drop Guidance on Pace
We expect BCB to cut rates by 50bps to 10.75% on 20 March, in line with the earlier guidance from the central bank and widely expected by the market. The committee has been guiding towards 50bps of cuts in future meetings. However, this time there is a risk that they will drop this guidance or keep it only for the next meeting and not thereafter. The market may see this as hawkish. Our expectation is 50, 50, and 25bps in the next three meetings (including next week’s).
Banxico to Cut 25bps, Starting Its Easing Cycle
We expect Banxico to cut rates by 25bps to 11% on 21 March. The market is split on this with a minority expecting an unchanged decision. We think the cut will be a close call, likely with split voting.
The central bank will guide towards data dependence and stress a gradual and calibrated path. We expect Banxico to stick to 25bps decrements over the next few policy meetings.