China | Emerging Markets | Europe | Global | Monetary Policy & Inflation | US
Why the Market Is Misjudging Payrolls
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 12 min read
US – Europe – $-Bloc and Scandies – China/Japan
US
Summary
- I expect a positive NFP surprise.
- In his testimony to Congress Powell could hint at a 50bp hike at the next FOMC.
Fed
This week we got more hints of an increase in the terminal FFR in the March SEP from Bostic (dove, non-voter) and Waller (hawk, voter). Kashkari said he was open to 25 or 50bp hikes at the March meeting.
This week’s NFP and next week’s CPI will be key to the FOMC decision but ultimately the decision is Chair Powell’s. This week he will be giving the bi-annual Humphrey-Hawkins testimony to Congress. If he intends to hike 50 bp he is likely to allude to it during his testimony.
Besides Powell, Barr is the only other speaker listed at the time of writing.
The pre-meeting blackout starts on the weekend.
Data
The Atlanta Fed GDP nowcast for Q1 fell to 2.3% from 2.7% a week ago. The Citi economic surprise index rose to 38.9 from 37.5 a week ago.
Key data this week include by order of importance:
- NFP (Friday): I expect a positive surprise relative to consensus of 200k that basically assumes that employment growth goes back to the downward sloping path prevailing before the revisions. This seems unlikely as other indicators signal strong demand growth. I also see a chance of a small improvement in participation as the rebound in the household savings rate suggest they have spent most of the pandemic transfers and need to go back to work.
- JOLTS (Wednesday): I will be looking for continued low layoff and high quit rates. The headline openings number in my view overstates job openings, as shown by the collapse in the ratio of actual hires to openings.
- Jobless claims (Thursday): I agree with the consensus showing low initial claims.
- Consumer credit (Tuesday): I agree with the consensus that sees a recovery following December disappointing number.
- Factory orders (Monday): I agree with the consensus.
Events/Political Developments
The US has approved new arms sales to China, the first in 2023, that are likely to escalate the tension with the mainland.
In an unusual move, Democratic and republican senators are jointly sponsoring a railway safety bill, following a derailment in Ohio that led to a toxic spill. The Republicans sponsors come from the populist wing of the party and highlight the growing split of the party between populist and establishment, with the latter more closely aligned with business interests.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe: Taking Stock of ECB Hawkishness
Key Points
- ECB speakers will be important to watch following last week’s EZ inflation beat. I see near-term risk that pricing for ECB hikes is pared. I see value in EUR 2s10s steepening.
- UK GDP data will be the main release (Friday); the market is expecting a bounce. MPC dove Dhingra will be interesting to hear from to see just how dovish she will be. I see value fading BoE hikes.
Watching ECB Speakers post-Inflation
I had been looking for a beat in Eurozone core inflation last week, but the upside surprise (+5.6% YoY, vs cons: +5.3%) was even greater than I had expected. The market is now pricing 4% terminal rate (Chart 1). I see a strong possibility that this can be achieved given the likelihood of 50bp hikes in March and May, however the speed of the re-pricing could see some pushback in the near-term. There are a few reasons for this:
- March MoM inflation tends to be very high, and there is a risk that repricing which would normally take place then took place in January – if we did get a somewhat weaker March inflation print I expect this would only be temporary, but it could trigger fast repricing.
- At a time when QT is only just beginning, ECB speakers may be tentative around the market pricing getting ahead of itself in case it triggers financial conditions to tighten faster than they would want.
- Though the ECB minutes were largely in line with expectation, reference to the possibility of paring 2025’s inflation forecast to 2% in the future would be dovish.
On balance then, I see the risks being skewed in favour of EUR swaps 2s10s steepening ahead. My PCA model is also currently flagging this trade.
While there isn’t much by way of data in the week, there will be a number of important ECB speakers to digest, including Lagarde (neutral) and Panetta (dove) on Wednesday. I see room for Lagarde to continue to plug ‘staying the course’ but she may also see room to stress the data dependence and the need not to assume anything is taken for granted. Panetta will probably remain highly dovish, although his reaction to the CPI beat will be interesting. He is probably one of the dovish members still betting on core inflation being dragged down by headline the way it was dragged up last year (in my opinion this is highly unlikely), so continued core beats should be a concern for him.
UK GDP and a Chance to Hear from Dhingra
Monthly UK GDP data is released on Friday. Following December’s drop of 0.5% the market is looking for a modest bounce back (consensus: +0.1%). Given very strong recent services PMI outturns there could be room for an upside surprise, helped by the occurrence of fewer strikes than in December.
Before GDP’s release, we get a chance to hear from dovish MPC member Dhingra (Wednesday). I expect she sits strongly in the ‘pause’ camp, alongside Tenreyro. As a consistent dove her view is not as important to hear as the more neutral voices (Bailey and Pill in particular) however it will be interesting to hear whether she sees rates as being around the right level now, or whether she sees them as being too high (à la Tenreyro).
In the current environment, I continue to see value fading pricing for BoE hikes (currently priced at c.4.80%) via being long short-end UK bonds or receiving short-end GBP swaps.
$-Bloc, Scandies and Switzerland
Reserve Bank of Australia
No need to beat around the bush, the RBA (Tuesday) are what matters right now. We, along with the 27 surveyed on Bloomberg, expect a 25bp hike. The cash rate should be 3.60% by Tuesday – no shock to anyone reading (I hope). However, the final paragraph will prove most important. That’s the bit where the RBA give their hint on how many more hikes could follow. Last time out, language implied at least two would follow. This time, we expect language will be toned down and will implying further work to be done.
Since the last meeting, we have had several comments chucked our way and been buried in data. On comments, most importantly, Governor Lowe alluded to what could force a pause: (hard) demand data weakening, in line with survey data, and a weakening labour force. We certainly had encouraging signs from the data; demand data has weakened (shown by GDP, retail sales, and survey data), unemployment tipped higher (we made the case this isn’t the whole story, the RBA agreed), wages proved weaker-than-expected, and headline inflation fell sharply (once again, caveats galore here with 62% of the basket covered in the reading, but still promising).
The story ahead is challenging, but we feel relatively comfortable in arguing against the market’s c.4.2% terminal rate (i.e., at least three more 25bps and maybe a 15bp). On the domestic side, already we are seeing demand falter, and this is before the real kickstart of the mortgage rollover we long called for. We believe another 25bp likely follows in April, taking the cash rate to 3.85%. At this point, demand data should begin to buckle giving the room to argue for a pause. The RBA may choose to close out the hiking cycle with a 15bp, just to tidy up the cash rate. We see the terminal rate at 3.85-4.00%. China remains the risk.
Bank of Canada
Q4 GDP disappointed markets expectations. Falling flat through Q4 2022, household consumption offset weak business investment activities. On the details, household consumption was driven by stronger durable goods growth while services consumption continued to edge higher. Unsurprisingly, residential investment drew business investment lower as interest rates continued to climb higher. The update sits in contrast with PMIs; February manufacturing PMIs tipped to 52.4 from 51.0. The services equivalent flew to 60.1 in January from 49.3 in December.
Elsewhere this week, the BoC released a staff analytical note investigating what is driving inflation (using the Business Outlook Survey). The takeaway is positive for the BoC:
‘firms are not currently setting prices based on their expectations for high inflation. Rather, firms raised their output prices due to higher costs and a greater ability to pass these costs on to customers. This suggests that firms’ price-setting behaviour remains tied to typical drivers: changes in input prices and the degree of competition.’
The upcoming week is busy. We expect the BoC (Wednesday) to deliver their conditional pause they laid out at their last meeting on the back of falling inflation momentum. The labour market is proving the risk, it has remained tight since the last meeting. For now, we think there is a 70% chance the BoC have done hiking.
Thereafter, Deputy Governor Carolyne Rogers (Thursday) will deliver remarks on the ‘Economic Progress Report’. It will likely prove how the BoC view is developing with incoming data and the possibility of any further hikes. Recall, the BoC have noted:
- It will take an accumulation of data to force another hike from the BoC; they want data to fall ‘broadly in line’ with forecast.
- They want goods inflation to collapse and services inflation to moderate.
- An easing labour market. In particular, the 41 indicators are improving; productivity is returning to trend (notably, services productivity); wage growth retreats as indicated by surveys.
- Normalisation of price-setting behaviour (survey price expectations).
The third component (labour force survey) is due for update on Friday. While markets likely focus on the headline number, follow up figures on overall labour market tightness will be dissected.
Reserve Bank of New Zealand
Not much drama over the past week. Just New Zealand continuing to look in an already weak state. Retail sales fell 0.6% through the fourth quarter (constant, SA, NZD), with large drops in electronics (-9.7% QoQ), furniture (-5.2% QoQ), and non-store and commission-based retailing (-6.0% QoQ). Core industries fell 1.3% QoQ.
The weak trend continued in the ANZ surveys, despite a marginal recovery (outside of agriculture, understandably). The consumer equivalent remained in a bad state; Confidence is sat at record lows with financial and economic expectations poor. Large purchase intentions paint a similar picture. Positively for the RBNZ, services inflation expectations continued to tick lower – it has correlated with headline services CPI (YoY) through Covid. Meanwhile, inflation expectations moved sideways but someway lower from the cycle highs.
Governor Orr also spoke over the past week. There was little to talk about. He noted the lags between hikes and impact – very fashionable of him – and repeated all the reasons to continue hiking (core too high, labour force beyond a maximum sustainable level, near-term inflation expectations remain elevated).
The week ahead will be quiet with the manufacturing BusinessNZ PMI likely to prove most meaningful. The January reading saw a return above 50 thanks to equally improving output, employment, stocks and deliveries. New orders remained sub-50.
Norges Bank
While retail sales appeared to have found their stride again, this would be misleading. Sure, they increased +1.3% MoM through January, but they fell 4.2% MoM through December. It should come as no surprise that the trend is negative (-0.5%), then. The largest jumps came for IT equipment (+4.1% MoM) and retail trade in non-specialised stores (+3.6% MoM). We also saw unemployment remain 0.1pp above forecast.
Core inflation (Friday) is expected to finally make progress. Markets expect it to moderate from 6.4% YoY to 6.4% YoY. This would leave it 0.5pp above forecast.
Riksbank
The past week was for the doves of the Riksbank. GDP fell, while retail sales continued their negative run. Adding to the pile, PMIs are now comfortably below 50. However, the core inflation remains the real issue for the Riksbank.
We have just had another meeting (1 March) where they would have digested the inflation prints. We’ll get to see what they are thinking with Thedeen (data-dependent hawk, Tuesday), Breman (neutral-dove, Wednesday), Bunge (neutral, Thursday) all speaking on topics regarding monetary policy and/or the economy. Jansson (hawk of all hawks, Thursday) is speaking on central bank digital currencies, so we don’t expect much there. I expect the takeaway will prove: the economy is far from in a great spot, but core inflation is too hot. Given the length between meetings, our expectation for another 50bp in April may prove the last hike in the cycle.
China/Japan
