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Jump to: US | Europe | $-Bloc | Emerging Markets
US
Summary
- CPI and PPI likely show that disinflation is continuing.
- February retail sales likely show that January weakness was a blip.
Market Implications
- We continue to expect the Federal Reserve to cut in June.
Fed
This week, Fed speakers continued to express their need for greater confidence on the disinflation path before cutting begins.
Some speakers displayed noticeably less enthusiasm for Fed cuts. Bostic noted the risk of inflation resurgence if the Fed were to cut too early, while Kashkari is now thinking of one-to-two 2024 cuts, against the two-to-three he expected last month. Very low February wage growth could restore their confidence.
Chair Powell gave us nothing new in his testimonies to Congress, except the announcement that the Fed likely waters down its proposed banks capital increase. Though this will not impact policy much in the ST.
The Beige Book contained the usual many shades of beige but overall came across as more upbeat than January’s.
The pre-meeting blackout starts on the weekend.
Data
NFP surprised; payrolls were higher-than-expected but wage growth was weaker-than-expected. The Atlanta Fed Q1 GDP fell to 2.5% from 3.0% a week ago. The Citi economic surprise index fell to 24.9 from 40.6 a week ago. Finally, WTIC spot rose to $79.1/bbl from $80.0/bbl a week ago.
This week, key data by order of importance includes:
- CPI (Tuesday): I agree with the consensus. We will need Thursday’s PPI to gauge where February PCE is likely to be.
- PPI (Thursday): I agree with the consensus. Medical and financial costs will be key drivers of PCE.
- Retail sales (Tuesday): I agree with the consensus. February was weak, which is inconsistent with strong employment and wage growth, and so a recovery this month, as the consensus expects, makes sense.
- March Uni. of Mich. Consumer Confidence (Friday): There could be a positive surprise as the overall survey tends to reflect respondents experience with inflation. With disinflation continuation, the survey could be up slightly against the consensus expecting a side move.
- Business surveys: Feb. NFIB (Tuesday), Mar. Empire (NY Fed manufacturing): I agree with the consensus and will be looking for stabilisation in the hard data part of the NFIB survey.
- Industrial production (Friday): I agree with the consensus that sees that sees no change. This is in line with the flat trend seen over the past 18 months.
- Jobless claims (Thursday): I expect continued low claims.
Events/Political Developments
With Super Tuesday behind us, and their main challengers out of the race, Biden and Trump can now turn to campaigning. Trump remains in the lead, but I will be watching for Biden’s strong SOTU speech to move the polls.
The House voted government funding until end-September which is expected to be voted by the Senate before Saturday midnight, preventing a government shutdown.
Table 1: Key Data / Events – US
Europe
Summary
- UK labour market will be important to watch. I see upside risk in private regular pay growth near-term, but undershoot versus BoE estimates further out.
- UK January GDP expected to show a modest tick-up after December’s decline
- Final EZ inflation will be watched for the details. I expect wage-intensive services inflation will remain well supported.
Upside Risk to UK Private Wages
Tuesday’s UK labour market release will probably be the main UK data event this week. The market is looking for unemployment rate to have remained unchanged in January at a depressed 3.8%, while regular pay growth is expected to have dropped marginally to +6.1%.
On the unemployment number, methodology changes could have effects once again (as they appeared to do so from October’s reintroduction of face-to-face interviews). The ONS will be using a larger sample within the January data collection.
On the wage side, the most important number we will be watching will be private regular pay growth. Recent survey evidence suggests moderation around the current YoY rate in the near-term (Chart 1). I see risk of a modest uptick in the YoY rate in the near-term to +6.3%, but for there to be an undershoot versus BoE estimates further out (Chart 2).
I continue to expect that the BoE can cut in June.
January UK GDP
UK January GDP (released Wednesday) is expected to show a modest rebound. Unless the data surprises strongly either way it will probably not feed too much into the BoE’s outlook.
ECB Speakers to Add Weight to June Cut
Last week’s ECB policy announcement, and consequent policy-maker comments provided a surprisingly strong dovish lean. The ECB is teeing up June as the likely date of the first cut, although there have also been comments suggesting that April should be considered “live”.
Dovishness also came through in the downgrade in inflation and growth outlooks. Not only were core and headline inflation downgraded, but the guidance lacked any mention of strong upside risks that I had expected (Chart 3). Meanwhile, the unemployment forecast was unchanged, alongside lower growth in ULC assumed (Chart 2).
This week, we get to hear from Holzmann (Tuesday), Cipollone (dove) and Stournaras (dove) on Wednesday, Schnabel (hawk), de Cos (), de Guindos, and Stournaras on Thursday. I expect the tone will reiterate that June is to be the date of the first cut.
This remains our base-case (the case since last December), but the market is underpricing the risk of delays beyond then.
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. My expectation for the detail is for wage-intensive services sector momentum to have continued to rise, led by hotel/accommodation price rebounds (Chart 5).
Table 2: Key Data / Events – Europe and UK
Rest of G10
Summary
- Australia: NAB Business Survey to provide update on consumer picture. RBA’s Hunter could update on RBA’s view of productivity.
- Japan: Long-term US bond buying remains high but is slowing.
- New Zealand: Non-tradables food disinflation expected to continue.
- Norway: Recent consensus record suggests a downside surprise in Core CPI could be on the cards!
- Sweden: Normalising seasonality leaves us aligning with lower forecasts (core: +3.5% YoY) in consensus expectations.
Market Implications
- Remain long EUR/CHF (target: 0.9700; stoploss: 9510).
- Markets have overstated AUD pessimism.
Australia NAB Survey Remains Key, RBA’s Hunter to Update Take on Productivity
With the NAB Business Survey due once more, our attention returns to the demand and price proxies we get within the survey. As it stands, demand (forward orders) sits marginally negative but far from recession territory (Chart 6). We’ll be looking for this to continue to help confirm our view that AUD pessimism is overstated. Should it start to decline, it would instead signal that the intensity of the mortgage rollover has increased and that trades should be aimed at RBA cuts sooner rather than later. Price metrics will prove useful, too (Chart 7).
Elsewhere, the RBA’s Hunter will participate in a panel at the AFR Business Summit (Monday). Her panel will consider Australian labour force productivity, a key issue with elevated Australia ULCs. We will be watching for any updated view from the RBA and if they are any more worried than before. Failing to signal positivity would be signalling that the RBA can remain long stubbornly hawkish for even longer.
March BoJ Tightening Seemingly Confirmed, Watching Portfolio Flows and Toyota/Rengo Wage Negotiations
The yen has rallied this week, with the TWI up 1.5% and USD/JPY flirting with 147. The BoJ potentially leaving negative rates as soon as March has been the main driving force, alongside a weaker dollar. A lot of this has been sparked by Nakagawa (one of the most dovish on the board) signalling that ‘Japan’s economy and inflation are steadily making progress toward meeting the stable 2% inflation target’. Moreover, she noted the ‘clear shift’ in wage setting. On that note, we are due Toyota’s offer for Rengo employees on Wednesday. We think it likely confirms that we are due the strongest Shunto since 1992, which would only add to market pricing of March tightening.
Aside from the initial kneejerk reaction from markets, the trend to a stronger yen requires investment flows to return from abroad which are likely to play out as the Fed cuts. As it stands, there has been heavy flows into foreign (mostly US) long-term debt (Chart 8). We get the latest numbers on Wednesday.
NZ Food Prices Likely Confirm Continued Non-Tradables Food Disinflation
Conway’s latest speech saw him focus on progress in inflation expectation and core inflation. That’s in contrast to his stubbornly hawkish speech we saw pre-RBNZ. This reflects the fact that RBNZ members are forced to discuss a view, agree on it, and then run with that view until the view of the board changes. Overall, we think it represents the fact that the RBNZ are looking for the one-offs in non-tradables inflation, that we have pointed out, to reverse. On that note, we get updated (monthly) food prices on Tuesday. So far, they have been leading the non-tradables component lower, signalling continued non-tradables food disinflation (Chart 9).
Is It Time to Leave the Stubborn Norwegian Core Inflation Narrative Behind?
Through Covid, as happened almost globally, forecasters consistently underestimated core inflation outturns. However, things appear to have changed. Stubbornness has been baked into forecasts leading to misses in recent months. So, perhaps the lack of market incentive to reprice Norges Bank explains why NOK has failed to appreciate as much as many expected. Updated data this week has a miss forecasted (consensus: 5.3% YoY vs 5.5% YoY). Should recent history continue, then we are on for a large miss versus Norges Bank forecasts – rather bearish for NOK!
Continued Riksbank Dovishness Due?
Consensus is split between a 3.5% and 3.6% core CPI YoY outturn for February. We sit in the former of the two groups and think even a smaller outturn could be possible. That’s because key seasonality’s appear to have normalised which means February price reversals are likely to return and play out at the print.
Table 3: Key Data / Events – Rest of G10
Emerging Markets
Summary
- China CPI, Social Financing and MLF decision.
- Czechia CPI to move closer to target.
- Polish disinflation close to an end.
Market Implications
- Surprise rate cut by PBoC may boost equities and weigh on CNH.
China CPI and MLF decision
China will report CPI for February, which should see a YoY rise to positive territory thanks to base effects and LNY seasonality. However, this is more noise than trend – we see deflationary pressures persisting in the economy.
China’s Aggregate Social Financing data for February would likely pull back after the January surge, as the eight-day holiday reduced business days. We will look at the January-February numbers combined to update our proxy for the credit impulse.
PBoC will announce its 1Y MLF rate on Friday. The market is expecting an unchanged decision. While we are not forecasting a cut, we would not be surprised if the central bank reduces the rate by a small 10bps amount.
Czechia Inflation to Drop Closer to Target
Last month’s 2.3% reading was the first time in more than two years that inflation had been within the CNB’s target band. It was also much lower than the CNB’s forecast of 3.0%. With base effects still favourable February should see another month of headline disinflation allowing CPI to move closer to the 2% target. CNB are however likely to focus on core inflation, at a higher 2.9% in January, and any acceleration in rate hikes from the current 50bps pace is unlikely at the board meeting later this month.
Poland Disinflation Temporary
Further disinflation is guaranteed over the next two months with last year’s MoM CPI readings above 1% in February and March. But with the government likely to confirm the restoration of 5% VAT on food from April, Q2 inflation is set to move higher. Glapinski has already said that rates are on hold until June leaving the February CPI release unlikely to change the policy outlook.
Table 4: Key Data / Events – Emerging Markets