Weekly Investment View: Fed to Stick With 3 Cuts in 2024

This Week

Dominique expects February’s core MoM PCE to be down on January and keep the Fed on track for three 2024 cuts; Caroline argues Poland’s local elections will show strong support for the Tusk-led coalition and bolster PLN; Henry believes UK labour market data has added to the likelihood of a June BoE cut, while another likely rise in EZ wage-intensive services sector momentum will juxtapose recent ECB dovishness; Viresh remains comfortable with his range-bound call for Brent of $80-$85/bbl, while looking for opportunities to fade extended gold positioning; John sees cautious consumers impacting companies outlooks in the retail sector.

Dominique Dwor-Frecaut – US Macro

Following the CPI, the most important release for the Fed outlook is Thursday’s PPI. It will indicate where core PCE will print, and core PCE is currently the main driver of Fed policy.

As Sam’s model had predicted, February CPI surprised on the upside at 36bp. This rounded up to 0.4%, against expectations of 0.3% (had it been 2bp lower, the CPI would have printed in line with expectations). All key categories – core goods excluding used cars, OER, and supercore services – increased by less than in January. Overall, following the high January print, the CPI is likely to add to Fed confidence that disinflation is continuing.

PCE tends to print lower than CPI because it allows for substitution effects and because of current divergence in medical costs between the two indices (Chart 1). So based on yesterday’s CPI, I expect February core MoM PCE to be down on January. I think this is enough for the Fed to stick to its current narrative of three 2024 cuts in the March SEP.

Caroline Grady – Emerging Markets

Poland’s 7 April elections for city mayors and local authorities will be the first real test of popularity for the Tusk-led coalition. Since taking office in December, the three-party coalition has reset relations with the EU, allowing for the release of all frozen cohesion and recovery funding. It has also enacted an expansionary budget including significant pay rises for teachers and some civil servants.

Opinion polls show support for Civic Coalition (KO) rising since the October general election and overtaking the opposition PiS. For smaller coalition partners, The Left and Third Way, support has been stable. Like the general election, the three parties will not run on joint tickets. However, there is some cooperation to avoid splitting the coalition vote. A strong result for the coalition should support PLN near term.

Henry Occleston – Eurozone & UK Macro

Private regular wage growth in the UK labour market data showed flat MoM growth (+5.8% YoY). This is slightly weaker than the MPR and even more so than I had expected (I was looking for near-term support before momentum fades). It is only a single outturn but on balance supports my belief the BoE can cut in June.

We get several ECB speakers this week. Last week’s ECB meeting and consequent comments provided a dovish lean. The ECB is teeing up June for the first cut, although some comments suggest April is ‘live’.

Following Holzmann (Tuesday), this week we hear from Cipollone (dove) and Stournaras (dove) on Wednesday and Schnabel (hawk), de Cos and de Guindos (both neutral) on Thursday. I expect them to reiterate June as the date of the first cut. This remains our base case (since last December), but the market is underpricing the risk of delays.

Despite recent ECB policymaker dovishness, the data will be most important. Preliminary February Eurozone core CPI aligned with my expectation. I expect the detail to show wage-intensive services sector momentum has continued to rise, led by hotel/accommodation price rebounds (Chart 3).

Viresh Kanabar – Commodities

Oil

Brent has fallen by $1 or so from $83.5/bbl, but the overall oil market remains supported.

More recently, both Italy and India have produced supportive data. Italian petroleum consumption came in at 4mn tonnes in January, an increase of 8% YoY amid increasing market concerns about the European economy.

Indian petroleum consumption also rose strongly at around 5.0% YoY, driven by strong demand for diesel, gasoline, and jet fuel.

Finally, while gasoil cracks have come in, strong margins for gasoline look to be sustaining refining margins. We still expect stronger gasoil cracks and think we have found support at $25/bbl on both ICE and NY Harbor Gasoil cracks.

Market implication: We remain comfortable with our rangebound call for Brent of $80-$85/bbl.

Gold

Following gold’s massive rally in recent weeks, positioning now is approaching levels associated with pullbacks.

Net speculative longs as a percentage of open interest have risen to 9.9%, the highest since January. This is in the 89^th percentile over the last three years. We know CTAs are max long, and it looks like we have participation from broader HFs. Despite potential crowding, extended positioning tends to persist before being washed out – as in March and November last year.

From a retail and institutional perspective, we continue to have large flows out of US ETFs. However, given the potential tailwind from lower US rates and a weaker dollar in the near term, we are not ready to fade this move yet.

Market implication: We are neutral on gold at these levels but look for changes in the narrative to fade extended positioning.

John Tierney – US Equities

Tech company outlooks keep falling short as they push their hopes for an AI bonanza to later this year. Investor disappointment helped fuel Friday’s equity selloff. However, it was minor when considered in the long run – over the past year, the SPX had 37 similar or larger one-day declines; the NASDAQ had 16 (Chart 5).

In the retail sector, discount and off-price vendors report strong beats and good outlooks, while full-price companies are struggling.

Regardless of outlook, most retailers mentioned that the macro environment continues to be challenging, suggesting consumers are cautious about spending despite a strong labour market.

Only 21 companies report earnings this week. On Thursday, Adobe will add to the outlook for when AI-related revenue starts to flow more broadly. Dollar General and Dollar Tree will report on who is shopping at their stores.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)