Weekly Investment View: Trading the Central Bank Bonanza

This Week

• Global Macro – Bilal eyes up a short USD/JPY position following the BoJ hike.
• US Macro – Dominique expects the Fed to stay on hold and retain three 2024 rate cuts in the SEP.
• EM Strategy – Mirza returns to a neutral stance on USD vs EMFX given the FOMC event risk; Caroline thinks CNB’s cautious stance will continue with another 50bp cut.
• EZ and UK Macro – Henry expects another pause from the BoE, and a miss in UK core CPI. He is dovish BoE vs ECB, and is looking for UK curve steepening.
• $-Bloc and Scandies – Ben expects dovish outturns from Norges Bank and the SNB, and remains long EUR/CHF.
• Commodities – Viresh would not chase this rally in Brent above $87/bbl and now favours a pullback towards $83/bbl. For gold, positioning and slowing demand for gold ETFs in China skews risks to the downside.
• US Equities – John sees rangebound equities until the path of rate cuts becomes clearer.

Bilal Hafeez – Global Macro

Unsurprisingly, USD/JPY has rallied, rather than retreated, following the BoJ’s dovish hike. This fits our thesis of underplaying the impact of the BoJ tightening cycle on the USD/JPY.

However, with USD/JPY now exceeding 150, verbal intervention is possible. The BoJ could emphasize the more hawkish elements of its hike, or perhaps we get comments from the MoF in coming days. This presents downside risk to the pair.

USD/JPY rose into the 2000 and 2006 BoJ hikes before subsequently falling (Chart 1). Combined with the risk of verbal intervention, this opens opportunity for a tactical short USD/JPY. Our upcoming G10 FX Weekly will have the full details.

Dominique Dwor-Frecaut – US Macro

I expect the Fed to keep its narrative of slower but continued disinflation and three 2024 rate cuts for the following reasons:

1. The Fed expects only an 80bp slowdown in core PCE in 2024: from 3.2% Q4/Q4 2023 to 2.4% Q4/Q4 2024.
2. Before January, 6m SAAR core PCE was 1.9% – i.e., well below the end-2024 and below the long-term 2% Fed targets.
3. January saw a rebound in core PCE to 42bp from a monthly average of 13bp during the previous three months. However, key data points since then suggest January is a one-off rather than the end of disinflation:
4. NFP saw a marked slowdown in MoM wage growth, 10bp against an average of 41bp over the previous three months.
5. CPI saw a marked slowdown in OER and supercore inflation. Together with the PPI, it suggests core PCE around 0.3% in February.
6. The Fed believes its policy stance is deeply restrictive.
7. There are 11 more PCE prints between now and the end of the year.

That said, the call for the median dot to remain at 4.6% is finely balanced. Only two FOMC members need to raise their dots to lift the median. On the other hand, this would not materially change the average dot, which would still round up to 4.7%.

Mirza Baig – Emerging Markets

The back-up in US rates, driven by hot inflation data, has reversed the recent rally in EM currencies. This triggered the -0.5% trailing stop loss on our short USD vs EMFX trade. I return to a neutral stance on EM currencies vs USD. I will be watching how the Fed responds to recent inflation data, and the evolution of risk sentiment.

Pay special attention to LATAM this week. BCB (Brazil) is set to cut the Selic rate by 50bps to 10.75%, but the committee may drop guidance of similarly sized cuts in future meetings. Markets will see this as hawkish. We expect 50, 50, 25 in the next three meetings (including this week). In addition, Bank of Mexico is set to start its long-awaited cutting cycle this week with a baby-step 25bp cut to 11%. The central bank will guide towards data dependence and stress a gradual and calibrated path. We expect Banxico to stick to 25bp decrements over the next three meetings.

Caroline Grady – Emerging Markets

A stronger currency over the past month will ensure the CNB continues its easing cycle. But the renewed FX strength alongside the 4.9pp drop in YoY inflation since the last policy meeting will not mean accelerated rate cuts. Headline inflation is back at the 2% target, but core remains elevated, as does services inflation. The CNB also sees neutral rates as higher than before the pandemic, suggesting the overall easing cycle may be shallower than the market expects. As such, the cautious stance is likely to continue this month with another 50bps cut, taking the policy rate to 5.75%.

Henry Occleston – Eurozone & UK Macro

The BoE will announce policy on Thursday. However, without a presser or updated forecasts, the event could be dull. Consensus is for no change in policy – I agree.

The voting pattern will be hard to call until we have the February CPI print (Wednesday). Analysts largely seek an unchanged voting pattern from last time (1-6-2 for a cut-pause-hike). I think the risk is skewed more dovish, with Haskel backing a pause.

If (as I expect) core and services inflation continues to undershoot versus February’s MPR (more detail below), Mann might even shift to a pause. She noted that the February decision was ‘finely balanced’, but recent comments have remained hawkish.

The MPC will have seen the CPI numbers on Monday. The market is looking for +3.5% in the headline and +4.6% in core. That headline figure seems reasonable, but I lean to the downside in core, with my bottom-up model suggesting +4.4% is possible.

A big unknown will be restaurant and accommodation inflation, which together tend to see large February rises. We are conscious of this risk, but our base case is for continued normalization of the inflation rates in both segments.

The BoE’s November MPR forecasts +3.5% headline, +4.9% core, and +6.1% services in February. As such, actual outturns seem likely to undershoot in core and services. But the degree of the miss is unlikely to drive too significant a dovish turn just yet (Chart 4).

We continue to pay 2Y EUR vs receiving 2Y GBP. We still see value in UK 2s10s steepeners vs US flatteners. If UK core CPI undershoots (as we expect), an outright UK 2s10s steepener could be good value.

Ben Ford – $-Bloc & Scandies

All eyes are on the Fed and BoJ this week, but Norges Bank and SNB deserve attention, too. We expect dovish outturns from both, albeit with still-careful demeanors.

Norges Bank is due a dovish monetary policy update having again overestimated core inflation. Consensus also has an equally poor recent track record. But is this not a repeat of January? Yes. However, the key difference this time is twofold: we have new forecasts, and momentum has decreased.

The SNB will be dovish but are unlikely to surprise the markets. They have no choice but to be dovish after Swiss inflation printed 0.63pp below forecast while core disinflation has room to run! They will refrain from cutting rates at this meeting. However, they could suggest easier language around FX intervention (i.e., potentially opening the door to future CHF sales) and confirm a June cut. We remain long EUR/CHF (target: 0.9700; stoploss: 0.9535; Chart 5).

Viresh Kanabar – Commodities

Oil

Brent has broken out to new highs of around $87 /bbl. Should we be chasing it?

Ultimately the answer is ‘no’ – it is probably too soon. For one, the disruptions at the start of the year are over. Libyan oil production is back up to 1.1mn b/d, while US production is back up to 13mn b/d.

Further, OPEC+ cuts have only reduced production by 400k b/d versus the last three months of 2023, as Iraq and Kazakhstan continue to overproduce. Meanwhile, Nigeria is currently producing over 1.4mn b/d, above our forecast of 1.3mn b/d for Q1 this year. We had highlighted Nigeria for a potential upside supply surprise this year.

So, the supply picture looks reasonable. What about demand?

Chinese data this year has been mixed. Crude imports for the first two months of the year averaged 10.8mn b/d, far lower than 2023’s average of 11.5mn b/d. However, these cargos were purchased towards the end of last year when oil prices were much higher. Therefore, we expect this number to rise in the coming months.

On the jet side, Chinese flight data looks positive and will show strong growth relative to 2023. However, much of this is down to base effects. Meanwhile, total air miles flown from March onwards are currently tracking in line with 2019, according to data from Airportia.

The surprise in global demand so far has come in Europe and the US – but both regions will only move global oil demand growth on the margin. Yet while the price of oil is indeed set on the margins, we think it has likely gone too far.

We have clearly seen markets bid up broad commodities in recent weeks including crude, gasoline, gasoil, copper, gold, and more. We avoid jumping on such a trade.

Market implication: We would not chase this rally in Brent above $87/ bbl and now favour a pullback towards $83/ bbl.

Gold

Following its fierce rally above $2,180/ oz, we have seen gold begin to consolidate while US inflation data came in hotter than expected for both CPI and PPI.

It is only natural that we should see profit-taking ahead of this week’s FOMC where (while not our base case) the Fed could look to reduce its guidance for the number of rate cuts this year.

Also, positioning is now in the 100^th percentile over the past three years with net longs having risen above 10% as a percentage of open interest. Meanwhile, we have also seen significant short covering as well, with speculative shorts falling from just under 30% to less than 14% currently (as a percentage of managed money positions).

From a macro-factor perspective, 10y UST yields have risen by almost 30 bps since last week, while EUR/USD now also looks to be falling, acting as a further headwind to gold prices.

Finally, we also highlight that flows into the largest gold ETFs in China have stalled and are beginning to reverse. Over the last 20 days, Chinese Gold ETFs saw outflows of more than $55mn or 1.4% of last month’s NAV. For context, this time last month, Chinese gold ETFs saw inflows of over $190mn or 5% of NAV. We think this is worth watching.

Market implication: While we are not advocating an outright short yet, we note extended positioning and slowing demand for gold ETFs in China skews risks to the downside.

John Tierney – US Equities

With the Ides of March over, investors are left to ponder the implications of last week’s hot inflation prints and another runup in Treasury yields. We think equities stay in a narrow range until either inflation cools or the economy/employment slows, giving the Fed cover to cut rates.

Oracle Corp caught a wave, while another one knocked Adobe Inc down. Yet together they illustrate how any explosive growth of the AI ecosystem depends on establishing the necessary infrastructure.

Only 13 companies report this week. They could signal whether demand for commodity memory chips has bottomed yet (Micron Technology) and whether people are buying sporty wear to go with sports activities (LuluLemon and Nike).

We remain constructive on equities, but investors must be patient.

(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.)