Inflation and consumption from the US and employment from the UK will dominate in the rather quiet week ahead of us.
USD
ISM services 52.6 vs 53 as expected and down from January when it printed 53.4. Digging into the details we can see some encouraging signs, such as increases in business activity and new orders which printed healthy 57.2 and 56.1. Additionally, prices paid index declined indicating easing of price pressures in the services sector. On the other hand, employment index declined into contraction and printed just 48 making it the second time in the last three readings that it was below the break even 50 level.
Fed Chairman Powell testified before the Congress and the prepared statement showed that they will likely start to cut rates at some point during the year and that rate cuts will not happen until they have greater confidence that inflation is moving down towards their 2% target. At the testimony he stated that more data is needed for rate cuts to commence and added that “believe that our policy rate is likely at its peak for this tightening cycle”.
February NFP number printed 275k vs 190k as expected. Good news stop there. Digging into details we can see that the unemployment rate jumped to 3.9% from 3.7% in January while participation rate remained at 62.5%. There was a big revision to the previous reading which now showed 229k jobs added vs 353k as preliminary reported. Average hourly earnings rose by 0.1% m/m, much slower increase than 0.3% m/m as was expected and 0.5% m/m in January. The details are pointing to a June rate cut.
The yield on a 10y Treasury started the week at 4.19%, rose to 4.23% and finished the week at around 4.07%. The yield on 2y Treasury started the week at 4.54% and reached the high of 4.62%. Spread between 2y and 10y Treasuries started the week at -35bp then widened to -39bp as curve continued to invert. The 2y10y is inverted for over eighteen months. FedWatchTool sees the probability of no change at March meeting at 97% while probability of a 25bp rate cut is at 3%. Probability of a May rate cut is around 26% while probability of a June rate cut is around 78%.
This week we will have inflation and consumption data. Inflation is expected to rise 0.3% m/m and 3.1% y/y which is unchanged from January reading.
Important news for USD:
Tuesday:
CPI
Thursday:
Retail Sales
EUR
Final PMI services for the month of February for the Eurozone was revised higher to 50.2 from 50 as preliminary reported. Positive revisions were made both to the German and French readings. It helped lift composite PMI to 49.2. Final reading of Q4 GDP for the Eurozone confirmed that economy came in flat on the quarter and rose measly 0.1% y/y.
ECB has left key interest rates unchanged as widely expected. New economic projections saw both inflation and GDP revised lower. CPI is now seen at 2.3% for 2024 (down from 2.7% previously), 2% for 2025 and 1.9% for 2026. GDP is seen at 0.6% in 2024, 1.5% in 2025 and 1.6% in 2026. At the press conference President Lagarde emphasized data dependent approach and added that although economy remains week there is a pick up seen in recent surveys. She clarified that they are more confident on inflation but not sufficiently confident and added that more will be known in April and even more in June thus hinting that, for now, June remains most realistic meeting for the first rate cut. She reiterated that it is not necessary for inflation to fall to 2% before starting to cut rates and stated that decision to keep rates unchanged was unanimous.
GBP
Final services PMI was revised down to 53.8 from 54.3 as preliminary reported and as was in January. New orders posted a healthy growth which is very encouraging and general number although weaker than in January is at a still high level. Composite printed 53, a tick up from 52.9 the previous month.
This week we will have employment data.
Important news for GBP:
Tuesday:
Payroll Change
Unemployment Rate
AUD
Q4 GDP number printed a growth of 0.2% q/q and 1.5% y/y. Government expenditure contributed to growth with former printing 0.6% increase and contributing 0.1pp to the GDP. The report shows “Household spending rose 0.1% in December quarter as a rise in spending on essentials (0.7%) was offset by a fall in discretionary spending (-0.9%).” This is concerning as cost-of-living crisis is dampening consumption and thus negatively impacting growth. Exports declined 0.3% while imports declined by 3.4% thus net trade contributed positively to the GDP. Terms of trade rose by 2.2% for the quarter but fell 3.9% for the 2023 while household saving to income ratio grew by 3.2% from 1.9% in the previous quarter.
The latest “Two Sessions” from China saw 2024 GDP growth target set at 5%, unchanged from 2023. The fiscal deficit-to-GDP target was set at 3%, no changes compared to the previous year and it is below expectations. Markets were expecting a bigger fiscal stimulus in order to support the economic growth. Helping consumer spending increase will be given a high priority. Trade will also be given great significance.
NZD
Terms of trade in the final quarter of 2023 plunged 7.8% led by a big drop in export prices (-4.2% q/q vs -0.4% q/q as expected). Import prices rose by 3.8% q/q vs expected drop of 0.2% q/q to put a further stain on the reading. A decrease in terms of trade could have a negative impact on the economy overall as purchasing power of exports declines. First GDT auction in March saw dairy prices fall 2.3%. This is the first decline in dairy prices after last six auctions saw price increases.
CAD
BoC has left the policy rate unchanged at 5% as was widely expected but statement did not sound as dovish as expected. The economy grew in Q4 by more than expected. They have acknowledged that inflation continues moderating, that shelter is the biggest contributor to inflation and that inflation should remain close to 3% in H1 of 2024 and then gradually ease in the second part of the year. The statement shows “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation…” indicating that BoC is not in a hurry to cut rates, so market needed to readjust its positioning which led to CAD strength. Governor Macklem affirmed this by stating that it is still too early to consider lowering the policy rate.
February employment report saw employment change come in at 40.7k vs 20k as expected. This is the highest employment change in seventeen months. The unemployment rate ticked up to 5.8% as expected with participation rate staying unchanged at 63.5%. Wages have risen at slower pace printing 4.9% increase, down from 5.3% increase in January. One of the highlights of the report was the fact that all of the jobs added, and then some, were full-time jobs (70.6k). Part-time jobs, on the other hand, declined by 29.9k. Labour market remains strong and a drop in wages will be welcomed by the BoC.
JPY
Q4 CAPEX data smashed expectations as it rose by 16.4% y/y vs 2.9% y/y as expected and up from 3.4% y/y in the previous quarter. This huge jump in investment should reflect positively on GDP in 2024. Company profits were affected as they rose 13% y/y vs 21.3% y/y as expected.
Tokyo CPI rose strongly in February after a drop in January and saw headline number print 2.6% y/y vs 1.8% y/y the previous month. Ex fresh food printed 2.5% y/y, up from 1.8% y/y in January. Ex fresh food, energy, “core-core”, was the only one that declined as it printed 3.1% y/y vs 3.3% y/y the previous month. Both final services and final composite PMI readings were revised up to show smaller decline than preliminary reported (52.9 and 50.6 respectively).
January wages rose by 2% y/y after a 1% y/y increase in December. When we take inflation into account real wages dropped 0.6% y/y making it a 22nd month of declining real wages. Japan’s largest trade union stated that wage hikes this year are bigger than last year. BoJ is looking for results of spring wage negotiations as valuable input for their policy setting. BoJ member Nakagawa stated that prospects of sustainably reaching inflation target of 2% are gradually increasing and MUFG now sees BoJ moving rates from negative territory in March. Governor Ueda echoed Nakagawa’s statement on inflation and added that it is possible to exit stimulus while striving to achieve 2% inflation target. JPY has had a great trading week and strengthened further on these comments.
CHF
SNB total sight deposits for the week ending March 1 came in at CHF478.5bn vs CHF480.5bn the previous week. No significant changes, just moving through the well-established range.
Inflation in Switzerland continued to decline as evidenced by February CPI reading which saw headline number tick down to 1.2% y/y from 1.3% y/y in January. Slower price increases were seen in prices of food and non-alcoholic beverages as well as in restaurants and hotels, transport, healthcare and household goods and services. Core CPI reading also ticked down to 1.1% y/y from 1.2% y/y the previous month.
