RBNZ meeting, PCE from the US and CPI from Eurozone will highlight the week ahead of us that will also contain Q4 GDP data from the US, Canada and Switzerland as well as official PMI data from China.
USD
The main message from the FOMC minutes is reluctance of members to ease rates prematurely. They are not comfortable yet with progress on inflation and would not like to risk lowering rates and potentially reigniting inflation. There was also a talk on QT tapering. Members seem to be willing to adjust it at the March meeting.
The yield on a 10y Treasury started the week at 4.28%, rose to 4.33% and finished the week at around 4.26%. The yield on 2y Treasury started the week at 4.48% and reached the high of 4.67%. Spread between 2y and 10y Treasuries started the week at -36bp then widened to -41bp as curve continued to invert. The 2y10y is inverted for over eighteen months. FedWatchTool sees the probability of no change at March meeting at 90% while probability of a 25bp rate cut is at 10%. Probability of a May rate cut is around 34%.
This week we will get second reading of Q4 GDP, Fed’s preferred inflation metric PCE and ISM manufacturing PMI.
Important news for USD:
Wednesday:
GDP
Thursday:
PCE
Friday:
ISM Manufacturing PMI
EUR
Wages in the Eurozone for the Q4 came in at 4.5% y/y, slightly lower than 4.7% y/y in Q3. ECB members, notably Lagarde and Lane, have emphasized that they are closely watching wages data. They were referring to Q1 2024 wages data that will come out in April but this welcoming slight drop may be a sign of things to come in April. Due to inflation falling faster than wages, we had first quarter of real wage growth in a long time.
Preliminary February PMI for the Eurozone saw manufacturing PMI slide to 46.1 form 46.6 in January on the back of horrendous German reading (42.3, down from 45.5). On the other hand, services returned to expansion with a 50 reading. Composite improved to 48.9. Apart from divergence between manufacturing and services sector there seems to be a divergence forming between German and French economies. France is showing stronger signs of recovery while Germany is stumbling. The report shows drags on new orders in manufacturing sector. Employment in the services sector is improving. Output prices continued to increase, now at a faster pace, and that will pose a problem for the ECB. Rate cuts will likely be delayed for the June meeting.
This week we will get preliminary March CPI data.
Important news for EUR:
Friday:
CPI
GBP
BoE Governor Bailey stated that they may start cutting rates even before inflation drops to their target thus echoing Fed’s message. There is the need to see steady progress on inflation returning to target. Bailey added that it is not possible to say when and by how much rates will be cut at this period in time.
UK economy is on a solid path according to preliminary PMI data for the month of February. Manufacturing PMI ticked up to 47.1 from 47 in January while services was unchanged at 54.3, it was expected for them to slide down to 54.1. Composite was lifted up to 53.3 from 52.9 in January. The report shows that business activity showed the biggest rise in nine months indicating strong demand. Selling prices for services have continued to increase as inflationary pressures remain persistent.
AUD
RBA meeting minutes showed that board was considering a 25bp rate hike or keeping rates steady. Due to balanced risks to outlook they opted for the latter. They see inflation coming down to their target but it could “take some time”, therefore future rate hikes cannot be ruled out. Board members added that if the economy weakens they are prepared to cut. Hawkish sounding minutes gave a push to AUD. Q4 wages rose 4.2% y/y, up from 4% y/y in the Q3 and putting them over the current inflation rate. The wage increase was highest since Q1 of 2009.
PBOC has kept MLF rate unchanged at 2.5% as was widely expected but cut 6-year LPR rate to 3.95% from 4.20%. This 25bp rate cut is the biggest ever cut to 5-year LPR. The 5-year LPR is used as a benchmark for new mortgages so this move is intended to make mortgages more accessible and thus help property developers. On the other hand, this move will put additional strain to already low bank margins.
This week we will get official PMI and Caixin manufacturing PMI data from China.
Important news for AUD:
Friday:
Manufacturing PMI (China)
Services PMI (China)
Composite PMI (China)
Caixin Manufacturing PMI (China)
NZD
Q4 PPI data continued to increase but at a lower pace than in Q3. Input prices rose 0.9% q/q vs 1.2% q/q the previous quarter while output prices rose by 0.7% q/q compared to 0.8% q/q increase in Q3. Slower pace is a good sign but the fact that prices are still rising will be worrisome for the RBNZ. Chances of a rate hike at next week’s meeting are increasing. GDT price index showed yet another increase in dairy prices, sixth consecutive auction of rising prices, as it printed 0.5%. This is yet another boost to NZD which was the strongest currency of the week.
This week we will have RBNZ meeting. Markets are unsure whether we will get hike or no change, but with recent string of data we are leaning slightly toward a 25bp rate hike.
Important news for NZD:
Wednesday:
RBNZ Interest Rate Decision
CAD
January CPI report was helped by big numbers in January of 2023 so we got a big drop in headline which printed 2.9% y/y from 3.4% y/y the previous month. Airfares recorded the biggest monthly drop followed by gasoline prices. Core readings also declined compared to December and printed 3.3% y/y for median and 3.4% y/y for common and trim. BoC will be satisfied with the fact that monetary policy is giving results and lower than expected reading will spark dovish tone from them. CAD has plunged after the inflation reading.
This week we will get Q4 GDP data.
Important news for CAD:
Thursday:
GDP
JPY
December core machinery orders rebounded nicely and beat expectations printing a 2.7% m/m increase vs 4.9% m/m decrease in November. Core machinery orders are seen as a good proxy for CAPEX 6-9 months ahead so this was a very encouraging reading. Be mindful that the data series is very volatile so it is better to use some three or six month averages when analysing expectations for future investments. Japanese government assessed economy as “recovering moderately though it appears to be stalling recently”. They see consumer spending weakening and that in turn is causing economy to stumble. The view on industrial production was also downgraded and in combination with lower expected consumer spending it raises the question about potential normalization of monetary policy.
Preliminary PMI data for the month of February showed slowdown in economic activity. Manufacturing PMI printed 47.2, down from 48 in January as new order and employment indexes showed rapid declines. Services declined to 52.5 from 53.1 the previous month which dragged composite to 50.3, barely in expansion. The report also shows that “Firms were also the least upbeat since January 2023, reflecting reduced optimism with regards to future output”. Nikkei has managed to print a new all time high reading with previous high being in 1989 before the housing bubble burst.
CHF
SNB total sight deposits for the week ending February 16 came in at CHF477.1bn vs CHF482.3bn the previous week. Total sight deposits return into the well-established range after threatening to breach it previous week.
This week we will get Q4 GDP data.
Important news for CHF:
Thursday:
GDP
