Preliminary inflation data from the Eurozone, Q4 GDP data from Australia, Canada and Switzerland as well as ISM PMI data from the US will highlight the week ahead of us.
USD
Second Q4 GDP report saw it slide to 2.7% vs 2.9% annualised as preliminary reported. Personal consumption contribution was revised down from 1.42pp to 0.93. Fixed investment improved to -0.81pp from -1.2 as preliminary reported. Net trade attributed 0.46pp to the GDP down from 0.56pp as preliminary reported. Fed’s preferred inflation metric PCE printed an increase in January. Headline number came in at 5.4% y/y vs 5.3% y/y in December while core PCE rose 4.7% y/y vs 4.6% y/y the previous month. Inflation has made a turn up which will cause Fed to step up its hawkish rhetoric. Additionally, personal spending rose 1.8% m/m while personal income rose 0.6% m/m.
The yield on a 10y Treasury started the week and year at around 3.82%, rose to 3.976% and finished the week at around 3.95%. The yield on 2y Treasury finished the week at around 4.79%. Spread between 2y and 10y Treasuries started the week at -80bp, tightened back to -74bp and then widened to -83bp post PCE report. FedWatchTool sees the probability of a 25bp rate hike in March at 58.3% while probability of a 50bp rate hike is at 41.7%.
This week we will get ISM PMI data.
Important news for USD:
Wednesday:
ISM Manufacturing PMI
Friday:
ISM Non-Manufacturing PMI
EUR
Preliminary February PMI for the Eurozone saw manufacturing slip to 48.5 from 48.9 in January on the back of big drops in German and French readings. Services ripped stronger and came in at 53 vs 50.8 the previous month with both German and French readings improving. This has pushed composite to 52.3 from 50.3 in January which is the highest since May of last year. S&P Global notes that: “Business activity across the eurozone grew much faster than expected in February” and that “February’s PMI is broadly consistent with GDP rising at a quarterly rate of just under 0.3%.” Additionally, signs of inflation pressures are still seen in the services sector and are connected to the rising wages.
Final inflation reading for the month of January came in a bit hotter than previously reported. Headline CPI came in at 8.6% y/y vs 8.5% y/y as preliminary reported with -0.2% m/m vs -0.4% m/m as preliminary reported. Core CPI also ticked higher compared to preliminary report and came in at 5.3% y/y vs 5.2% y/y. Revisions are due to delay of German data that happened before the preliminary inflation reading was reported. Final reading of German Q4 GDP came in at -0.4% q/q vs -0.2% q/q as preliminary reported. Household consumption was down -1% q/q while gross fixed capital formation (capital investment) was down -2.5% q/q. German economy will have a low base for Q1 GDP reading but incoming data (manufacturing PMI, Ifo current situation, consumer confidence) all pointed to a negative growth in the first quarter. This will make two consecutive quarters of negative GDP, a definition of technical recession.
This week we will have preliminary February inflation data.
Important news for EUR:
Thursday:
CPI
GBP
Preliminary PMI data in February smashed expectations and provided us with a very strong report. Manufacturing came in at 49.2 vs 47 in January while services came in at 53.3 vs 48.7 the previous month. Combined together they lifted composite to 53 from 48.5 in January. The report shows great resilience of the economy and business sentiment has been improved due to signs of peak in inflation and lowering of recession fears. GBP has reacted strongly on the news with GBPUSD gaining more than 100 pips. In the end, S&P notes that: ”However, while the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern, especially in the service sector. As such, the resilience of the economy and the stickiness of the survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively, which may dampen future growth expectations and suggests that the possibility of recession later in the year should not be ruled out.” BOE member Catherine Mann, a well-known hawk, stated that financial markets have absorbed substantial degree of tightening and added that further tightening and sooner rate hikes will most likely be needed.
AUD
RBA minutes from February meeting revealed that the board considered a 50 bp hike and that pausing was not an option. Falling real incomes persuaded them to go for a 25bp rate hike. Board members agreed that further rate hikes would likely be needed and they have modelled their inflation forecasts based on a 3.75% cash rate. This is a continuation of hawkish message we saw in statement and in Governor Lowe’s speech in parliament. Wage data for Q4 came in at 0.8% q/q vs 1% q/q as expected and as was in Q3 and 3.3% y/y vs 3.5% y/y as expected. Wages rising slower than expected will ease fears of dreaded wage-price inflation dynamic. Q4 CAPEX data was very encouraging as it came in at 2.2% q/q vs 1.3% q/q as expected. Q3 CAPEX was revised up to 0.6% q/q from -0.6% q/q. Building CAPEX was the most prominent with 3.6% q/q increase showing that investments are pouring in into construction sector. CAPEX reading gave AUD a small boost.
PBOC has left 1-Year and 5-Year LPR (Loan Prime Rate) unchanged at 3.65% and 4.3% respectively. 1-Year LPR is used as benchmark for most new and outstanding loans while 5-Year LPR is used as benchmark for most home mortgage rates.
This week we will get Q4 GDP data from Australia and official PMI data from China.
Important news for AUD:
Wednesday:
GDP
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
NZD
RBNZ delivered a 50bp rate hike as expected and lifted Official Cash Rate (OCR) to 4.75% from 4.25%, Board members have even considered a 75bp rate hike. Monetary conditions will need to tighten further as inflation is too high and employment is beyond maximum sustainable level. Balance of risks surrounding inflation is to the upside while housing and household balance sheets are two main downside risks. RBNZ now see OCR at 5.14% in June 2023 vs 5.41% previously. OCR is seen at 5.5% in March of 2024 as before while annual inflation projection for the same period is lifted to 4.2% from previous number of 3.8%. Hawkish rhetoric coming from RBNZ to give NZD some love after previous weeks’ declines. RBNZ Governor Orr stated that some early signs of inflation abating are starting to form but core inflation is still too high. He added that due to cyclone Gabrielle there will be some increased price pressures to come which may require higher rates for longer. Cyclone Gabrielle has caused floods and landslides in the North Island of New Zealand taking 5 lives and causing massive material damage that is estimated to be north of NZD13bn.
CAD
January inflation numbers came in softer than expected with headline CPI coming in at 5.9% y/y vs 6.1% y/y as expected and 6.3% y/y in December. Median and common core measures were unchanged at 5% y/y and 6.6% y/y while trim came down to 5.1% y/y from 5.3% y/y the previous month. BOC already announced they will pause with rate hikes and with inflation coming down it will only reinforce their stance.
This week we will get Q4 GDP data .
Important news for CAD:
Tuesday:
GDP
JPY
Preliminary PMI data for the month of February was a mixed bag. Manufacturing dropped to 47.4 from 48.9 in January making it fourth consecutive month of contraction and lowest reading since August of 2020. Output and new order components dropped, same as input prices but output prices rose indicating that inflation is being passed on to consumers. Services PMI jumped to 53.6 from 52.3 the previous month with reading being sixth in expansion and highest since June of 2022. New orders continued to grow and business sentiment strengthened. Input and output prices rose as combination of rising fuel and wage costs. Composite remained unchanged at 50.7.
January CPI for the entire country saw headline number come in at 4.3% y/y vs 4.5% y/y as expected and up from 4% y/y in December. CPI ex energy came in at 4.2% y/y as expected, up from 4% y/y the previous month while CPI ex energy, fresh food came in at 3.2% y/y as expected, up from 3% y/y in December. BOJ Governor nominee Ueda spoke at length in the parliament stating that inflation is transitory (driven by the supply side, cost-push) and that it is expected for it to come down to the 2% target in the middle of next fiscal year. Fiscal year starts on April 1 so inflation should hit the target at around October. It is necessary to continue with monetary policy easing in order to realise wage hikes. He added that there are various possibilities for what YCC might look like going forward but he did not want to comment on it now. Targetting short-term yields might be one of the strategies. Monetary normalisation will be appropriate if trend inflation improves significantly.
CHF
SNB total sight deposits for the week ending February 17 came in at CHF526.8bn vs CHF525.6bn the previous week. A small increase in sight deposits as SNB further calibrates its policy.
This week we will get Q4 GDP data
Important news for CHF:
Tuesday:
GDP
