The week ahead of us will provide us a breather from the massive week we just head which will give investors time to digest implications of recent central bank decisions and economic data. Most important news event will be on Friday when we will get PCE inflation data.
USD
Fed has kept funds rate unchanged at 5.25-5.50% range as was widely expected but delivered a more dovish message. The statement showed that economy and labour markets are strong and that inflation has eased although it remains elevated. The stance on monetary policy was unchanged with “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.
Dot plot continued to show three rate cuts in 2024 but rates were moved up for the other years. We now have 3.9% median for the End of the Year (EoY) 2025, compared to 3.6% in December plot. Median rate for 2026 has been lifted to 3.1% EoY vs 2.9% EoY in December and longer run rate is seen at 2.6% vs 2.5% in December. GDP projection was revised up and it now shows real GDP at 2.1% in 2024 and 2% in 2025 and 2026 effectively removing any talks about recession as growth will be above the trend for the next three years. Core PCE inflation was revised up for 2024 to 2.6% from 2.4% previously and headline PCE is revised up for 2025 to 2.2% from 2.1% in December. In the longer run it is still expected to be at 2%.
At the press conference Chairman Powell stated that path forward remains uncertain and that risks are moving into better balance. Inflation has eased, although still high but longer-term inflation appear to remain well anchored. He reiterated that they will likely be cutting rates at some point this year. Powell dismissed January and February inflation increases as just bumps in the road on the way to 2% and stated that January number was possibly influenced by the seasonal adjustment effects. When asked about financial conditions he stated that they are restrictive and are weighing on economic activity. Additionally, he added that peak rates are achieved and hinted that QT tapering could show up as early as next meeting.
The yield on a 10y Treasury started the week at 4.29%, rose to 4.34% and finished the week at around 4.20%. The yield on 2y Treasury started the week at 4.71% and reached the high of 4.75%. Spread between 2y and 10y Treasuries started the week at -42bp then tightened to -37bp as bull steepening of curve took place after Fed left three cuts in dot plot for 2024. The 2y10y is inverted for over eighteen months. FedWatchTool sees the probability of no change at May meeting at 88% while rate cut probability is at 12%. Probability of a June rate cut is around 74% and has jumped after the Fed meeting.
This week we will have Fed’s preferred inflation measure, PCE, as well as personal income and spending data.
Important news for USD:
Friday:
PCE
EUR
Final February CPI was unchanged at 2.6% y/y, down from 2.8% y/y in January. Core CPI was also unchanged at 3.1% y/y, down from 3.3% y/y the previous month. Inflation is moving in the right direction, but the pace is slowing down. Compensation data showed that wage growth in Q4 was 3.1% y/y, down from 5.2% y/y in the previous quarter. Wages continue to increase, although at a slower pace and still show strong growth.
Preliminary PMI data for the month of March showed the familiar picture of two economies diverging. Manufacturing continued to decline with 45.7 reading, down from 46.5 in February with both German and French readings declining. Germany printed weak 41.6. Output and new orders continued on their downward path in the Eurozone. On the other hand, services improved to 51.1 from 50.2 the previous month and better than 50.5 as expected. The report states that price pressures have not increased further in the services sector and have actually eased a bit, which is a nice positive and will make ECB happy. Composite was still lifted up and barely missed breakeven 50 reading as it printed 49.9, up from 49.2 in February.
GBP
Inflation continues to decline in the UK as evidenced by the February reading. Headline CPI dropped to 3.4% y/y, a two-year low, from 4% y/y in January, while 3.5% y/y print was expected, mainly due to a big drop in food prices. Core CPI fell to 4.5% y/y from 5.1% y/y the previous month, while a drop to 4.6% y/y was expected. Services inflation also recorded a nice drop as it printed 6.1% y/y, down from 6.5% y/y in January. Inflation is expected to continue declining due to lower energy costs for households and markets now have fully priced in rate hike for August.
Preliminary March PMI showed a big jump in manufacturing as it printed 49.9, up from 47.5 in February and much better than 47.8 as expected. Services sector eased a bit but still printed a very healthy 53.4 vs 53.8 the previous month. In combination, they caused composite to tick down to 52.9 from 53 in February. The report states that data point to a small positive for Q1 GDP reading. Inflation still remains a problem as it proves more sticky.
BoE left the rate unchanged at 5.25% as was widely expected. There were dovish signals in the voting and in the statement. Result of voting was 8-1 (Dhingra voted for a rate cut). Previously Haskel and Mann, two biggest hawks, voted for rate hikes, now they have moved to neutral position indicating that bank’s next move will be a cut. The statement contained a passage “the Committee recognised that the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level” giving another nod to the rate cuts.
AUD
RBA left the cash rate unchanged at 4.35% as was widely expected. The statement left out the part where further rate hikes “cannot be ruled out”, the tightening bias, and changed it with “The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out”. That indicates that board is moving toward neutral bias and is prepared to cut if the conditions warrant it. Markets see it as a dovish tilt from the RBA and are pricing in September for the first rate cut.
The statement showed that inflation is moderating but is still at high levels. The decline in inflation is driven by moderating goods inflation while services inflation is declining at a more gradual pace. The outlook remains highly uncertain. “The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026.” At the press conference Governor Bullock stated that progress is being made in fight against inflation and recent data confirms that progress. She added that it is too soon to rule anything in or out and clarified that change in forward guidance was made due to incoming data.
February employment report provided us with some stellar numbers. The economy added massive 116k jobs compared to 40k as expected and up from partly 500 in January. The unemployment rate plunged to 3.7% from 4.1% the previous month while expectations were for it to just tick down to 4%. Participation rate slid to 66.7% from 66.8% in January. Most of the jobs added, 78.2k, were full-time which just adds to the strength of this report. Historically February has always been a month of strong job gains.
Economic activity from China saw strong increase for industrial production in the first two months of the year as it increased 7% y/y beating expectations 5% y/y. Retail sales also beat expectations as it increased by 5.5% y/y vs 5.2% y/y as expected, but came in lower than 7.4% y/y in December hinting that consumer is not doing that good and that its contribution to the 5% GDP target for the 2024 will be questionable. Given the strong industrial production reading it seems that path to GDP target will be through exports. PBOC has left 1 and 5 LPR rates unchanged at 3.45% and 3.95% respectively as was widely expected.
NZD
Q4 GDP showed economy slip into technical recession with two consecutive quarters of falling GDP. The number printed -0.1% q/q vs 0.1% q/q as expected with -0.3% q/q print in Q3. This is fourth negative quarter result in the past five quarters. The yearly figure printed a decline of 0.3%. There is some optimism regarding positive growth in Q1 of 2024. Second dairy auction in March saw prices decline by 2.8%. This is a second in a row auction that saw falling dairy prices.
CAD
February inflation data saw another month of falling inflation. CPI came in at 2.8% y/y vs 3.1% y/y as expected and down from 2.9% y/y in January. Core measures also all declined with median and common printing 3.1% y/y while trim printed 3.2% y/y. This is the second consecutive month of headline inflation declining and coming in below 3% which may nudge BoC to cut before the Fed. Markets were selling CAD after the report in anticipation of faster rate cuts.
JPY
BoJ delivered first rate hike in 17 years as was well telegraphed by the markets and brought the rate to positive territory, in the range of 0-0.10%. The bank decided to remove the upper bend of 1% on 10y JGB yield, thus effectively stopping the Yield Curve Control (YCC). However, the bank will continue purchasing JGB’s “with broadly the same amount as before” and will step up those purchases in nimble manner if yields increase rapidly. Additionally, BoJ will discontinue purchases of ETFs and J-REIT’s as well as reduce purchases of corporate bonds with a plan to discontinue them in one year.
The report shows that wages are expected to continue to increase during the year thus strengthening positive wage-price spiral which means that price target of 2% would be achieved in sustainable manner and was the main reason for a hike. The statement shows “as a virtuous cycle from income to spending gradually intensifies, Japan’s economy is projected to continue growing at a pace above its potential growth rate”. The statement also shows that “Given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being” showing that BoJ is still very cautious, leaning dovish and JPY continued to weaken.
Governor Ueda stated at the press conference that negative rates and YCC fulfilled their intended roles but that accommodative financial conditions will stay. He emphasized the virtuous wage-price cycle as the main reason for rate hike. He added that they will consider options for easing policy if it is needed. On the other hand, the pace of future rate hikes will depend on the how economy develops and future price outlook. Ueda stated that reaching 2% price target sustainably looks more and more likely but it is still not fully guaranteed. This last remark sounded dovish.
Preliminary March PMI data showed increases across sectors. Manufacturing printed 48.2, up from 47.2 in February. Moving closer to expansion, but still in contraction since May of 2023. Services surged to 54.9 from 52.9 the previous month indicating a very strong activity and it propelled composite to 52.3 from 50.6 in February. February CPI for the entire country saw jump in headline and ex fresh food to 2.8% y/y from 2.2% and 2% previous month. Ex fresh food, energy component continued to decline as it printed 3.2% y/y compared to 3.5% y/y in January, but it still sits comfortably above the 3% level.
CHF
SNB total sight deposits for the week ending March 15 came in at CHF469.2bn vs CHF477.4bn the previous week. Again no significant moves in the sight deposits as SNB ceases to use them as a monetary policy tool. Swiss government has lowered expected CPI for the 2024 to 1.5% from 1.9% as seen previously. Projected CPI for 2025 was unchanged at 1.1%.
SNB has cut interest rates by 25bp bringing it to 1.50%. The move surprised the markets as Swissy lost around 100 pips against the majors in a minute. The main reason for rate cut was success in fight against inflation. Similarly to the government, the bank cut CPI projection to 1.4% for 2024 from 1.9% and to 1.2% for 2025 from 1.6% previously. “The SNB will continue to monitor the development of inflation closely, and will adjust its monetary policy again if necessary to ensure inflation remains within the range consistent with price stability over the medium term.” This statement indicates that there could be another rate cut at June meeting.
