Inflation data from the US and the EU will be highlights of the rather quiet week as markets digest latest central bank meetings.
USD
On late Sunday afternoon Fed has announced that they will be improving effectiveness of USD funding abroad by allowing swap facilities to be used daily instead of weekly. “These swap facilities are designed to improve liquidity conditions in global money markets…” Existing home sales in February jumped to 4.58m from 4m in January. They have been falling for twelve consecutive months and as the mortgage rates start coming down the trend will reverse.
Fed has delivered another 25bp rate hike as widely expected and thus lifted the rate to 4.75-5% range. The statement showed that Fed will now switch fully to data dependent mode. The reference to “ongoing increases” in rates was omitted and switched with “some additional policy firming may be appropriate”. The accompanying Summary of Economic Projections saw median rate for the end of 2023 unchanged at 5.1%. 2024 rate was revised up to 4.3% from 4.1% while rate for the end of 2025 was kept at 3.1%. Both headline and core PCE inflaton for 2023 were moved higher while GDP and the unemployment rate were moved lower.
Chairman Powell has started the press conference by saying that inflation is too high adding that they will need to closely monitor banking conditions as well as that they have the tools to deal with the issue. In the Q&A section he stated that FOMC members thought they will need a higher terminal rate couple of weeks ago. He acknowledged that crisis in the banking sector could have effects as a rate hike. This means that due to potential bank runs banks will limit loans/credit creation and thus sack the liquidity from the market, creating tighter monetary conditions, which is what Fed is doing with rate hikes. Powell was adamant that there will be no rate cuts.
The yield on a 10y Treasury started the week and year at around 3.45%, rose toward 3.6% and finished the week at around the 3.4% level. The yield on 2y Treasury reached at around 4.15% and then fell sharply post-FOMC to around 3.55%. Spread between 2y and 10y Treasuries tightened over the weekend and started the week at -36bp then widened further to -55bp, tightened again post-FOMC to -36bp. FedWatchTool sees the probability of no change in May at 85% while probability of a 25bp hike is at 15%.
This week we will get Fed’s preferred inflation measure.
Important news for USD:
Friday:
PCE
EUR
ZEW survey for the month of March showed first declines in four months. Current conditions declined to -46.5 from -45.1 in February while outlook for Germany dropped to 13 from 28.1 the previous month. Outlook for the Eurozone also plunged printing 10, down from 29.7 in February. Turmoil in financial system is destroying optimism among financial participants and it is clearly reflected in this survey.
Preliminary March PMI data for the Eurozone saw further declines in manufacturing sector as headline number printed 47.1, down from 48.5 in March. The reading was dragged down by the weak German sector while French sector posted a small improvement. Services sector, on the other hand, posted a healthy rebound with 55.6, up from 52.7 in February and thus lifted composite to 51. from 52 the previous month. This now makes a new ten-month high in composite reading. Inflationary pressures have continued to moderate.
This week we will have preliminary March inflation data.
Important news for EUR:
Friday:
CPI
GBP
Inflation in the UK for the month of February accelerated, thus braking the three consecutive months of declines, and remained in double digits as it came in at 10.4% y/y vs 10.1% y/y in January. Expectations were for a drop to 9.9% y/y. Restaurants and cafes, food, and clothing showed the biggest jump in prices while prices for recreational and cultural goods and services and motor fuels declined on the month. Core CPI reading is very concerning as it came in at 6.2% y/y vs 5.7% as expected and up from 5.8% y/y the previous month.
BOE has decided to hike interest rate by 25bp to the 4.25% level. The vote was split 7-2 with two members, Tenreyro and Dhingra, voting to keep rate unchanged. Inflation has unexpectedly turned higher but according to bank’s projections it will fall significantly in Q2 of 2023. Fiscal support should add 0.3% to the GDP. The statement shows “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” BOE is turning to data dependent mode as well. Governor Bailey added that they are not certain yet if 4.25% will be the peak in rates. Currently the markets are pricing a 50/50 chance of another 25bp rate hike in May.
Consumption data showed a nice improvement as headline retail sales rose 1.2% m/m while core retail sales rose 1.5% m/m. The details are less rosy with headline retail sales getting a boost from sales at non-food stores such as discount department stores, clothing, second-hand goods stores, such as auction houses and charity shops. Preliminary PMI data in March showed slowdown across the economy. Manufacturing declined further into restriction territory followed by services who are still hanging in expansion at 52.8 which managed to keep composite reading at 52.2.
AUD
Minutes from the latest RBA meeting showed that the Board agreed to reconsider case for pausing at April meeting as pausing would allow time to reassess the outlook for the economy. They are watching data on jobs, inflation, retail sales, business surveys, global developments. Current assessment is that inflation is too high, labour market is tight and business surveys are solid. Recent data were beyond expectations. AUD was sent lower by this as markets are pricing out further rate hikes and pricing in pause from RBA.
After last week’s surprising RRR cut PBOC decided to leave LPR rates unchanged. LPR for 1-year is at 3.65% and this rate is used for a great majority of new and outstanding loans. LPR 5-year is at 4.30% and this rate is used for mortgages, great majority of mortgages are based on a 5-year LPR.
NZD
Westpac quarterly consumer confidence printed 77.7 in Q1, a nice jump from 75.6 in Q4 of 2022. RBNZ speakers were adamant stating their intent to fight against inflation, to bring it down from very high levels. Chief economist Conway added that if inflation expectations do not fall they will be forced to do more.
CAD
February inflation report saw CPI fall more than expected. Headline number came in at 5.2% y/y vs 5.4% y/y as expected and down from 5.9% y/y in January. Food prices were the biggest contributor as they rose by 10.6% y/y. This is the seventh consecutive month of reading printing in double digits. Energy prices declined with gasoline prices leading the way (-4.7% y/y). All of the core readings declined with median coming in at 4.9% y/y vs 5% y/y, trimmed at 4.8% y/y vs 5.1% y/y and common at 6.4% y/y vs 6.6% y/y the previous month. BOC is the first central bank that halted rate hiking cycle and with inflation continuing to fall combined with banking woes around the globe it is very likely that current rate level of 4.5% will represent terminal rate. Additionally, the new move in rate hikes seems to be tilted toward a rate cut.
JPY
February inflation data for the entire country of Japan showed slowdown similar to numbers from Tokyo area. Headline number came in at 3.3% y/y vs 4.3% y/y in January. Ex fresh food category fell to 3.1% y/y from 4.2% y/y the previous month. CPI ex fresh food and energy came in higher then expected at 3.5% y/y vs 3.2% y/y in January. This is a new 40-year high and it showcases that inflationary pressures are stickier than BOJ thought and hoped for. Preliminary March PMI data showed continued improvement along the sectors with manufacturing coming in at 48.6 vs 47.7, services at 54.2 vs 54 and composite at 51.9 vs 51.1 the previous month.
CHF
SNB total sight deposits for the week ending March 17 came in at CHF515.1bn vs CHF510.8bn the previous week. A rare jump in the sight deposits whose trend in last 6 months is clearly to the downside. It is yet to be seen if this is a one-off or beginning of a reversal in trend.
Over the weekend Switzerland’s biggest bank UBS has purchased distressed Credit Suisse bank. The move should bring some peace in the financial markets which are in turmoil after collapse of SVB and Signature banks. The deal is worth around CHF3bn and it will not require approval of shareholders as Swiss government decided to change laws in order to facilitate the deal coming through.
SNB has delivered a 50bp rate hike thus lifting the rate to 1.5%. The main goal of rate hike is to subdue renewed increase in inflationary pressures which are characterized as broad-based. Additional rate hikes cannot be ruled out and bank remains ready to intervene in the financial markets if the need arises. “The new forecast puts average annual inflation at 2.6% for 2023, and 2.0% for 2024 and 2025”. GDP is seen increasing by around 1% in 2023.
