ECB meeting, inflation data from the US and China as well as GDP data from the UK and Japan will be highlights of the week ahead of us.
USD
ISM Manufacturing PMI for the month of February came in at 58.6 vs 58 as expected and up from 57.6 in January. New orders index jumped to 61.7 with production improving to 58.5. Backlog of orders surged to 65 with new export orders also surging. Prices slipped to 75.6 from 76.1 indicating potentially better situation regarding supply chains disruptions. The only dent on a hugely impressive report was employment index which dropped to 52.9 from 54.5 in January, However, the reading is still above 50 so there is no big concern there. Additionally, the only industry that reported a decrease from January was Wood Products. Non-manufacturing was not as impressive as it came in at 56.5 vs 61 as expected. Business activity and new orders dropped around 5 index points while employment index fell into contraction (48.5). Inventories, backlogs of orders, new export orders and prices paid all rose indicating stronger foreign demand as well as growing price pressures.
Fed Chair Jerome Powell confirmed a 25bp rate hike at the March meeting on the back of high inflation and strong labor market. On the balance sheet reduction he stated that it will “commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments”.The yield on 10y T-Note fell to 1.687% as flight to safety and risk off mood dominated the markets at the beginning of the week but it rebounded later on going as high as 1.9% only to finish the week around 1.79%.
We had another strong jobs report with headline number coming in at 678k vs 400k as expected. The unemployment rate has dropped to 3.8% from 4% in January, indicating that labour market has potentially reached full employment. Even the participation rate improved to 62.3% giving strength to the drop in the unemployment rate. On the other hand, average earnings data has missed expectations and came in weaker than expected (flat m/m and 5.1 y/y). Leisure and hospitality added 178k with food service and drinking places adding 124k. They are low-paying jobs so they brought the average earnings down.
This week we will have inflation data that could get very close to 8% or even surpass that level.
Important news for USD:
Thursday:
CPI
EUR
Final Eurozone PMI for the month of February were revised lower on the back of downward revisions to German and French reading. Italy and Spain surprised positively to the upside. Services reading was a mirror image of the manufacturing reading. It was revised down due to revisions in German and French readings while Italy and Spain surprised to the upside. Composite was also dragged down from the preliminary reported figure.
Preliminary CPI data showed headline reading jump to 5.8% y/y vs 5.4% y/y as expected on the back of increases in energy and food prices. Core reading came in at 2.7% y/y vs 2.5% y/y as expected. Both EU and German reading showed inflation accelerating at 0.9% m/m vs 0.3% m/m in January. With energy pricing rising out-of-hand, WTICrude above $110, we can expect inflation to continue increasing in the coming months and putting pressure on ECB to act.
This week we will have ECB meeting. There was hawkishness in minutes from the previous meeting, however with Russia-Ukraine situation escalating further we cannot see ECB moving towards tightening as stagflation risks increase. PEPP program should end and APP purchases should be increased by €20-40bn at the meeting.
Important news for EUR:
Thursday:
ECB Interest Rate Decision
GBP
The UK’s February manufacturing PMI was revised up to 58.0 from 57.3 as preliminary reported. It is the first rise in two months. Services reading, on the other hand, was revised down to 60.5 but it is still very well into expansionary territory. Omicron related restrictions were cancelled and it led to big jump in business activity as well as in new orders. Composite was at 59.9.
This week we will get January GDP data and it is expected that the UK strongly started in new year.
Important news for GBP:
Friday:
GDP
AUD
RBA March meeting did not bring any new information. The rate was left unchanged at 0.10% as widely expected. Board members have reiterated their willingness to be patient and affirmed that they are not prepared to increase the cash rate until inflation is sustainably within the 2-3% target range. They have acknowledged wage growth, however they are still low and members expect them to gradually rise towards the desired 3% level. Q4 GDP data came in at 3.4% q/q vs 3% q/q as expected due to the strong rebound in household consumption (6.3% vs -4.8% in Q3).
Official PMI data from China showed a struggling but resilient economy. Manufacturing ticked up to 50.2 from 50.1 in January while expectations were for it to slip into contraction with 49.9. Non-manufacturing fared much better and came in at 51.6, thanks to big jump in construction reading and it propelled composite to 51.2. Caixin manufacturing also managed to escape the contraction and came in at 50.4 vs 49.1 as expected. The report shows that business confidence started to pick up while new order rose above the 50 level (50.7, up from 49.3 the previous month) indicating that demand is pushing the recovery up. Caixin services dropped to 50.2 from 51.4 the previous month and that left composite barely hanging in the expansion territory at 50.1.
This week we will get trade and inflation data from China.
Important news for AUD:
Monday:
Trade Balance (China)
Wednesday:
CPI (China)
NZD
GDT auction brought another impressive result. Change in index came in at 5.1% for a fourth consecutive auction of dairy price increases above 4%. Average price has crossed the $5000 mark. Terms of trade for New Zealand in Q4 were -1% q/q and considering latest dairy auctions that number will turn into a positive in Q1 of 2022. Combined with aggressive hiking path by RBNZ we see NZD going higher.
CAD
BOC has delivered a rate hike of 25bp now lifting the rate to 0.50% as was widely expected. Unlike New Zealand and the UK, BOC decided to continue reinvesting proceeds from maturing bonds until they find appropriate time to start balance sheet reduction. Members have noted the war in Ukraine as a new source of instability that will lead to inflation worries around the world as well as additional supply disruptions which will weigh on global growth. Economic growth in Q4 in Canada has been stronger than expected indicating that economic slack has been absorbed and that Q1 will also be stronger than expected. The bank members see policy rate as primary tool of monetary policy and agree that rates will need to rise further as economy expands and price pressures remain. In regards to reduction of balance sheet and timing of rate hikes bank members stated “The resulting quantitative tightening (QT) would complement increases in the policy interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”
Q4 GDP came in at 6.7% annualized vs 6.3% as expected and showed a growth of 1.6% q/q vs 1.3% q/q as expected. Investments in business inventories and gross fixed capital formation contributed to the jump while net external demand was a drag on growth with growth in imports outpacing growth of exports.6
This week we will get a February employment report.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
Preliminary January data were a mixed bag. Industrial production declined at the start of the year and came in at -1.3% m/m and -0.9% y/y. On the other hand, retail sales recorded another drop on the month (-1.9% m/m) but improved for the year, coming in at 1.6% y/y for the fourth consecutive month of increases. Social restrictions made it hard for consumers to spend more. Capex data for the Q4 showed a smaller than expected increase. It came at 3.4%, up from 1.2% in Q3, but less than 4.3% as expected. Corporate profits were also down compared to the Q3 as covid struggles were gripping the economy.
This week we will have a final Q4 GDP reading.
Important news for JPY:
Wednesday:
GDP
CHF
Q4 GDP data came in at 0.3% q/q vs 0.4% q/q as expected and 3.7% y/y. Private consumption came in at just 0.3% q/q vs 2.7% q/q in Q3 with net exports negatively contributing to the reading. Government consumption was up 1% q/q vs -0.4% q/q in the previous quarter and that helped keep the reading positive. Retail sales rebounded strongly in January coming in at 5.1% y/y vs -0.4% y/y in December indicating that consumers started the year on a strong foot. SNB total sight deposits for the week ending February 25 were unchanged at CHF725.2bn. Inflation has crept in into Switzerland with February reading showing headline at 2.2% y/y vs 1.8% y/y as expected and core at 1.3% y/y vs 0.9% y/y as expected. Higher fuel prices and housing rents were the main contributors.
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Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.
