The Morning Hark - 4 Mar 2024
Today’s focus...Swiss inflation print to push SNB to be the first to cut? Bitcoin rally continues as does Asian session dullness. The Week Ahead.
Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil quiet in Asia with Brent and Crude May futures trading up a touch at 83.60 and 79.20 respectively.
On Sunday OPEC+ agreed to extend their voluntary oil output cuts to the end of the second quarter, as was widely reported last week. In addition Russia will cut its oil output and exports by an additional 471,000 bpd in the second quarter.
EQ - Asian equity markets all fairly dull with the Nikkei and Hang Seng futures close to flat at 40,135 and 16,470 respectively. This despite further all time highs for the Nikkei. All very matter of fact nowadays these 35 year highs!
The US indices little changed with the S&P and Nasdaq futures currently at 5140 and 18,355 respectively.
Gold - Gold at last saw us breaking out significantly from our 2000/2050 range on Friday with the softer US data springing a sell off in yields and giving gold some wings. The April futures currently trading steady at 2090.
FI - Global yields up a touch in Asia, reversing some of the sell off we saw post data on Friday, with the US2y and US10y yields currently at 4.56% and 4.21% respectively. The 10y trading around our 4.20% pivot. A proper move either side will be significant particularly if it is to the downside.
European yields ended the week little changed with the German 10y at 2.42% and the Italian 10y yield at 3.88%.
UK gilt 10y similarly at 4.22%.
FX - FX in Asia I’m sad to say is the same old story with the USD little changed overnight as the USD Index holds steady at 103.88. The JPY, EUR and GBP currently sitting at 150.40, 1.0840 and 1.2660 respectively.
Today’s FX option expiries sees nothing of note.
Others - Bitcoin and Ethereum after last week’s rally, then consolidation, the pair are off to a decent start this week with them currently up around two percent at 63,700 and 3470 respectively.
Macro Themes At Play
Recap
Switzerland Retail Sales for January provided an upside surprise with the MoM rising 0.7% MoM, its best reading in 7 months. The YoY likewise back into positive territory to 0.3% again a 7 month high.
Switzerland procure.ch Manufacturing PMI for February saw a small downside miss to 44 marking a fourteenth month in contraction.
Germany HCOB Manufacturing PMI for February scraped above the consensus call to 42.5. Underlying measures were far from inspiring with production falling the most in 4 months and the employment gauge fell the most since August 2020.
EU HCOB Manufacturing PMI was revised a touch higher in February to 46.5. Sadly for the powers that be, in the marbled halls of the ECB, its the “weaker” members who are propping this number up with Spain, Portugal and Greece all contributing with better numbers.
UK S&P Global Manufacturing PMI similarly revised up a touch to 47.5 but this marks the 19th consecutive month of contraction for the series.
Well that wasn’t in the script as the EU Inflation Report for February comes in hotter than expected. The MoM headline came in at 0.6% its highest level since April and taking the YoY to 2.6%, higher than expected although a touch lower than last month. Core YoY however remains above 3% at 3.1% despite it being an almost two year low it was higher than had been anticipated. Next week’s ECB looks set to take a more hawkish tack one would think on the back of these numbers.
January’s EU Unemployment Rate bang in line at 6.4%.
Canada S&P Global Manufacturing PMI for February had a decent uptick to 49.7, its best print since April.
US S&P Global Manufacturing PMI produced some good news with the headline printing 52.2 a small upside beat on both expectations and previous.
US ISM Manufacturing PMI Feb, in contrast to the PMI, a disappointment with the headline printing 47.8 much lower than had been expected and the previous month’s print. The underlying measures did little to cheer either with Employment slipping back to 45.9 its second lowest print since the pandemic. New Orders after last month’s climb back into growth we have seen a reversion back to the contraction zone at 49.2. Prices Paid however backed off smalls to 52.5 again not a great look for the Fed.
US Michigan Consumer Sentiment for February was also revised lower to 76.9 The Inflation Expectations remain steady with the 1 and 5y coming in at 3% and 2.9% respectively and in line with last month’s readings.
US Construction Spending MoM for January finished off what has been a pretty poor day for US data with a -0.2% print, its first negative print for the series since late 2022.
Central Bank Speakers
Pretty much the same old for the central bankers. Fed still see work to do and are keen to be patient before pushing the button. Probably Waller’s comments garnered the most attention with him stating that the Fed should raise their investments in the short end of the curve which spurred the US yield sell off.
Fed’s Barkin said that we’ll see if there are rate cuts this year but it all depends on the progress made on inflation. She still sees wage and inflation pressures hence she is in no hurry to cut rates.
Goolsbee was banging on again about housing data as the thing that has been “really weird”. He wouldn’t be surprised if January inflation data was just noise.
Logan felt that the Fed should slow asset runoff as the reverse repo dwindles.
Waller said that the timing of the balance sheet redemptions pace will be independent of any changes to the policy rate. He also stated his preference for more investment by the Fed into the short end of the curve and less MBS.
Bostic is grateful for the progress on inflation but the job is not yet done and he doesn’t want to have to start raising rates again. He needed to see more evidence on inflation returning to normal and he felt that the Fed would need to hold rates higher for longer.
Kugler was cautiously optimistic about disinflation without big job losses.
ECB’s Holzmann usual themes of the ECB; can’t rush to a decision on rates and we still need to be attentive to inflation risks.
BoE’s Pill claimed that the baseline scenarios for cutting rates was some way off. Evidence to do so needs to be more compelling especially that persistent inflation is being squeezed down. Monetary policy can remain restrictive even after a rate cut.
Apollo, the asset manager, was in the news as their chief economist had the view that the Fed would not cut rates in 2024. The main reasons for this were US growth is accelerating whilst inflation remains sticky, labour market is tight, survey prices paid are on the rise, as are rents and financial conditions continue to ease.
This is something we have spoken about this year previously will the market start to price out the cuts in the curve below the “Fed 3 cut” line? More chatter like this would help but ultimately, no matter what the Fed say, at this point it is all down to the data.
The Week Ahead
At last some action to get our teeth into but maybe I’ll regret saying that come Friday! Inflation reports out of Switzerland and Japan, China’s annual set-piece meeting to announce economic targets, ECB and BoC rate decisions, UK Spring Budget, Powell’s testimonies and US NFP. If that doesn’t shake the tree I don’t know what will?
Switzerland Inflation Report. Will January’s big drop be partially unwound or is there a new trend emerging? Consensus is pointing to the latter with the YoY expected to drop further to 1.1%. Given the swaps market is pricing in a more than 50% chance of a SNB rate cut in the upcoming March meeting, such a print should push those odds a lot higher. The SNB could be the first major central bank to start cutting just as their Chairman Jordan heads out the door. He unexpectedly resigned at the tail end of last week, three years early, and will step down in September. He was the longest serving Chair of any of the major central banks and was one of the most “innovative”. Just take a look at a EURCHF chart from 15 January 2015 to see some of his best work!
Japan Tokyo Inflation Report. Expectations are for a jump in headline CPI to 2.5% from 1.6%. Remember some of this rebound could be down to the surprise softer number we saw back in January. This measure is seen as a good leading indicator for the nationwide number and, if realised, will fuel further speculation that the BoJ could surprise and exit negative rates in March. We feel such a move unlikely given the amount of emphasis they have put on the spring wage negotiation rounds but it is the BoJ! A good amount of these negotiations will be announced on 13 March but not all. The BoJ meeting is the week after.
China Two Sessions Meeting. This meeting is a forum for the powers that be to announce the annual economic targets for the coming year. Growth will probably be maintained around its current 5% level with the potential for more fiscal measures to be announced to support the more vulnerable parts of the ailing economy. Once again expectations are for the reforms to disappoint with them siding more on the moderate size rather than the bold measures the market has been craving for some time now.
US ISM Services. Hopefully some better news from the services’ sector compared to Friday’s poor manufacturing print. For reference January rebounded strongly (especially the employment measure) after December’s sharp drop. Expectations are for a small pullback from January’s print although still remaining well in expansionary territory.
UK Spring Budget. At one point it was looking like a pre-election giveaway budget but that window of opportunity appears to be getting smaller and smaller as indeed do the proposed tax cuts. Estimates suggest he has £12.5/15bn at best which, these days, doesn’t get you much and there have suggestions that he will look to cut spending even more to allow some extra headroom but that looks a stretch. Where will the money go; probably on freezing fuel duty, some housing market measures and income tax reductions. Seems that Hunt is scrambling about trying to do a bit of teeming and lading to make the numbers work in order to get those headline grabbing tax cuts. Areas where he may seek funds from are; second home rentals, passenger duty on business class fares, extension of the windfall levy on oil and gas producers and taxes on vapes. All very interesting!
BoC Interest Rate Decision. Holding pattern meeting, as are so many of them these days, given the first move for a cut from the BoC looks to be in the summer. The BoC though will want to walk the fine line of preparing the market for a summer move whilst trying not to let the market get ahead of itself, especially after the recent scaling back of what had been previously priced in the curve for rate cuts. Currently the market is around 3 cuts for the year and very much in line, and in step, with the market’s thoughts on the Fed. Data, since the last meeting, has been mixed with GDP for q4 hotter than expected, labour market remaining firm and retail sales holding up well. On the flip side inflation was a lot softer than anticipated with headline now below 3%. Will they give a nod to the softer inflation profile and start chatting about easing monetary policy in the coming meetings? On the margins probably not just yet until we see some softer data playing out. So on hold, April too soon? So June just right?
Powell’s Testimonies to the House and Senate. Hard to see Powell drifting from his normal patient and considered self when discussing monetary policy and the economic outlook. Yes he would like to cut rates but with inflation remaining sticky, the labour market tight and GDP growing its hard to justify.
ECB Interest Rate Decision. Summertime move so every meeting until then is a stepping stone? March seems off limits but April has been touted. However last week’s inflation prints seem to have put paid to April being live so, like the BoC, June looks like being a busy month. In addition the ECB speakers have commented at length that the q1 wage negotiations will be key for the rate cut deliberations so April would be pushing it timing wise. Given the lack of movement on rates and the “patient” approach from them it would seem the updated forecasts are the most interesting thing about this week’s meeting. We’d expect to see downward revisions to both growth and inflation but by how much? For reference GDP 2024 0.8%, 2025 1.5% with inflation at 2.7% and 2.1% (returning to 2% in q3 2025) for the respective periods. A lower inflation forecast, and/or an earlier return to the target rate, would suggest earlier policy rate adjustments. Statement wise little change with the potential for them to give a nod to the easing inflation profile albeit remains sticky. We’d expect Lagarde to play down any rate cut chatter from the meeting but does she allude to a discussion over rate cuts being likely to start in April to prepare for the June starting gun?
Canada GDP. Rebound expected after the previous quarter’s 0.3% contraction but will it be enough to offset that number? Expectations are for it to just fall shy and in addition the increase is expected to be owed more to the reduction in supply disruptions than actual “real” growth. Not a game changer for the BoC.
US NFP. After January’s blowout headline as well as, for once, upward revisions will there be some payback from February’s data? Expectations look for a return to “trend” around the 200k but given the previous blowout number will there be large downward revisions to it? Average hourly earnings expected to drop back to 0.3% MoM after last month’s blip higher with the unemployment rate remaining steady at 3.7%.
The Day Ahead
Swiss Inflation Report for February up first and then little else until overnight when we start to get the final February Services PMI prints from Australia, Japan and China.
Today and tomorrow the China Two Sessions Meeting with the main address set for tomorrow.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the week ahead ahead in terms of data and speakers:
Monday
Switzerland Inflation Rate MoM Feb consensus % vs previous 0.2% (07.30 GMT)
Switzerland Inflation Rate YoY Feb consensus 1.1% vs previous 1.3% (07.30 GMT)
Australia Judo Bank Services PMI Final Feb consensus vs previous 49.1 (22.00 GMT)
Japan Tokyo Core CPI YoY Feb consensus 2.5% vs previous 1.6% (23.30 GMT)
Japan Tokyo CPI YoY Feb consensus % vs previous 1.6% (23.30 GMT)
Japan Tokyo CPI ex Food and Energy YoY Feb consensus % vs previous 2.2% (23.30 GMT)
Fed Speakers
Harker (17.00 GMT)
Tuesday
China Two Sessions Meeting - Premier Li to address
Japan Jibun Bank Services PMI Final Feb consensus vs previous 53.1 (00.30 GMT)
China Caixin Services PMI Feb consensus vs previous 52.7 (01.45 GMT)
Germany HCOB Services PMI Final Feb consensus 48.2 vs previous 47.7 (08.30 GMT)
EU HCOB Services PMI Final Feb consensus 50 vs previous 48.4 (09.00 GMT)
UK S&P Global Services PMI Final Feb consensus 54.3 vs previous 54.3 (09.30 GMT)
Canada S&P Global Services PMI Feb consensus vs previous 45.8 (14.30 GMT)
US S&P Global Services PMI Final Feb consensus vs previous 52.5 (14.45 GMT)
US ISM Services PMI Feb consensus 53 vs previous 53.4 (15.00 GMT)
US ISM Services Employment Feb consensus vs previous 50.5 (15.00 GMT)
US ISM Services New Orders Feb consensus vs previous 55 (15.00 GMT)
US ISM Services Prices Feb consensus vs previous 64 (15.00 GMT)
US Factory Orders MoM Jan consensus -2.8% vs previous 0.2% (15.00 GMT)
Fed Speakers
Barr (17.00 GMT)
Barr (20.30 GMT)
Wednesday
Australia GDP Growth Rate QoQ q4 consensus 0.3% vs previous 0.2% (00.30 GMT)
Australia GDP Growth Rate YoY q4 consensus 1.4% vs previous 2.1% (00.30 GMT)
EU Retail Sales MoM Jan consensus 0.1% vs previous -1.1% (10.00 GMT)
EU Retail Sales YoY Jan consensus % vs previous -0.8% (10.00 GMT)
UK Spring Budget (12.30 GMT)
US ADP Employment Change Feb consensus 150k vs previous 107k (13.15 GMT)
BoC Interest Rate Decision rates to be held steady at 5% (14.45 GMT)
US JOLTs Job Openings Feb consensus 8.895m vs previous 9.026m (15.00 GMT)
US JOLTs Job Quits Feb consensus m vs previous 3.392m (15.00 GMT)
Canada Ivey PMI s.a. Feb consensus vs previous 56.5 (15.00 GMT)
BoC Press Conference (15.30 GMT)
Fed Speakers
Powell (15.00 GMT)
Daly (17.00 GMT)
Kashkari (21.15 GMT)
Thursday
China Balance of Trade Feb consensus $107bn vs previous $75.34bn (03.00 GMT)
China Exports YoY Feb consensus 2.5% vs previous 2.3% (03.00 GMT)
China Imports YoY Feb consensus 2% vs previous 0.2% (03.00 GMT)
Switzerland Unemployment Rate Feb consensus % vs previous 2.5% (06.45 GMT)
Germany Factory Orders MoM Jan consensus -6% vs previous 8.9% (07.00 GMT)
ECB Interest Rate Decision rates to be held steady at 4.5% (13.15 GMT)
ECB Press Conference (13.45 GMT)
Fed Speakers
Powell (15.00 GMT)
Mester (16.30 GMT)
BoE Speakers
Bailey (16.30 GMT)
Friday
EU GDP Growth Rate QoQ q4 3rd Est consensus 0% vs previous -0.1% (10.00 GMT)
EU GDP Growth Rate YoY q4 3rd Est consensus 0.1% vs previous 0% (10.00 GMT)
Canada Unemployment Rate Feb consensus 5.8% vs previous 5.7% (13.30 GMT)
Canada Employment Change Feb consensus 20k vs previous 37.3k (13.30 GMT)
Canada Average Hourly Wages YoY Feb consensus % vs previous 5.3% (13.30 GMT)
US NFP Feb consensus 200k vs previous 353k (13.30 GMT)
US Unemployment Rate Feb consensus 3.7% vs previous 3.7% (13.30 GMT)
US Average Hourly Wages MoM Feb consensus 0.3% vs previous 0.6% (13.30 GMT)
Fed Speakers
Williams (12.00 GMT)
Good luck.
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