The majors were mostly firmer last week as the broad-based dollar rally ran out of steam. NZD, EUR, and GBP outperformed while NOK, CAD, and CHF underperformed. We believe it unwise to buy risk and sell the dollar ahead of a pivotal week that has Fed chair Powell testifying before Congress as well as the February jobs report. Data are expected to show ongoing resilience in the U.S. economy, while Powell is expected to highlight a more hawkish stance from the Fed. Risk assets are also likely to suffer from disappointment with China’s modest growth forecast for this year of “around 5%.”
Fed Chair Powell will be in focus this week. He will deliver the Fed’s semiannual monetary policy report to Congress, appearing before the Senate Banking Panel Tuesday and the House Financial Services Committee Wednesday. His prepared remarks for this testimony were released Friday and noted Fed officials expect that “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive.” Fed officials last week acknowledged that policy would have to be tightened, perhaps further than what was expected just a few weeks ago. Of course, the Q&A with Powell will be closely watched for another dovish slip of the tongue. While he will most likely avoid making any policy commitments, we are hopeful that Chair Powell stays on message and highlights the upside risks of inflation. Barr speaks Thursday.
Fed tightening expectations remain elevated. WIRP suggests 25 bp hikes in March, May, and June are priced in that takes Fed Funds to 5.25-5.50%. Despite market chatter of a possible 50 bp move this month, WIRP suggests only 25% odds of such an outcome. The odds of a fourth hike in July have risen to nearly 50% but should rise further if the data continue to run hot. Strangely enough, an easing cycle is still expected to begin in Q4, albeit at much lower odds. Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing. For now, we believe the uptrends in U.S. yields and the dollar remain intact.
February jobs report Friday will be the highlight of the week. Consensus sees 215k jobs added vs. 517k in January, with the unemployment rate seen steady at 3.4% and average hourly earnings picking up to 4.7% y/y vs. 4.4% in January. Obviously, the big question is whether January NFP gets revised significantly. Ahead of that, ADP reports its private sector jobs estimate Wednesday and is expected at 200k vs. 106k in January. Other labor market data will be reported, with JOLTS job openings Wednesday expected at 10.584 mln vs. 11.012 mln in December. February Challenger job cuts and weekly jobless claims will be reported Thursday.
Other minor data will be reported. January factory orders will be reported Monday and are expected at -1.0% m/m vs. 1.8% in December. Of note, headline durable goods orders came in weak but core (non-defense ex-aircraft) orders and core shipments were firm. Wholesale trade sales and inventories and consumer credit will be reported Tuesday. Trade balance will be reported Wednesday. Q4 change in household net worth will be reported Thursday. February budget statement will be reported Friday.
Bank of Canada meets Wednesday and is expected to keep rates steady at 4.5%. Bank of Canada expectations continue to adjust. WIRP suggests odds of a final 25 bp hike to 4.75% have fallen to around 65% after being fully priced in last week. This is subject to change, especially if we get a third straight strong jobs report this week.
Canada also reports jobs data Friday. Consensus sees 7.5k vs. the whopping 150.0k in January, with the unemployment rate seen rising a tick to 5.1%. Ahead of that, February Ivey PMI will be reported Monday and January trade data will be reported Wednesday.
Eurozone reports some key data. January retail sales will be reported Monday and is expected at 0.6% m/m vs. -2.7% in December. Final Q4 GDP data will be reported Wednesday. Germany reports January factory orders Monday and are expected at -0.9% m/m vs. 3.2% in December. German retail sales will be reported Wednesday and are expected at 2.4%m/m vs. -4.9% in December. Italy reports January retail sales Wednesday and are expected at 0.1% m/m vs. -0.2% in December. Spain reports January IP Tuesday and is expected at 0.2% m/m vs. 0.8% in December. Spanish retail sales will be reported Friday.
ECB tightening expectations have moved higher. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 50 bp hike May 4 is about 60% priced. 25 bp hikes June 15, July 27, and September 14 are priced in that would result in a peak policy rate near 4.0%, up from 3.75% at the start of last week and 3.5% at the start of last month. With CPI still running hot, it appears that the hawks remain in the driver’s seat. Lane speaks Monday. Lagarde and Panetta speak Wednesday. Vujcic speaks Thursday. Panetta speaks again Friday.
Monthly U.K. data dump begins Friday. January GDP, IP, services, construction output, and trade will all be reported. GDP is expected at 0.1% m/m vs. -0.5% in December, IP is expected flat m/m vs. 0.3% in December, services is expected at 0.3% m/m vs. -0.8% in December, and construction is expected flat m/m vs. flat in December. Ahead of that, February construction PMI will be reported Monday.
BOE tightening expectations remain steady. WIRP suggests a 25 bp hike March 23 is 90% priced in, as is a 25 bp hike May 11. One last 25 bp hike is fully priced in for August that would see the policy rate peak near 4.75% vs. 4.5% at the start of last week. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September.
Switzerland reports February CPI Monday. Headline is expected at 3.1% y/y vs. 3.3% in January. If so, it would resume the disinflation process that was interrupted by the January spike but would remain well above the 2% target. At the last policy meeting December 15, the Swiss National Bank hiked rates 50 bp to 1.0% and Governor Jordan said “There is a danger that inflation could remain elevated in Switzerland in the medium term owing to second-round effects. The renewed tightening of our monetary policy is therefore necessary.” He added that “It was pretty clear that 50 bp is the right decision. If you look at our inflation forecasts over the medium term, inflation is still slightly above our 2% threshold.” Next policy meeting is March 23 and another 50 bp hike is expected. The swaps market is pricing in a peak policy rate near 2.25%, up from 1.75% after the December meeting.
Norway reports February CPI Friday. Headline is expected at 6.8% y/y vs. 7.0% in January, while underlying is expected at 6.3% y/y vs. 6.4% in January. If so, both measures would resume the disinflation trend that was interrupted by the January spike. At the last policy meeting January 19, Norges Bank kept rates steady at 2.75% but noted that “The policy rate will need to be increased somewhat further.” Governor Bache later said rates “will most likely be raised in March.” The expected rate path from December saw the policy rate peaking near 3.0%, with gradual easing expected in H2 2024. Updated macro forecasts and expected rate path will come at the March 23 meeting, when a 25 bp hike to 3.0% is expected. Of note, the swaps market is now pricing in a peak policy rate near 3.5%.
Two-day Bank of Japan meeting ends Friday. This will be the last one under current Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests nearly 25% odds of liftoff April 28, rising to over 40% June 16 and then nearly 75% for July 28. That said, the actual tightening path is seen as very mild as the market is pricing in only 15 bp of tightening over the next 12 months followed by only 30 bp more over the subsequent 24 months. That is why we expect the knee-jerk drop in USD/JPY after liftoff to be fairly limited.
Ahead of the decision, January labor cash earnings Tuesday will be key. Nominal earnings are expected at 1.9% y/y vs. 4.1% in December, while real earnings are expected at -3.2% y/y vs. -0.6% in December. Higher real earnings are a key requirement for the BOJ to contemplate tightening. Early wage negotiations point to a solid jump in wages this spring. January leading and coincident indices will be reported Wednesday. Final Q4 GDP data will be reported Thursday.
January current account data will be reported Wednesday. An adjusted surplus of JPY853 bln is expected vs. JPY1.2 trln in December. However, the investment flows will be of most interest. December data showed that Japan investors were net sellers of U.S. bonds for the fourth straight month (-JPY331 bln) and in thirteen of the past fourteen. Japan investors remained net sellers (-JPY193 bln) of Australian bonds for the sixth straight month but turned net buyers of Canadian bonds (JPY74 bln) for first time after ten straight months of net selling. Investors turned net sellers of Italian bonds (-JPY99 bln) after two straight months of net buying. Japan investors were total net sellers of foreign bonds for the fourth straight month in December (-JPY919 bln). If the BOJ does hike rates this year and JGB yields continue rising, we see scope for further selling of foreign bonds (and for a stronger yen) as Japan investors bring more money home.
Reserve Bank of Australia meets Monday and is expected to hike rates 25 bp to 3.60%. The better than expected January CPI print was welcome but with inflation still well above the 2-3% target ranges, the bank will have to continue hiking. The swaps market is pricing in a peak policy rate near 4.35% over the next 12 months followed by an easing cycle over the subsequent 12 months, highlighting the “higher for longer” theme.
Just ahead of the decision, January trade data will be reported. Aussie bulls will be disappointed by the modest growth target for China of “around 5%.” This suggests the mainland recovery will most likely be modest and will have limited impact on regional trade and activity. Australian exports have been slowing over the course of the past year and this trend is likely to continue.