Drivers for the Week of March 17, 2024

March 17, 2024

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar mounted a broad-based recovery last week on the back of higher-than-expected inflation data. CAD, EUR, and CHF outperformed while NOK, NZD, and SEK underperformed. It's a jam-packed week ahead with policy rate announcements by the Fed, BOJ, RBA, BOE, Norges Bank, and SNB. Additionally, the preliminary March PMIs for the major economies will offer a timely update on the economic outlook. We believe the U.S. economy will continue to outperform, keeping upward pressure on U.S. yields and the dollar.

AMERICAS

U.S. Treasury yields traded at the highest since late February. The solid gains were triggered by more signs the progress on taming U.S. inflation may be stalling, suggesting the Fed will be patient before loosening policy. Indeed, Fed funds futures have trimmed the probability of a June rate cut to around 60%, with the first cut now fully priced in for the July meeting. We see scope for market expectations on Fed policy to adjust further in favor of a firmer dollar, as underlying US price pressures are still high, and the economic growth outlook remains encouraging.

This week’s highlight is the two-day FOMC meeting that ends Wednesday. The Fed is widely expected to keep interest rates unchanged and begin in-depth discussions about slowing the pace of its balance sheet runoff that’s currently running at $95 bln/month). While the Fed delivered a hawkish hold in January followed by consistently hawkish official comments, Powell’s dovish testimony before Congress recently raises some risks that the Fed’s policy statement is tweaked to signal greater confidence that inflation is moving sustainably towards 2%.

Updated macro forecasts will be key. Growth and inflation forecasts are likely to be raised, reflecting the current macro backdrop of sticky inflation and a resilient economy and labor market. However, it’s the Dot Plots that will command the most attention and we see risks of a hawkish shift. We've noted before that it would take only two FOMC members to shift their 2024 Dot from 4.625% to 4.875% to move the Fed median in a similar manner. Looking ahead, it would take just three FOMC members to shift their 2025 Dot from 3.625% to 3.875% to get a similarly hawkish shift in the Fed median. Given the current economic outlook, it’s hard to justify 175 bp of total easing in 2024 and 2025 that’s currently implied by the Dots.

Chair Powell’s press conference brings the most risk of a surprise. Will he reprise the hawkish tone of his January press conference? Or will he repeat his more dovish testimony before Congress earlier this month?

March survey readings continue to roll out. S&P Global reports its preliminary PMIs Thursday. Manufacturing is expected at 51.8 vs. 52.2 in February, services is expected at 52.0 vs. 52.3 in February, and the composite is expected at 52.1 vs. 52.5 in February. ISM PMIs won’t be reported until next week. Regional Fed surveys will also be reported. New York Fed services index will be reported Monday. Philly Fed manufacturing index will be reported Thursday and is expected at -2.3 vs. 5.2 in February.

Housing data will hold some interest. March NAHB housing market index will be reported Monday and is expected to remain steady at the six-month high of 48. February building permits and housing starts will be reported Tuesday. Permits are expected at 2.0% m/m while starts are expected at 7.4% m/m. February existing home sales will be reported Friday and are expected at -1.5% m/m as the “hate my house, love my mortgage” dilemma continue to undermine the resale market.

Weekly jobless claims will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month. These are expected at 215k vs. 209k last week. Continuing claims are reported with a one-week lag and are expected at 1.824 mln vs. 1.811 mln last week. There is no Bloomberg consensus yet for March NFP, but its whisper number stands at 222k vs. 275k actual in February.

Canada highlight will be February CPI Tuesday. Headline is expected at 3.1% y/y vs. 2.9% in January, core trim is expected to remain steady at 3.4% y/y, and core median is expected to remain steady at 3.3% y/y. If so, headline would move further above the 2% target and means the BOC can be patient before loosening policy. Canada’s OIS curve implies the first 25 bp policy rate cut will come July 24.

January retail sales data Friday will also be important. Statistics Canada advanced retail indicator suggests sales decreased -0.4% m/m in January following a 0.9% increase the previous month.

EUROPE/MIDDLE EAST/AFRICA

Bank of England meeting ends Thursday. It is widely expected to leave the policy rate at 5.25% but the risk is that the MPC voting shifts less hawkish. Judging from recent comments, Haskel is the most likely to switch his vote from a 25 bp hike to a hold. Mann will likely stay the course favoring a 25 bp rate hike while Dhingra should maintain her preference for a 25 bp cut. Finally, we don’t anticipate material changes to the policy statement. The BOE will likely reiterate “monetary policy needs to be restrictive for an extended period of time” and that it “will keep under review for how long Bank Rate should be maintained at its current level.” Market pricing still sees August 1 as the likely start of the easing cycle.

U.K. data highlight will be February CPI Wednesday. Headline is expected at 3.5% y/y vs. 4.0% in January, core is expected at 4.6% y/y vs. 5.1% in January, and CPIH is expected at 3.9% y/y vs. 4.2% in January. If so, headline would be the lowest since September 2021 but still well above the 2% target.

Preliminary March PMIs will be reported Thursday. Manufacturing is expected at 47.8 vs. 47.5 in February, services is expected at 53.8 vs. 53.8 in February, and the composite is expected at 53.2 vs. 53.0 in February.

February retail sales data Friday will be important. Headline is expected at -0.3% m/m vs. 3.4% in January, while ex-auto fuel is expected at -0.2% m/m vs. 3.2% in January. Overall, positive real wage growth, a recovery in housing market activity, and improving consumer confidence point to a favorable household spending outlook as the U.K. economy remains surprisingly resilient.

Eurozone Q4 labor costs will be reported Tuesday. Costs are likely to ease from 5.3% y/y in Q3, confirming the decline in the already released Q4 compensation of employee print to 4.6% y/y. The ECB is waiting to have more data on the evolution of wages before cutting interest rates. The ECB’s timelier indicator of negotiated wage rates for Q1 is scheduled for release on May 23, two weeks before the June 6 ECB meeting. Interest rate futures are pricing in roughly 85% odds of a 25 bp rate cut then. There will be lots of ECB speakers. Centeno speaks Monday. Guindos and de Cos speak Tuesday. Lagarde, Lane, de Cos, Schnabel, Nagel, and Villeroy speak Wednesday. Nagel, Holzmann, Centeno, Nagel, and Lane speak Friday.

Preliminary March PMIs will be reported Thursday. Headline manufacturing is expected at 47.0 vs. 46.5 in February, services is expected at 50.5 vs. 50.2 in February, and the composite is expected at 49.7 vs. 49.2 in February. Looking at the country breakdown, the German composite is expected at 46.8 vs. 46.3 in February and the French composite is expected at 48.7 vs. 48.1 in February. Italy and Spain will be reported with the final PMI readings.

Germany reports its sentiment indicators. March ZEW survey will be reported Tuesday. Expectations are expected at 20.2 vs. 19.9 in February, while current situation is expected at -82.3 vs. -81.7 in February. March IFO business climate survey will be reported Friday. Headline is expected at 85.8 vs. 85.5 in February, with expectations expected at 84.6 vs. 84.1 in February and current assessment expected at 86.8 vs. 86.9 in February. Germany remains the weak link in the eurozone.

Swiss National Bank meets Thursday. We are going against consensus for steady rates and instead expect the SNB to cut rates by 25 bp and reiterate its willingness “to be active in the foreign exchange market as necessary.” Three of the analysts polled by Bloomberg share our view, while the swap market sees nearly 30% odds of a cut this week. We note that headline and core CPI inflation have been running under the 2% target since June 2023 and tracking below the SNB’s December 2023 projection. Bottom line: CHF is vulnerable to the downside this week from a dovish surprise.

Norges Bank meets Thursday and is expected to keep rates steady at 4.50%. The focus instead will be on the bank’s policy guidance offered in the updated Monetary Policy Report. The December report indicated the policy rate would stay around 4.50% until Q3 2024 before gradually moving down to a terminal rate of 2.50% in Q1 2026. The Norges Bank will likely bring forward the timing of when the terminal rate is reached because inflation in Norway is slowing faster than the bank’s forecast. Bottom line: NOK faces downside risks this week.

ASIA

Two-day Bank of Japan meeting ends Tuesday. Despite a flurry of reports last week that the bank may hike this week, our base case is for the bank to keep the policy rate at -0.10% and stick with its 10-year JGB yield target of “around” 0% with 1% as an upper bound reference. We also expect the BOJ to terminate its guideline to purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). This guideline has become redundant considering the BOJ has not bought ETF/J-REITs since October 2023 and Japan’s stock market rallied recently to a 34-year high. The monetary policy implications are minimal because ETFs and J-REITs account for only 5% of the BOJ’s balance sheet. Of note, the market is pricing in 55% odds of a hike this week. USD/JPY is vulnerable to a kneejerk drop if the BOJ delivers a rate hike. However, USD/JPY uptrend will likely remain intact because Japan’s improving inflation backdrop and soft economic activity suggest the BOJ is unlikely to normalize the policy rate by more than is currently priced in over 2024. Updated macro forecasts won’t come until the April meeting.

February national CPI Friday will be the data highlight. Headline is expected at 2.9% y/y vs. 2.2% in January, core (ex-fresh food) is expected at 2.8% y/y vs. 2.0% in January, and core ex-energy is expected at 3.3% y/y vs. 3.5% in January. If so, core would accelerate for the first time since October and move away from the 2.0% target that it briefly hit.

Preliminary March PMIs will be reported Thursday.

February trade data will also be reported Thursday. Exports are expected at 5.1% y/y vs. 11.9% in January, while imports are expected at 0.5% y/y vs. -9.8% in January.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.35%. Importantly, we expect the RBA to warn again that “a further increase in interest rates cannot be ruled out” because recent Australian economic data releases have largely come in line with RBA projections. Given the RBA’s hawkish messaging, the market now sees the first cut fully priced in September 24 vs. August 6 earlier this month. RBA releases its Financial Stability Review Friday. It will offer an updated assessment of Australia’s financial system, which in October 2023 was characterized as strong.

February jobs report Thursday will be the data highlight. Consensus sees a 40.0k gain in jobs vs. 500 in January, with the unemployment rate expected to fall a tick to 4.0%, which is the lower end of the RBA’s estimated full-employment range of 4.00 to 5.75%. Bottom line: tight labor market conditions in Australia pose an upside risk to services inflation and justifies the RBA not ruling out further increase in interest rates.

Preliminary March PMIs will also be reported Thursday. The 52.1 reading for the composite PMI will be nearly impossible to maintain in light of sluggish mainland China growth and slowing domestic activity.

New Zealand highlight will be Q4 GDP data Thursday. GDP is expected at 0.1% q/q vs. -0.3% in Q3, while the RBNZ projects GDP to be flat. Given the Q4 contraction in both retail sales and manufacturing, we see downside risks to GDP. Despite inflation coming down and the economy slowing, markets are now pricing in the start of an RBNZ easing cycle in October vs. August earlier this month.

Q4 current account data Wednesday will be closely watched. The deficit is expected at -7.0% of GDP vs. -7.6% in Q3.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2023. All rights reserved.