The major currencies were mostly higher last week as the dollar came under broad-based pressure after the FOMC meeting. NOK, JPY, and EUR outperformed while the dollar bloc underperformed. While we do not think the Fed is as dovish as current market pricing, we question why risk assets should rally when the implicit economic outlook is one of sharply slower U.S. growth stemming from ongoing banking sector stresses. Data from China this week are expected to show that the reopening impact is wearing off. A backdrop of slowing global growth coupled with ongoing risk off impulses is not good for risk assets and so we do not think this current bounce in the foreign currencies can be sustained.
The key takeaway from last week’s central bank decisions is that banking sector stresses won’t derail the global fight against inflation. After the Fed hiked 25 bp Wednesday, others followed suit Thursday as the Swiss National Bank hiked 50 bp, Norges Bank hiked 25 bp, and the Bank of England hiked 25 bp. It wasn’t just Developed Markets, as Taiwan and the Philippines led the Emerging Markets central banks in hiking rates. It seems clear to us that most policymakers are looking beyond the recent banking sector developments and focusing on the need to limit price pressures.
The Fed was no exception. After hiking rates 25 bp, the Fed noted that additional policy firming may be appropriate. The Dot Plots showed the median 2023 Fed Funds forecast unchanged at 5.1%, while the 2024 median moved up slightly to 4.3%. The Fed noted that U.S. banks remain sound and resilient but acknowledged that recent events will weigh on growth. This was about as hawkish as the Fed could be given the banking sector stresses that are ongoing. To us, the underlying message is similar to the ECB’s. That is, once we get past the banking sector stresses, the tightening cycle likely remains intact.
We got our first inkling as to how seriously the banking sector is weighing on the Fed's reaction function and policy path. Chair Powell noted that a significant group on the FOMC expects credit tightening to result and that this could mean less need to hike rates. The fact that the Dot Plots were basically unchanged meant that no one really wanted to jack up their rate calls right now with so much uncertainty still. Powell also acknowledged that the Fed considered a pause but added that it’s too soon to say how Fed policy has been impacted by the banking crisis.
The next FOMC meeting is May 2-3 and WIRP suggests around 25% odds of 25 bp hike then. After that, it’s all about the cuts. Nearly four cuts by year-end are priced in. In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year. There are plenty of Fed speakers this week and will likely shed more light on where the Fed consensus now stands. Jefferson speaks Monday. Barr testifies before the Senate Banking Committee Tuesday and the House Finance Services Committee Wednesday. Barkin and Collins speak Thursday. Williams, Waller, and Cook speak Friday. Over the weekend, Kashkari said that the banking sector crisis has increased the risks of recession but added that it was too soon to say what it means for Fed policy.
February core PCE data Thursday will be the data highlight. Consensus sees headline PCE at 5.1% y/y vs. 5.4% in January and core PCE steady at 4.7% y/y. Of note, so-called super core (core services ex-housing) PCE came in at 4.6% y/y in January. CPI core services ex-shelter fell a tick to 6.1% y/y in February but does not always correlate well with super core PCE. Personal income and spending will be reported at the same time and are expected at 0.2% m/m and 0.3% m/m, respectively.
Key survey readings for March will continue rolling out. Chicago PMI Friday will be key and is expected at 43.0 vs. 43.6 in February. Last week, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May. Regional Fed surveys will also be reported. Dallas manufacturing survey will be reported Monday and is expected at -10.0 vs. -13.5 in February. Richmond Fed manufacturing and Dallas Fed services surveys will be reported Tuesday, with the Richmond reading expected at -9 vs. -16 in February.
Other minor data will be reported. February wholesale and retail inventories, advance goods trade (-$90.0 bln expected), January FHFA and S&P CoreLogic house prices, and March Conference Board consumer confidence (101.0 expected) will all be reported Tuesday. February pending home sales will be reported Wednesday and are expected at -3.0% m/m vs. 8.1% in January. Weekly jobless claims and another Q4 GDP revision will be reported Thursday. Initial claims are expected at 196k vs. 191k last week and continuing claims are expected at 1.697 mln vs. 1.694 mln last week. Of note, consensus for March NFP currently stands at 238k vs. 311k in February. Final March Michigan consumer sentiment will be reported Friday.
Canada has a quiet week. January GDP data Friday will be the highlight and is expected at 2.9% y/y vs. 2.3% in December. Recent data suggest that the economy remains resilient. Bank of Canada next meets April 12 and WIRP suggests nearly 20% odds of a rate cut then. A total of three cuts by year-end are priced in and this seems very unlikely. Deputy Governor Gravelle speaks Tuesday.
The Credit Suisse situation may have been much worse than markets realized. Swiss Finance Minister Karin Keller-Sutter said over the weekend that “CS would not have survived Monday. Without a solution, payment transactions with CS in Switzerland would have been significantly disrupted, possibly even collapsed.” She estimated that the impact of a disorderly bankruptcy may have been as much as double Switzerland’s GDP and added that “we should have expected a global financial crisis” as “the crash of CS would have sent other banks into the abyss.” While this dire prediction may have been meant to give cover to Switzerland’s intervention in Credit Suisse, it won’t do anything to help calm markets when they reopen Monday.
Swiss National Bank policymakers will speak Wednesday. Maechler and Moser both speak at an SNB event and they will surely be asked about the banking sector outlook. Last week, the bank hiked rates 50 bp to 1.5% and flagged more hikes ahead as Governor Jordan said “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” We concur.
Eurozone preliminary March CPI data will be very important. Note that high base effects due to Russia’s invasion of Ukraine last year will lead to sizable drops in the y/y readings. Spain and Germany report Thursday. Spain’s EU Harmonised inflation is expected at 4.0% y/y vs. 6.0% in February and Germany’s is expected at 7.5% y/y vs. 9.3% in February. France and Italy report Friday. France’s EU Harmonised inflation is expected at 6.4% y/y vs. 7.3% in February and Italy’s is expected at 9.0% y/y vs. 9.8% in February. Eurozone-wide inflation data will also be reported Friday. Headline is expected at 7.2% y/y vs. 8.5% in February and core is expected at 5.7% y/y vs. 5.6% in February.
Markets have repriced the ECB tightening outlook. The next policy meeting is May 4 and WIRP suggests only 65% odds of a 25 bp hike then. After that, odds of another 25 bp hike top out near 45% in July and so the peak policy rate is seen between 3.25-3.5%. A rate cut is priced in by year-end, which seems very unlikely. There are plenty of ECB speakers this week and we expect the debate between the hawks and doves will remain intense. Simkus, de Cos, Nagel, Elderson, Centeno, and Schnabel all speak Monday. Muller, Lagarde, Nagel, Villeroy, and Makhlouf speak Tuesday. Kazimir and Schnabel speak Wednesday. Kazaks and Lagarde speak Friday. Guindos speaks Saturday.
Germany reports some key indicators. March IFO business climate survey will be reported Monday. Headline is expected to fall a tick to 91.0, as a slight rise in the current assessment will be offset by a slight drop in expectations. April GfK consumer confidence will be reported Wednesday and is expected at -29.5 vs. -30.5 in March. March unemployment and February retail sales will be reported Friday. Sales are expected at 0.5% m/m vs. flat in January. Ahead of Germany, Spain reports February retail sales Thursday.
The U.K. has a quiet week. CBI reports its distributive trades survey for March Monday. Retailing reports sales is expected at -3 vs. 2 in February. February consumer credit will be reported Wednesday. Q4 current account (-GBP17.5 bln expected) and final Q4 GDP data will be reported Friday. Many analysts are saying that the U.K. could avoid recession this year but we believe this is too optimistic.
Bank of England tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 65% odds of a 25 bp hike, with odds of another hike topping out near 10% in Q3. After that, a rate cut is priced in that would take the bank rate back down to 4.25% by year-end. With inflation still rising, a rate cut this year seems very unlikely. The bank releases its financial policy summary Wednesday. There will be some key BOE speakers this week. Bailey speaks Monday. He then testifies before Parliament on SVB Tuesday. Mann speaks Wednesday.
Japan reports a slew of key data this week. Tokyo March CPI Friday will be the most important. Headline is expected at 3.2% y/y vs. 3.4% in February, core (ex-fresh food) is expected at 3.1% y/y vs. 3.3% in February, and core ex-energy is expected at 3.2% y/y vs. 3.1% in February. Most of the relief seen recently is due to the government’s energy subsidies that kicked in last month.
Real sector data will also be key. February IP, labor market, housing starts, and retail sales data will all be reported Friday. IP is expected at 2.7% m/m vs. -5.3% in January and sales are expected at 0.4% m/m vs. 0.8% in January. The unemployment rate is expected to remain steady ay 2.4% while the job-to-applicant ratio is seen up a tick to 1.36, matching the cycle high from December. As the chart shows, Japan is seeing a similar divergence in sectors as many other countries as manufacturing weakens and consumption picks up.
Recent data should keep the Bank of Japan on hold for now. WIRP suggests less than 5% odds of liftoff April 28, rising to around 30% June 16 and 45% for July 28. A hike isn’t fully priced in until October 31. In addition, the subsequent 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 10 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.
Australia highlight will be February CPI data Wednesday. Headline is expected at 7.2% y/y vs. 7.4% in January. If so, it would be the second straight month of deceleration but would remain well above the 2-3% target range. February retail sales data Tuesday (0.1% m/m expected) and private sector credit data Friday (0.4% m/m expected) will also be closely watched. Reserve Bank of Australia next meets April 4 and WIRP suggests nearly 10% odds of a rate cut then. A total of two cuts by year-end is almost priced in and this seems very unlikely.