The US curve has steepened to new highs; the FOMC ends a two-day meeting with a decision Wednesday; February retail sales data Tuesday will be the US data highlight this week; Fed manufacturing surveys for March will start to roll out; this will be a fairly busy data week for Canada
BOE ends its meeting with a decision Thursday; eurozone has a fairly light data week; After last week’s ECB meeting, the weekly details of its bond-buying operations Monday have taken on greater importance; Norges Bank meets Thursday and may deliver a hawkish hold
BOJ ends a two-day meeting with a decision Friday.; Japan and Australia have busy weeks
The dollar has resumed its climb. This is due largely to the rise in US yields (see below). DXY found some support near 91.40 and has already clawed back nearly half of last week’s losses. This supports our view that the recent dollar softness was largely profit-taking and consolidative in nature. We believe DXY is still on track to test the November 23 high near 92.80 and then the November 11 high near 93.208. The euro is trading near $1.1950 and remains on track to test the November 23 low near $1.18 and then the November 11 low near $1.1745. Sterling is softer after being unable to break back above $1.40 and is now testing support near $1.39. The rise in USD/JPY has resumed and is trading back above 109. We believe the pair remains on track to test the June 5 high near 109.85.
The US curve has steepened to new highs. Our favored metric (3-month to 10-year) has risen to 160 bp, the highest since 2017 and on track to test the December 2016 near 210 bp. The 2- to 10-year spread has risen to 148 bp and is the highest since 2015 and on track to test the June 2015 near 176 bp. The pace of steepening has so far not been disruptive as US equity markets power higher and spread product holds up relatively well. That said, the Fed will have to address this move higher in rates before it snowballs into something it can no longer control.
Market pricing for the first Fed hike is creeping into Q3 2022. For an extended period, Q1 2023 was penciled in but that shifted to Q4 2022 as US data improved and is now moving into Q3 2022. This is at odds with the Fed’s Dot Plots showing steady rates through 2023. If that timetable continues to accelerate, the Fed will have to push back more forcefully against any notions of tightening coming sooner rather than later. At the margin, enhanced Fed tightening expectations should help boost the dollar, as other central banks are likely to follow the Fed much, much later. We saw a similar dynamic play out during the financial crisis.
The FOMC ends a two-day meeting with a decision Wednesday. No change in policy is expected but the messaging and forward guidance will be crucial for bond yields. This is especially true since the Fed is likely to mark up its growth forecasts with its quarterly update to its Summary of Economic Projections, due to a healthy combination of accelerated vaccine roll out and aggressive fiscal stimulus. The Dot Plots are still expected to show no rate hikes through 2023 and that’s when things get tricky. The market is clearly not on board with the Fed’s messaging on rates. We will be sending out an FOMC preview Monday.
February retail sales data Tuesday will be the US data highlight this week. Headline sales are expected to fall -0.5% m/m vs. 5.3% in January, while sales ex-autos are expected to rise 0.1% m/m vs. 5.9% in January. The so-called control group used for GDP calculations is expected to fall -0.9% m/m vs. 6.0% in January. Some payback is to be expected after January’s surge, but markets will be looking through any weakness towards another likely blockbuster reading for this month, as stimulus checks are reportedly being sent out as we write.
Fed manufacturing surveys for March will start to roll out. Empire survey will be reported Monday and is expected at 14.5 vs. and 12.1 in February. This will be followed by the Philly Fed survey Thursday and is expected at 24.0 vs. 23.1 in February. These are the first snapshots for March and will help set the tone for other data to come. February IP will be reported Tuesday and is expected to rise 0.4% m/m vs. 0.9% in January. The US manufacturing sector remains solid, and services are expected to catch up as the vaccine roll out accelerates.
Weekly jobless claims Thursday will be closely watched. They are expected to show continued incremental improvements, with initial claims seen at 700k vs. 712k last week and continuing claims seen at 4.07 mln vs. 4.144 mln last week. Of note, initial claims will be for the BLS survey week containing the 12th of the month and will be the first clue for NFP. Currently, consensus sees +625k vs. +379k in February and reflects the reopening seen this month in some of the major states such as Texas and Florida.
The US growth outlook remains very strong. The Atlanta Fed’s GDPNow model suggests Q1 growth is 8.4% SAAR, while the New York Fed’s Nowcast model suggests Q1 growth is 8.6% SAAR. The New York Fed just started tracking Q2 and suggests 4% SAAR growth. Of note, Bloomberg consensus for Q1 is currently at 4.5% SAAR, picking up to 6.5% SAAR in Q2 and 6.2% in Q3. The same consensus sees core PCE picking up to 2.1% y/y in Q2 from 1.5% in Q1 before edging back down to 1.8% in Q3 and 1.9% in Q4.
Other minor data round out the week. January TIC data will be reported Monday, followed by February import/export prices and January business inventories (0.3% m/m expected) Tuesday. February building permits (-7.2% m/m expected) and housing starts (-1.6% m/m expected) will be reported Wednesday, followed by February leading index (0.3% m/m expected) Friday.
This will be a fairly busy data week for Canada. Highlights are February CPI Wednesday and January retail sales Friday. Headline inflation is expected to rise 0.9% y/y vs. 0.7% in January, while common core is expected to rise 1.4% y/y vs. 1.3% in in January. Headline sales are expected to fall -2.5% m/m vs. 1.3% in November, while sales ex-auto are expected to fall -2.4% m/m vs. 2.1% in November. Canada also reports in January manufacturing sales and February existing home sales Monday. The Bank of Canada just delivered a dovish hold last week and is seen remaining on hold while fiscal policy carries the load in 2021. Next policy meeting is April 21 and no change is expected then.
The Bank of England ends its meeting with a decision Thursday. The last meeting February 4 saw the bank deliver a less dovish than expected hold. Of note, it said it was appropriate to prepare for negative rates but said it did not intend to signal that negative rates are coming. Deputy Governor Ramsden went even further and said he envisions slowing the pace of QE later this year. Since that meeting, the UK curve has steepened by 40-45 bp at the long end and 55-60 bp in the intermediate range. During that time, sterling has gained 2% vs. the dollar and over 2.5% vs. the euro. We will be sending out a BOE preview later this week. Other than the BOE, the UK has a quite week and only reports February public sector net borrowing data Friday.
After last week’s ECB meeting, the weekly details of its bond-buying operations Monday have taken on greater importance. For the week ending March 5, net purchases fell to EUR11.9 bln from $12.04 bln the previous week, a new low since early January. Redemptions came in at a relatively high EUR6.3 trln. Without them, gross purchases were EUR18.2 bln, up from EUR16.9 bln the week prior but still lower than the three weeks prior of EUR18,3 bln, EUR19.6 bln, and EUR18.4 bln. Mere jawboning will have little lasting impact and so the ECB will have to step up its purchases significantly and eventually increase the so-called envelope for PEPP later this year. Eurozone has a fairly light data week. March ZEW survey will be reported Tuesday. January trade data will be reported Friday.
Norges Bank meets Thursday and may deliver a hawkish hold. Rates will be kept at zero but there is a chance that the bank updates its rate path to show hikes starting late this year. At the last meeting January 21, the bank left rates unchanged and kept the rate path steady, showing a likely lift-off in H1 2022 and the policy rate near 1.0% by end-2023. However, the bank sounded upbeat then as it noted that “vaccination is well under way, and it appears that the vaccination rollout will be somewhat faster than assumed earlier. Vaccination and the winding down of containment measures will boost growth further out in 2021.” Norway just reported February CPI headline inflation of 3.3% y/y vs. 2.5% in January, while underlying remained steady at 2.7% y/y. The bank will release updated macro forecasts that are likely to reflect the improved outlook and justify a sooner lift-off in rates.
The Bank of Japan ends a two-day meeting with a decision Friday. While no change is expected in its main policy settings for rates and YCC, the bank will also release the results of its policy review and there are some possible tweaks to its ETF purchases and other minor changes. It will likely pay some lip service to a possible rate cut but one is highly unlikely. We do not think the BOJ will allow greater fluctuations in its YCC policy, not in the current rising rate environment. When all is said and done, the BOJ should just sit back and let the market take USD/JPY higher rather than rock the boat with some sort of cosmetic change in policy. We will be sending out a BOE preview later this week.
Japan has a heavy data week. January core machine orders will be reported Monday. February trade data will be reported Wednesday. Exports are expected to fall -0.1% y/y vs. 6.4% in January, while imports are expected to rise 12.0% y/y vs. -9.5% in January. Ahead of the BOJ decision, February national CPI will be reported Friday. Headline is expected to fall -0.7% y/y vs. -1.2% in December, while core (ex-fresh food) is expected to fall -0.6% y/y vs. -1.0% in December.
Australia has a busy week. RBA minutes will be released Tuesday. For now, the economic outlook is solid but the RBA should continue to push back against rising long rates. February jobs data will be reported Thursday, with a 35k gain expected vs. 29.1k in January and the unemployment rate expected to drop a tick to 6.3%. Preliminary February retail sales will be reported Friday, with sales expected to rise 0.6% m/m vs. 0.5% in January.