A Fistful Of Pounds
- UK Government expected to announce pre-election tax cuts.
- US job numbers, Fed Chair Powell’s testimony and the Fed Beige Book are today’s domestic highlights.
- Bank of Canada and National Bank of Poland are expected to stand pat.
USD is holding on to most of yesterday’s loss triggered by the sharper than anticipated slowdown in US service sector growth momentum. We would fade USD weakness because the details of the ISM Services index are consistent with a favourable US macro backdrop of resilient economic activity (new orders and business activity were up) and easing inflation pressures (prices paid fell).
Two periods stand out with a similar favourable macro backdrop of strong growth and easing inflation: 1995-2000 and 2014-2015. Both periods coincided with a sharp appreciation in USD reflecting in part cyclical growth divergences and different trajectories for monetary policies among the systemically important economies. Similar conditions are present today. The US economy is outperforming most major economies and interest rate differentials support a firmer USD over the next three to six months.
Today, the US ADP employment report (1:15pm London) and the Job Openings and Labor Turnover Summary (JOLTS) (3:00pm London) will likely show an ongoing moderation in labour demand. The ADP private sector job is expected to increase by 150k in February versus 107k in January, with risks skewed to the downside because of the drop in the ISM Services employment index below the 50 boom/bust level.
Meanwhile, US job openings are anticipated to continue trending lower in January but not enough to lead to a higher unemployment rate. The job opening rate fell from a high of 7.4% in March 2022 to 5.4% December 2023. According to research by Fed Governor Christopher Waller the job opening would need to fall below 4.5% to see a significant increase in the unemployment rate.
Fed Chair Jay Powell will testify before the House Financial Services Committee (3:00pm London) and the Fed Beige Book (7:00pm London) is expected to show again the US economy remains in a healthy state. In the January Beige Book, Districts indicated that expectations of their firms for future growth were positive, had improved, or both.
GBP and Gilts will be driven today by the details of the UK Spring Budget (12:30pm London). Chancellor of the Exchequer Jeremy Hunt is expected to announce pre-election tax cuts. Market participants should pay particular attention to the updated fiscal stance projection, specifically the change in the cyclically-adjusted primary deficit. Wider deficits (or looser fiscal stance) over the projection horizon could further delay the start of a BOE easing cycle and underpin GBP.
EUR/USD is trading slightly under yesterday’s high around 1.0876. Eurozone retail sales volumes are expected to increase by 0.2% m/m in January after falling by 1.1% the previous month (10:00am London). Stronger retail sales activity can offer EUR additional intra-day support.
CAD will take its cue from the Bank of Canada (BOC) rate decision (2:45pm London) and the post-meeting press conference (3:30pm London). The BOC is expected to maintain the policy rate at 5%. Recall, at the 24 January policy meeting, the BOC made no policy changes but removed reference that it was prepared to “raise the policy rate further if needed” because of the sluggish Canadian growth outlook. Since then, Canada inflation eased a bit more in January than the BOC projected, and real GDP growth was much better than the BOC had pencilled-in for Q4 2023. As such, the post-meeting statement will likely remain balanced and support money market pricing for 75bps of BOC cuts over 2024.
PLN will likely remain well bid, particularly versus other EMEA currencies. The National Bank of Poland is widely expected to keep the policy rate at 5.75% (announcement is around 1:30pm London). Above target inflation (3.9% y/y in January) and stagnant economic activity (real GDP growth was flat over Q4 2023) validate the central bank of Poland neutral policy guidance. Money markets have fully priced-in only one 25bps cut over the next 12 months. This seems reasonable considering the potential GDP boost from the EU unblocking as much as €137bn of funds to Poland.
USD/JPY is heavy under 150.00 as Japan’s OIS curve continues to bring forward the timing of a first BOJ rate hike. Japan’s OIS curve now implies a 60% probability of a 10 bp BOJ policy rate increase in March versus 50% yesterday and 30% on Monday. Japan’s January labor cash earnings report later tonight (11:30pm London) will be a key driver of near-term interest rate expectations. Nominal earnings are expected at 1.2% y/y in January vs. 0.8% the previous month. Faster wage growth can harden the case for a March BOJ rate hike and support a firmer JPY.
AUD/USD is up near 0.6520 underpinned by the rally in Asian equities and Australian government bonds yields tracked major economies bond yields lower. Australia’s economy grew in line consensus and RBA projections, but details were unimpressive. Real GDP rose by 0.2% q/q to be up 1.5% year-over-year in Q4 2023. Government spending and private non-dwelling business investment were the main drivers of GDP growth over the quarter. Net trade was also a significant growth tailwind because of falling imports, indicative of subdued domestic demand activity. Indeed, household spending contribution to GDP growth in Q4 was flat. Changes in inventories was the main drag to growth in Q4. Bottom line: weak consumer spending activity justifies money markets continuing to price roughly 50 bp of RBA policy rate cuts this year.
NZD/USD is trading near the top-end of a six-day 0.6070-0.6110 range. RBNZ Chief Economist Paul Conway reiterated the Bank’s guidance that interest rate needs to remain at a restrictive level for a sustained period of time. However, Conway cautioned that the RBNZ could “end up cutting more quickly than what we are currently considering” if the Fed did start to cut toward the end of this year, because “the exchange rate [NZD] would start to appreciate, which would bring down inflationary pressures [in New Zealand]”.
USD recovered some of its recent losses ahead of the US ISM Services index (3:00pm London). Headline is expected at 53.0 vs. 53.4 in January. The risks are skewed to the downside because the S&P Global preliminary February services PMI came in at 51.3 vs. 52.3 expected and 52.5 in January.
