• Fed officials appear to be cautiously looking through the banking panic; Fed tightening expectations still need to adjust higher; February core PCE data will be the data highlight; Chicago PMI will be important too; Canada reports January GDP data
  
• Eurozone preliminary March CPI data came in mixed; markets have repriced the ECB tightening outlook upwards; Germany reported soft March unemployment and February retail sales data; U.K. reported Q4 current account and final Q4 GDP data; SARB delivered a hawkish surprise yesterday
  
• Japan reported Tokyo March CPI; real sector data were mixed as labor market data came in soft; China reported official March PMI readings

The dollar is trading firmer ahead of PCE and quarter-end. DXY is up for the second straight day and trading back above 103. While some of today’s dollar gains may be due to quarter-end rebalancing, we believe that markets are overestimating the Fed’s capacity to ease and so the dollar should eventually recover further when these expectations are repriced. The euro is trading lower near $1.0870 while sterling is trading lower near $1.2375. USD/JPY finally broke above 133 and traded as high as 133.60 before falling back slightly to near 133.25 currently. With the BOJ seen on hold for the foreseeable future and banking sector tensions easing, we believe USD/JPY remains a buy at current depressed levels. Bottom line: we expect the dollar rally to resume after this current bout of market turmoil fades and markets are one again able to focus on the fundamentals.

AMERICAS

Fed officials appear to be cautiously looking through the banking panic. Kashkari said “The services part of the economy has not yet slowed down and wage growth is - we want higher wages - but wage growth is still growing faster than what is consistent with our 2% inflation target. That tells me we still have more work to do to bring the services side of the economy back into balance.” Kashkari added that “What’s unclear right now is how much of the banking stresses of the past few weeks is leading to a sustained credit crunch which would then slow down the US economy.” Collins said “Inflation remains too high, and recent indicators reinforce my view that there is more work to do, to bring inflation down to the 2% target associated with price stability.” She added that it’s too soon to determine what action will be appropriate at the May meeting, noting that the banking crisis adds more uncertainty to the economic outlook and hat tighter lending standards could reduce the need for further rate hikes. Barkin said the possible range of Fed outcomes going forward as “pretty wide” and added that “If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50 bp increase.” Like the others, Barkin said it’s too early to say if the banking crisis is going to cause a credit crunch. Williams, Waller, and Cook speak today.

Fed tightening expectations still need to adjust higher. The next FOMC meeting is May 2-3 and WIRP suggests around 60% odds of 25 bp hike then. After that, it’s all about the cuts. Nearly two cuts by year-end are priced in. In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year.  Data today
may provide a wake-up call.

February core PCE data 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. The Cleveland Fed’s Nowcast model estimates headline PCE at 5.10% y/y and core PCE at 4.73% y/y, which is smack at consensus. 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.

Chicago PMI will be important too. Headline 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. ISM reports its PMI readings next week. Final March Michigan consumer sentiment will also be reported today.

Canada reports January GDP data. Growth 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 over 10% odds of a rate cut then. A rate cut by year-end is fully priced in and this seems very unlikely.

EUROPE/MIDDLE EAST/AFRICA

Eurozone preliminary March CPI data came in mixed. Note that high base effects due to Russia’s invasion of Ukraine last year will lead to sizable drops in the y/y readings. France and Italy reported today. France’s EU Harmonised inflation came in at 6.6% y/y vs. 6.5% expected and 7.3% in February and Italy’s came in at 8.2% y/y vs. 8.8% expected and 9.8% in February. As a result, eurozone headline came in at 6.9% y/y vs. 7.1% expected and 8.5% in February and core came in as expected at 5.7% y/y vs. 5.6% in February. While the EB targets headline inflation, it has become increasingly focused on the continued rise in core to new record highs.

Markets have repriced the ECB tightening outlook upwards. The next policy meeting is May 4 and WIRP suggests over 90% odds of a 25 bp hike then. After that, another 25 bp hike is pricing in for either June or July. After that, odds of one last 25 bp hike top out near 60% in October and so the peak policy rate is now seen between 3.50-3.75%, up from 3.25-3.5% at the start of this week. A rate cut is no longer priced in by year-end, as it was during the height of the banking panic. Kazaks, Visco, Lagarde, and Vujcic speak today and Guindos speaks tomorrow.

Germany reported soft March unemployment and February retail sales data. Sales came in at -1.3% m/m vs. 0.5% expected and a revised 0.1% (was -0.3%) in in January. Unemployment rose 16.0k vs. 1.0k expected and a revised 6.0k (was 1.0k) in January. This was the biggest rise since November and took the unemployment rate up a tick to 5.6%. Head of the Federal Labor Agency noted that “Overall, the labor market was robust in March. However, the weak economy is leaving its mark: the spring revival is only taking hold in a restrained way.” Factory orders and IP will be reported next week and are expected to come in at 0.4% m/m and -0.4% m/m, respectively. Of note, Bloomberg consensus sees Q1 German GDP contracting -0.3% q/q and would follow a -0.4% q/q contraction in Q4.

The U.K. reported Q4 current account and final Q4 GDP data. Growth was revised up to 0.1% q/q vs. flat preliminary, which took the y/y rate up to 0.6% vs. 0.4% preliminary. The upward revision was due largely to improvements in private consumption (0.2% q/q) and net exports, which offset weaker government spending (0.5% q/q) and F=GFCF (0.3% q/q). Many analysts are saying that the U.K. could avoid recession this year but we believe this is still too optimistic. Of note, Bloomberg consensus sees GDP contracting -0.3% q/q in both Q1 and Q2 vs. 0.1% q/q in Q4. The current account gap came in at -GBP2.5 bln vs. -GBP17.5 bln expected and a revised -GBP12.7 bln (was -GBP19.4 bln), which is positive for sterling at the margin.

Bank of England tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 75% odds of a 25 bp hike, with odds of another hike topping out near 75% in Q3. A rate cut by year-end is no longer priced, as it was during the height of the banking panic. As a result, the peak policy rate is now seen near 4.75%, up from 4.25% in mid-March.

South African Reserve Bank delivered a hawkish surprise yesterday. It hiked 50 bp to 7.75% vs. 25 bp expected in a 3-2 vote, with the two dissents in favor of a smaller 25 bp move. The bank raised its inflation forecast for this year to 6.0% vs. 5.4% previously and now sees inflation returning to the 3-6% target range in Q3 vs. Q2 previously. The bank said future decisions will remain data dependent. After the dovish surprise in January, markets were looking for a sign that the tightening cycle was nearing an end. We didn't get that yet and so the next meeting May 25 remains very much live. As SARB said, it will depend on how the data come in.

ASIA

Japan reported Tokyo March CPI. Headline came in at 3.3% y/y vs. 3.2% expected and 3.4% in February, core (ex-fresh food) came in at 3.2% y/y vs. 3.1% expected and 3.3% in February, and core ex-energy came in at 3.4% y/y vs. 3.2% expected and 3.1% in February. Most of the relief seen recently is due to the government’s energy subsidies that kicked in last month. The fact that core ex-energy continues to accelerate to the highest since January 1990 suggests that broad-based price pressures remain and that the energy subsidies are only papering over this worrisome trend. To be fair, many other countries are seeing a similar divergence between headline and core inflation.

Real sector data were also reported. February IP, labor market, housing starts, and retail sales data were mixed. IP came in at 4.5% m/m vs. 2.7% expected and -5.3% in January, while sales came in at 1.4% m/m vs. 0.3% expected and 0.8% in January. Lastly, housing starts came in at -0.3% y/y vs. -0.5% expected and 6.6% in January. The picture for Q1 is somewhat mixed but growth will very likely pick up a bit from 0.1% SAAR in Q4. However, consensus of 1.2% SAAR may be too optimistic.

On the other hand, labor market data came in soft. The unemployment rate came in at 2.6% vs. 2.4% expected and actual in January, while the job-to-applicant ratio came in at 1.34 vs. 1.36 expected and 1.35 in January. A softer labor market may prevent wages from rising as much as the Bank of Japan would like in order to feel comfortable about removing accommodation. February labor cash earnings data will be reported next Friday, with nominal earnings expected at 1.3% y/y vs. 0.8% in January and real earnings expected at -2.3% y/y vs. -4.1% in January.

Recent data should keep the Bank of Japan on hold for now. WIRP suggests no odds of liftoff April 28, rising to around 10% June 16 and 50% for July 28. A hike isn’t 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 20 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.

China reported official March PMI readings. Manufacturing came in at 51.9 vs. 51.6 expected and 52.6 in February while non-manufacturing came in at 58.2 vs. 55.0 expected and 56.3 in February. As a result, the composite PMI rose to 57.0 vs. 56.4 in February. Caixin PMI readings will be reported next week. Despite the pickup in the composite reading, regional trade data suggest China reopening is having little impact on its major trading partners. Even the domestic data have been disappointing and so markets should not get to over-optimistic about reopening.