• Fed officials have another thing to worry about; Fed tightening expectations still need to adjust higher; February JOLTS job openings will be the data highlight; March ISM manufacturing PMI came in soft; Chile is expected to keep rates steady at 11.25%
  
• The ECB split remains; Germany reported firm February trade data; the sterling rally continues; Sweden’s largest pension fund Alecta announced a shakeup in its equities division
  
• RBA kept rates steady at 3.60%, as expected; RBNZ meets tomorrow and is expected to hike rates 25 bp to 5.0%; HKMA intervened in the FX market for the first time in nearly two months; Korea reported mixed March CPI data

The dollar remains under pressure. DXY is down for the second straight day and trading flat near 101.926. Clean break below 102 sets up a test of the February low near 100.82. The euro is trading higher near $1.0920 and is on track to test the February high near $1.1035. Sterling is leading this move in the foreign currencies and traded at the highest level since last June higher near $1.2520. USD/JPY is testing the 133 level. 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. Lastly, AUD is the worst performing major today after the RBA kept rates on hold (see below). Bottom line: we expect the dollar bounce after markets reprice Fed tightening expectations but this is taking far too long. In the meantime, the price action has been awful for the dollar and so further near-term losses appear likely.

AMERICAS

Fed officials have another thing to worry about. After OPEC+ unexpectedly announced a 1.1 mln bbl/day output cut, oil prices jumped Monday. Bullard said it was not yet clear what higher oil prices will mean for Fed monetary policy, noting “This was a surprise. Whether it will have a lasting impact is an open question. Oil prices fluctuate around. It’s hard to track exactly. Some of that might feed into inflation and make our job a little bit more difficult.” OF note, Bullard said last month that his own forecast was for rates to peak at 5.625% this year and he remains one of the most hawkish Fed officials. The March Dot Plots show three Fed officials at 5.625% for year-end and one at 5.875%.

Fed tightening expectations still need to adjust higher. WIRP suggests around 70% odds of 25 bp hike at the May 2-3 FOMC meeting. 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. Last week’s PCE data were mixed. While headline and core both came in a tick lower than expected, super core accelerated for a second straight month to 4.63% y/y and is the highest since October. This is not the direction that the Fed desires and so we look for the hawkish tilt in Fed comments to continue. Cook, Collins, and Mester speak today.

February JOLTS job openings will be the data highlight. Headline is expected at 10.500 mln vs. 10.824 mln in February. It’s worth noting that quits fell to 3.9 bln in January, the lowest since May 2021 and a sign perhaps that the labor market churn is easing as job security falls. Other key labor market data will be reported this week ahead of the jobs report Friday. ADP reports its private sector jobs estimate tomorrow and is expected at 210k vs. 242k in February. Then March Challenger jobs cuts and weekly jobless claims will be reported Thursday. OF note, NFP consensus stands at 240k vs. 311k in February, while the unemployment rate is seen steady at 3.6%. Average hourly earnings are expected to slow to 4.3% y/y vs. 4.6% in February. It's worth noting that the data will come on Good Friday. With markets likely to be very thin, we could get some outsize movements from the numbers, whether good or bad.

March ISM manufacturing PMI came in soft. Headline came in at 46.3 vs. 47.5 expected and 47.7 in February. The details were weak, with prices paid at 49.2 vs. 51.1 and 51.3 in February, new orders at 44.3 vs. 47.5 expected and 47.0 in February, and employment at 46.9 vs. 49.1 in February. Of note, supplier deliveries fell to 44.8 vs. 45.2 in February and is the lowest since March 200,while backlog of orders fell to 43.9 vs. 45.1 in February. The lower these numbers are, the lower the strains in the supply chains. If these measures continue to fall, this is obviously a good sign for inflation going forward, as is the prices paid component falling to 49.2. Of course, the services sector is really what's driving the economy right now and so Wednesday's reading will be more important. Headline is expected at 54.3 vs. 55.1 in February. February factory orders will be reported today and are expected at -0.5% m/m vs. -1.6% in January.

Chile central bank is expected to keep rates steady at 11.25%. At the last policy meeting January 26, the bank warned that rate cuts won’t be seen until the process of inflation returning to target “has been consolidated.” March CPI will be reported Thursday. Headline is expected at 11.1% y/y vs. 11.9% in February. If so, it would be the fourth straight month of deceleration to the lowest since last April but still well above the 2-4% target range. That is why we believe the market is wrong to price in the start of an easing cycle in the next three months.

EUROPE/MIDDLE EAST/AFRICA

The ECB split remains. Holzmann said “If things in May haven’t really become more terrible, I think we can afford another 50 bp, and in particular, if no social agreement emerges to temper inflation we’ll have to do more to produce it.” Elsewhere, Simkus said “I believe we’ve covered the larger part of the path of the interest-rate increases, but we’re not there yet.” The next policy meeting is May 4 and WIRP suggests around 90% odds of a 25 bp hike then with another 25 bp hike priced in for July 27. After that, odds of one last 25 bp hike top out near 45% in October and so the peak policy rate is now seen between 3.50-3.75%, up from 3.25% during the height of the banking panic. Chief Economist Lane speaks tomorrow.

Germany reported firm February trade data. Exports came in at 4.0% m/m vs. 1.8% expected and a revised 2.5% (was 2.1%) in January and imports came in at 4.6% m/m vs. 1.0% expected and a revised -1.4% (was -3.4%) in January. In one of the first signs that China reopening may be having an impact, German exports to non-EU countries rose 6.6% m/m. Factory orders will be reported tomorrow and are expected at 0.3% m/m vs. 1.0% in January. IP will be reported Thursday and is expected at -0.1% m/m vs. 3.5% in January. Both data sets will be perused for further signs of strength.

The sterling rally continues. This is the currency pair we have gotten the most wrong in recent months, as our negative fundamental view of the U.K. has remained in place even as sterling has emerged as the best performing major YTD. Cable traded near $1.2520 today, the highest since last June. The May 2022 high near $1.2665 is the next target. What’s most confounding to us is that sterling continues to gain even as Bank of England tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 80% odds of a 25 bp hike, with odds of another 25 bp hike topping out near 70% in Q3. As a result, the peak policy rate is now seen between 4.50-4.75%. Tenreyro said today “I expect that the high current level of Bank Rate will require an earlier and faster reversal, to avoid a significant inflation undershoot.” Chief Economy Pill speaks later today while Tenreyro speaks again tomorrow.

Sweden’s largest pension fund Alecta announced a shakeup in its equities division. Because of its losses stemming from the recent banking sector problems, Alecta placed its equities head on leave after suffering nearly $2 bln in losses in its region U.S. bank investments. Of note, the fund had built up its stake in SVB to become one of its biggest shareholders. Alecta said that it doesn’t expect to recover any part of its investments in SVB and Signature and that it has sold its First Republic holdings at a loss. Alecta CEO Billing said “The losses in the U.S. banks have seriously damaged customers’ trust in Alecta and its equity management. It’s now up to us to prove that we deserve customers’ trust again. Alecta’s equity management needs a fresh start and a new management.” The problem for Swedish pensions funds is that due to the small size of its domestic economy, they are forced to invest abroad in larger, more liquid companies. As such, these funds will always have to maintain massive foreign exposure.

ASIA

Reserve Bank of Australia kept rates steady at 3.60%, as expected. This was the first pause in the tightening cycle since the RBA began hiking rates back in May 2022. The bank noted that “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty. In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labor market.” Updated macro forecasts won’t come until the bank’s Statement of Monetary Policy for its next meeting May 2. The market is not pricing in any more hikes, while a rate cut is nearly priced in before year-end. We cannot rule out another hike this year, but we can rule out a cut this year. Lowe speaks tomorrow and is expected to provide more details about the bank’s stance. The RBA releases its Financial Stability Report Thursday.

Reserve Bank of New Zealand meets tomorrow and is expected to hike rates 25 bp to 5.0%. At the last policy meeting February 22, it hiked rates 50 bp to 4.75% and signaled more hikes ahead as it noted that “While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation. The Committee agreed that monetary conditions need to tighten further.” Looking ahead, WIRP suggests one final 25 bp hike July 12 is priced in that would see the policy rate peak near 5.25%, down from 5.5% after the last meeting. Updated macro forecasts won’t come until the May 24 meeting but it’s worth noting that the February forecasts see the policy rate peaking near 5.5% this year and staying there for much of next year.

The Hong Kong Monetary Authority intervened in the FX market today for the first time in nearly two months. With USD/HKD trading at the upper end of the 7.75-7.85 trading band around the 7.80 peg rate, the HKMA bought HKD7.1 bln ($905 mln) to defend it. The last time the HKMA intervened was February14 when it bought HKD14.868 bln ($1.895 bln) to defend it. While no one really expects the peg to break, low local rates have led some to sell HKD and buy the higher yielding USD.

Korea reported mixed March CPI data. Headline came in a tick lower than expected at 4.2% y/y vs. 4.8% in February, while core was steady at 4.8%. Headline is the lowest since March 2022 but remains above the 2% target. At the last meeting February 23, Bank of Korea kept rates steady at 3.5% and was the first pause since the bank started the tightening cycle back in April 2022. However, Governor Rhee signaled further hikes are likely by saying “I hope the hold this time isn’t going to be seen as meaning the rate hike stance is over.” Next policy meeting is April 13 and with inflation continuing to ease, another hold seems likely. The market is pricing in no more rate hikes and a peak policy rate near 3.5% but it really will be data dependent.