- Fed Chair Powell begins his semiannual testimony to Congress; the Fed’s Beige Book report will also be released; ADP February private jobs estimate will be the data highlight; ISM services PMI came in soft; BOC is expected to keep rates steady at 5.0%
- Eurozone reported soft January retail sales data; Germany reported firm January trade data; U.K. Chancellor of the Exchequer Hunt delivers his spring budget shortly; Poland is expected to keep rates steady at 5.75%; Egypt delivered a hawkish surprise and floated the pound
- Australia reported Q4 GDP data; RBNZ Chief Economist Conway spoke
The dollar is soft ahead of ADP and Powell. DXY is trading lower near 103.641 and clean break below 103.694 sets up a test of the February 2 low near 102.901. The euro is trading higher near $1.0875, while sterling is trading higher near $1.2720 ahead of Chancellor Hunt’s spring budget (see below). The yen continues to outperform, with USD/JPY trading as low as 149.35 today before rebounding to trade near 149.75 currently. Recent developments support our view that the Fed is unlikely to cut rates anytime soon. The U.S. data continue to come in mostly firmer and so Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation. This week’s data may be a spark for that move.
AMERICAS
Fed Chair Powell begins his semiannual testimony to Congress. He appears before the House Financial Services Committee today and the Senate Banking Committee tomorrow. Powell and company have been incredibly disciplined in their messaging since the January 30-31 FOMC meeting, and we see no reason why this would change now. We expect Powell to maintain the cautious narrative this week. The market currently sees basically no odds of a cut in March, rising to nearly 25% in May, and only 85% in June. Daly, and Kashkari also speak today.
The Fed’s Beige Book report will also be released. This was prepared for the upcoming March 19-20 FOMC meeting. Here are some highlights from the previous Beige Book report for the January 30-31 FOMC meeting: On overall economic activity: Overall, most Districts indicated that expectations of their firms for future growth were positive, had improved, or both. On labor markets: Firms from many Districts expected wage pressures to ease and wage growth to fall further over the next year. On prices: Three Districts noted that their firms were expecting price increases to ease further over the next year, while four Districts’ firms anticipated little change. Not much has changed since the last report and so we expect a similar tone to emerge today, which should underscore that the Fed is in no rush to cut rates.
ADP February private jobs estimate will be the data highlight. Consensus sees 150k vs. 107k in January. Looking ahead to Friday’s jobs report, consensus sees a 200k rise in NFP vs. 353k in January as the labor market comes into better balance. Bloomberg’s whisper number stands at 203k. The pace of wage growth, a key driver of core services CPI inflation, will also generate a lot of attention. Average hourly earnings are expected to slow to 4.3% y/y vs. 4.5% in January. Of note, NFP has outperformed ADP the past six months.
Other important labor market data will be reported. January JOLTS data will be reported, with openings expected at 8.850 mln vs. 9.026 mln in January. Of note, the job openings rate fell from a high of 7.4% in March 2022 to 5.4% in December. 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. Also keep an eye on layoffs and hires. February Challenger job cuts and weekly jobless claims will be reported tomorrow.
ISM services PMI came in soft. Headline came in at 52.6 vs. 53.0 expected and 53.4 in January. The details were mixed, as employment fell to 48.0 vs. 50.5 in January, activity rose to 57.2 vs. 55.8 in January, and prices paid fell to 58.6 vs. 64.0 in January. The drop in prices paid will be welcomed by the Fed but we don't think this report moves the needle on monetary policy.
Q1 growth estimates have been marked down but remains solid. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated today after the data. January wholesale inventories and trade sales will be reported. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.3% SAAR and will be updated Friday. Its first Q2 growth estimate should be released this week.
Bank of Canada is expected to keep rates steady at 5.0%. At the previous meeting January 24, the BOC made no policy changes but removed the language that it was prepared to “raise the policy rate further if needed,” presumably because of the sluggish growth outlook. Since then, inflation eased a bit more in January than the BOC projected, while Q4 GDP growth was much better than the BOC had penciled in. As such, the post-meeting statement will likely remain balanced and continue to support market pricing for 75 bp of easing in 2024, mostly likely beginning June 5. Updated macro forecasts won’t come until the April 10 meeting.
Canada’s February PMI readings also command attention. Ivey PMI will be reported and stood at 56.5 in January, the highest since April 2023. Yesterday, S&P Global services and composite PMIs came in at 46.6 and 47.1, respectively, with both improving from January.
EUROPE/MIDDLE EAST/AFRICA
Eurozone reported soft January retail sales data. Sales came in a tick lower than expected at 0.1% m/m vs. a revised -0.6% (was -1.1%) in December, while the y/y rate came in at -1.0% vs. a revised -0.5% (was -0.8%) in December. This was the weakest y/y rate since September as the eurozone economy struggles to gain traction. Italy and Spain both report retail sales next week.
Germany reported firm January trade data. Exports jumped 6.3% m/m vs. 1.5% expected and a revised -4.5% (was -4.6%) in December, while imports rose 3.6% m/m vs. 1.8% expected and -6.7% in December. In y/y terms, exports rose 0.4% vs. -3.1% in December and was the first positive reading since May 2023. Imports fell -9.0% y/y. While this was the best reading since April 2023, it still suggests that domestic demand remains weak. Factory orders will be reported tomorrow and are expected at -6.0% m/m vs. 8.9% in December. IP will be reported Friday and is expected at 0.6% m/m vs. -1.6% in December. Data are likely to confirm that Germany remains the weak link in the eurozone.
U.K. Chancellor of the Exchequer Hunt delivers his spring budget shortly. He is widely expected to announce pre-election tax cuts. Market participants should pay close attention to the updated fiscal projections, specifically the change in the cyclically adjusted primary deficit. Wider deficits (or looser fiscal stance) over the forecast horizon could further delay the start of a BOE easing cycle and would help underpin GBP. Current market pricing has the first cut coming in August, with 75 bp of total easing seen in 2024.
National Bank of Poland is expected to keep rates steady at 5.75%. It publishes the minutes to its February 7 meeting Friday. At that meeting, the bank kept rates steady, and Governor Glapinski has maintained a hawkish stance. He warned earlier in February that “I don’t see prospects for a MPC majority to cut rates if data matches our forecasts this year,” while MPC member Kotecki said more recently “now we should forget about a rate cut, until core inflation permanently nears the 2.5% target.” The market is pricing in steady rates over the next three months, followed by 25 bp of easing over the subsequent three months. This seems reasonable considering the potential GDP boost from the EU unblocking as much as EUR137 bln of funds to Poland.
Egypt’s central bank delivered a hawkish surprise and floated the pound. At an unscheduled meeting, the bank unexpectedly raised the policy interest rate by 600 bp to an historic high of 27.25% “to fast-track the disinflation path and ensure a decline in underlying inflation.” More importantly, the central bank also announced it will allow “the exchange rate to be determined by market forces.” The central bank justified the moves by noting that “the domestic economy has been recently weighed down by foreign exchange shortages resulting in the existence of a parallel exchange rate market and constraining economic growth.” The pound has fallen by nearly 40% to trade above 50, which roughly coincides with the parallel exchange rate. In our experience, a newly floated exchange rate eventually settles near the parallel rate but often after a significant overshoot. In other words, EGP weakness could persist near-term. Today’s actions will be welcomed by the IMF and should help to finalize an augmented financing package for Egypt in the next few weeks.
ASIA
Australia reported Q4 GDP data. Growth came in as expected at 0.2% q/q vs. a revised 0.3% (was 0.2%) in Q3. The y/y rate also came in as expected at 1.5% vs. 2.1% in Q3. Government spending and private non-dwelling business investment were the main drivers of growth in Q4. 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. Inventories were the main drag to growth in Q4. Bottom line: weak consumer spending activity justifies money markets continuing to price roughly 50 bp of rate cuts this year, likely starting in August.
RBNZ Chief Economist Conway spoke. He reiterated the Bank’s guidance that interest rates need to remain at a restrictive level for a sustained period of time. However, Conway cautioned “If the Fed, for example, did start to cut toward the end of this year and we didn’t” then “that would show up first and foremost in the exchange rate. The exchange rate would start to appreciate, which would bring down inflationary pressures.” Of note, current market pricing has the RBNZ cutting rates in October, while the bank’s latest Monetary Policy Statement sees the first cut in Q2 2025.
