- Fed Chair Powell continues his semiannual testimony to Congress; other Fed officials appear to be more hawkish than Powell; a hawkish shift in the March Dot Plots is very possible; the Beige Book report suggests the Fed is in no hurry to cut rates; ADP came in slightly lower than expected but JOLTS data suggest the labor market remains tight; BOCE delivered a hawkish hold; Peru is expected to cut rates 25 bp to 6.0%
- The two-day ECB meeting ends shortly with an expected hold; President Lagarde’s press conference will be key; Germany reported weak January factory orders; U.K. spring budget turned out to be a non-event; BOE reported its February DMP survey
- Japan reported firmer January cash earnings data; BOJ liftoff expectations have intensified; Australia reported January home loan and trade data; Malaysia kept rates steady at 3.0%, as expected
The dollar is soft ahead of the ECB decision. DXY is trading lower near 103.173 and is on track to test the February 2 low near 102.901. The euro is trading lower near $1.0895. The euro tends to weaken on ECB decision days. It has done so four of the past five and is so far holding true to form ahead of the decision (see below). The yen continues to outperform after strong wage data boosted BOJ liftoff expectations (see below), with USD/JPY trading at the lowest since February 7 near 147.75. Clean break below 147.80 sets up a test of the February 1 low near 145.90. Sterling is trading higher near $1.2755 despite the spring budget being a non-event (see below). We are frustrated by the current dollar weakness, as 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 recover after this current period of weakness. Tomorrow’s jobs data may be a spark for that move.
AMERICAS
Fed Chair Powell continues his semiannual testimony to Congress. He appears before the Senate Banking Committee today. Yesterday, he stuck to familiar ground in his testimony before the House Financial Services Committee. Powell unsurprisingly noted that “rate cuts will depend on path of the economy” and added that the "strength of economy and labor market means we can approach that carefully, thoughtfully.” 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 today. The market currently sees basically no odds of a cut in March, rising to nearly 20% in May, and only 85% in June.
Other Fed officials appear to be more hawkish than Powell. Kashkari said “It’s hard for me to see the data that have come in that are saying more cuts than I said in December. At a base case where I was in December, or potentially one fewer, but I haven’t decided yet.” Of note, Kashkari has said that he (like Bostic) penciled in two cuts this year in the December Dot Plots. Kashkari added that “If we start to see multiple high inflation prints and inflation starts to flare back up again, that could justify us going and raising rates further from here, but I think the first thing we would do is just hold policy at this level for an extended period of time.”
A hawkish shift in the March Dot Plots is very possible. We’ve noted that it would only take two Fed policymakers shifting their 2024 Dots from 4.625% to 4.875% to get a similar shift in the median. However, Kashkari’s comments highlight the fact that we could get a hawkish shift in the median Dot from any number of different combinations across the Fed spectrum. Recall that Bostic was also noncommittal about a second hike earlier this week. Mester speaks today.
The Beige Book report suggests the Fed is in no hurry to cut rates. This was prepared for the upcoming March 19-20 FOMC meeting. Here are the highlights and not much has really changed since the last report. On overall economic activity: Economic activity increased slightly, on balance, since early January, with eight Districts reporting slight to modest growth in activity, three others reporting no change, and one District noting a slight softening. The outlook for future economic growth remained generally positive, with contacts noting expectations for stronger demand and less restrictive financial conditions over the next 6 to 12 months. On labor markets: Employment rose at a slight to modest pace in most Districts. Overall, labor market tightness eased further, with nearly all Districts highlighting some improvement in labor availability and employee retention. Wages grew further across Districts, although several reports indicated a slower pace of increase. On prices: Price pressures persisted during the reporting period, but several Districts reported some degree of moderation in inflation. Nevertheless, businesses found it harder to pass through higher costs to their customers, who became increasingly sensitive to price changes.
ADP private jobs report came in slightly lower than expected. It reported 140k jobs added vs. 150k expected and a revised 111k (was 107k) in January. We note that NFP has outperformed ADP for six straight months. Looking ahead to Friday, consensus sees a 200k rise in NFP vs. 353k in January, while Bloomberg’s whisper number stands at 205k.
January JOLTS data suggest the labor market remains tight. Openings came in at 8.863 mln vs. 8.850 mln expected and a revised 8.889 mln (was 9.026 mln) in January. The job opening rate was 5.3% for a second consecutive month and remains above the 4.5% level that would historically trigger a significant increase in the unemployment rate. Layoffs fell to 1.572 mln vs. 1.607 mln in December, while hires fell to 5.687 mln vs. 5.787 mln in December. February Challenger job cuts and weekly jobless claims will be reported today.
Q1 growth estimates remain solid. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.5% SAAR and will be updated today after the data. January trade and consumer credit will be reported today. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.3% SAAR and will be updated tomorrow. Its first Q2 growth estimate should be released at the same time.
Bank of Canada delivered a hawkish hold. The policy rate was kept at 5% and the bank will continue to normalize its balance sheet. However, the bank reiterated that “the Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” It noted that “the economy grew in the fourth quarter by more than expected, although the pace remained weak and below potential” and added that it “continues to expect inflation to remain close to 3% during the first half of this year before gradually easing.” Governor Macklem added the bank “won’t be lowering rates at the pace we raised them.” Bank of Canada easing expectations can still adjust higher in the near-term, especially if Friday’s Canadian employment report is solid. For now, the market is pricing in 75-100 bp of easing in 2024, mostly likely beginning June 5.
Peru central bank is expected to cut rates 25 bp to 6.0%. At the last meeting February 8, the bank cut rates 25 to 6.25%. Since then, February inflation came in higher than expected at 3.29% y/y vs. 3.02% in January. It was the first acceleration since January 2023 and moves further above the 1-3% target range. As such, the central bank’s cautious approach to easing seems justified. Looking ahead, Bloomberg consensus sees 50 bp of easing in Q2, 75 bp in Q3, and 25 bp in Q4 that would see the policy rate end the year at 4.5%. Another 50 bp of easing to 4.0% is seen in 2025.
EUROPE/MIDDLE EAST/AFRICA
The two-day European Central Bank meeting ends shortly with an expected hold. The bank is widely expected to leave the policy rate at 4% and reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. The ECB is also expected to slash its growth and inflation forecasts. The economy unexpectedly stagnated in Q4, and inflation figures have recently been below the ECB’s predicted levels, suggesting a faster than anticipated disinflationary process.
ECB President Lagarde’s post-meeting press conference will be key. Her comments will be scrutinized for any hints about the timing and scope of future interest rate cuts. Lagarde has indicated that borrowing costs could be lowered from the summer, noting the eurozone Q1 wage numbers will be important for the ECB’s policy assessment. The eurozone Q1 indicator of negotiated wage rate is scheduled to be released on May 23, two weeks before the June 6 policy meeting.
Germany reported weak January factory orders. Orders came in at -11.3% m/m vs. -6.0% expected and a revised 12.0% (was 8.9%) in December. This dragged the y/y rate down to -6.0% vs. a revised 6.6% (was 2.7%) in December, supporting our belief that the December bounce was likely to prove temporary. IP will be reported tomorrow and is expected at 0.6% m/m vs. -1.6% in December. Data continue to confirm that Germany remains the weak link in the eurozone.
The U.K. spring budget turned out to be a non-event. Yes, the U.K. government turned on the fiscal tap but the implications for monetary policy are limited. The government forecasts a cyclically adjusted primary budget deficit (which accounts for cyclical changes to the economy and excludes interest payments) of 0.4% in FY2024/25 compared to a surplus of 0.3% in the Autumn 2023 Budget. However, the Office of Budget Responsibility (OBR) estimates the U.K. output gap to widen by only 0.1 ppt in FY2024/25 and diminish thereafter. The market reaction has been muted. Despite higher planned gilt sales, yields are lower.
Bank of England reported its February Decision Maker Panel survey. 1-year inflation expectations came in at 3.3% vs. 3.0% expected and 3.4% in January and is the low for the cycle. 3-year expectations remained at 2.7% for a second consecutive month. Both remain well above the 2% target, which suggests the BOE will not be in a rush to cut rates. Importantly, expectations for future UK wage growth continue to suggest slower average regular earnings growth. Expected year-ahead wage growth remained unchanged at 5.2% on a three-month moving average basis versus actual average regular pay growth of 6.2% in the three-month period ending in December. The market still sees the first cut coming August 1.
ASIA
Japan reported firmer January cash earnings data. Nominal earnings came in at 2.0% y/y vs. 1.2% expected and 0.8% in December, while real earnings came in at -0.6% y/y vs. -1.5% expected and -2.1% in December. This was the fastest growth in nominal earnings since June 2023. However, we noted that the increase in total cash earnings was the result of a one-off 16.2% increase in special cash earnings (bonuses). The less volatile scheduled cash earnings remained muted at 1.4% y/y for a second consecutive month in January. The Bank of Japan is closely monitoring whether a virtuous cycle between wages and prices will intensify before shifting away from looser policy settings. BOJ board member Nakagawa pointed out that the certainty of reaching the price goal is rising and the chances that companies will give higher pay increases at annual wage negotiations this spring are increasing.
Recent wage and price growth have boosted Bank of Japan liftoff expectations. The market now sees nearly 80% of liftoff at the March 18-19 meeting, up from around 25% at the end of February. Those odds rise to 85% April 25-26 and fully priced in June 13-14. In turn, the rising odds have helped boost the yen, with USD/JPY trading at the lowest level since February 7 near 147.75. Clean break below 147.80 sets up a test of the February 1 low near 145.90. However, the next important technical support levels come in near 147.65 (100-day moving average) and 146.15 (200-day moving average). We believe that a sharper decline in USD/JPY below those key levels will be tough to sustain as Japan’s improving inflation backdrop and soft economic activity suggest the BOJ’s normalization process will be gradual and brief. Indeed, the swaps market is pricing in only 50-75 bp of total tightening over the next three years.
Australian demand to purchase new dwellings remains subdued. The value of new housing loans commitments unexpectedly dropped in January by -3.9% m/m vs. 2.0% expected and -4.1% in December. This was due to lower owner-occupier loan commitments (-4.6% m/m) and investor loan commitments (-2.6% m/m). Forward-looking indicators like the “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey suggests buying sentiment will stay weak.
Australia also reported January trade data. Exports came in at 1.6% m/m vs. a revised 1.5% (was 1.8%) in December, while imports came in at 1.3% m/m vs. a revised 4.0% (was 4.8%) in December. The y/y rate for imports remains on a weakening trend, which is consistent with sluggish domestic demand, but the improvement in exports is surprising given ongoing weakness in mainland China.
Bank Negara Malaysia kept rates steady at 3.0%, as expected. However, the exchange rate is clearly seen as a risk as the bank noted “the ringgit is currently undervalued, given Malaysia's economic fundamentals and growth prospects.” This suggests BNM is unlikely to shift to looser policy settings anytime soon despite low inflation of 1.5% y/y in January. While the bank does not have an explicit inflation target, low price pressures should allow it to keep rates on hold for now in order to help support the ringgit. Indeed, the swaps market continues to price in steady rates over the next three years.
