- The U.S. has avoided an imminent government shutdown; Fed officials remain cautious about easing; highlight will be January PCE, personal income, and spending; Canada highlight will be Q4 GDP data
- February CPI data for the eurozone started rolling out; Germany reported soft January retail sales; U.K. reported January money and credit data; U.K. Treasury named Clare Lombardelli as BOE Deputy Governor; Switzerland and Sweden reported Q4 GDP data; Hungary central bank warned that its independence is at risk
- BOJ officials continue to hint at liftoff; Japan reported January retail sales, IP, and housing starts; Australia reported January retail sales data; February ANZ Business Outlook survey for New Zealand was reported
The dollar is soft ahead of key PCE data. DXY is trading slightly lower near 103.833. The yen is the best performing major after a BOJ official spoke about liftoff (see below), with USD/JPY trading lower near 150. The euro is trading flat near $1.0835 as February CPI data roll out (see below), while sterling is trading lower near $1.2655. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon even as other major central banks tilt more dovish. The U.S. data continue to come in mostly firmer while 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. Today’s data may be a spark for that move.
AMERICAS
The U.S. has avoided an imminent government shutdown. Congressional leaders agreed on a deal that provides one week of temporary funding for parts of the government and avoids a partial shutdown this weekend. It also extended funding for the rest of the government through March 22 and avoids a partial shutdown stemming from the previous March 8 deadline. We still expect an eventual deal that funds the government fully through September 30, but it may take another kick or two of the can to get across the finish line.
Fed officials remain cautious about easing. Collins said “It will likely become appropriate to begin easing policy later this year. When this happens, a methodical, forward-looking approach to reducing rates gradually should provide the necessary flexibility to manage risks, while promoting stable prices and maximum employment.” Williams said, “We still have a ways to go on the journey to sustained 2% inflation” and added that he “will be focused on the data, the economic outlook, and the risks, in evaluating the appropriate path for monetary policy that best achieves our goals.” Bostic said “I still see signs that suggest that this is not going to be a fast march to 2%. As long as we are going to get there, and we are not seeing bad things happen on the side I am comfortable being patient.” Bostic, Goolsbee, Mester, and Williams speak today.
Market expectations continue to adjust. The odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen to 15%. More importantly, the June cut that was fully priced in at the start of last week has seen those odds fall below 70%. With market pricing now matching the Fed's December Dot Plots with three cuts in 2024, let's look ahead to the March Dot Plots. By our calculations, it would only take two FOMC members to move their 2024 Dot up to 4.875% from 4.625% to get a similar shift in the 2024 median, or two cuts vs. three. Given how strong the US data have been coming in, a hawkish shift in the March Dot Plots is very possible, bordering on likely.
Data highlight will be January PCE. Headline is expected to fall two ticks to 2.4% y/y, while core is expected to fall a tick to 2.8% y/y. Of note, the expected 0.4% m/m gain for core PCE would be the largest since January 2023. Given the upside surprises for CPI and PPI, we see upside risks for PCE. The Cleveland Fed’s Nowcast model projects headline and core at 2.3% and 2.7%, respectively, which puts it slightly below consensus. For February, the model projects headline and core at 2.3% and 2.6%, respectively.
Personal income and spending will be reported at the same time. They are expected at 0.4% m/m and 0.2% m/m, respectively. Real personal spending is expected at -0.1% m/m vs. 0.5% in December. There are downside risks to personal spending after the weak January retail sales data, which many chalked up to bad weather across much of the country that month. Pending home sales will also be reported and are expected at 1.5% m/m vs. 8.3% in December.
Surveys for February will continue rolling out. Chicago PMI will command the most attention and is expected at 48.0 vs. 46.0 in January. Kansas City Fed also reports its manufacturing index and is expected at -2 vs. -9 in January. Kansas City Fed reports its services index tomorrow. So far, the regional Fed manufacturing surveys have come in stronger than expected and are consistent with improved readings in the wider manufacturing PMI surveys.
We got a modest revision to Q4 GDP data. Growth was revised down a tick to 3.2% SAAR. Personal consumption contributed 2.00 ppt to growth vs. 1.91 previously, fixed investment contributed 0.43 ppt vs. 0.31 previously, and government consumption contributed 0.73 ppt vs. 0.56 previously. However, this was offset by net exports (0.32 ppt vs. 0.43 previously) and inventories (-0.27 ppt vs. 0.07 previously). Of course, this is old news as markets look ahead to Q1 and beyond. The Atlanta Fed’s GDPNow is tracking Q1 growth at 3.2% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.8% and will be updated tomorrow. This model also starts estimating Q2 growth starting in early March.
Weekly jobless claims will be closely watched. That’s because continuing claims will be for the BLS survey week containing the 12th of the month. These are expected at 1.874 mln vs. 1.862 mln previously. Elsewhere, initial claims are expected at 210k vs. 201k previously. Bloomberg consensus for February NFP stands at 180k vs. 353k in January, while its whisper number stands at 217k.
Canada highlight will be Q4 GDP data. Consensus sees growth at 0.8% SAAR vs. -1.1% in Q3. In contrast, the Bank of Canada estimates growth to have stalled in Q4 as inventory drawdowns and a decline in business investment offset export and consumption spending growth. With price pressures easing, another sluggish GDP print would add to BOC easing expectations. The market sees 60% odds that the first cut comes June 5, while July 24 is fully priced in.
EUROPE/MIDDLE EAST/AFRICA
February CPI data for the eurozone started rolling out. France’s EU Harmonized inflation came in as expected at 3.1% y/y vs. 3.4% in January, while Spain’s came in a tick higher than expected at 2.9% y/y vs. 3.5% in January. Germany reports later today and is expected at 2.7% y/y vs. 3.1% in January. Italy and eurozone report tomorrow. Italy’s ’s EU Harmonized inflation is expected at 1.0% y/y vs. 0.9% in January. For the eurozone as a whole, headline is expected at 2.5% y/y vs. 2.8% in January while core is expected at 2.9% y/y vs. 3.3% in January. The risks are skewed to the upside as the eurozone PMI suggested prices pressures were higher in February. Regardless, the disinflationary process is still on track and below the ECB’s predicted levels and a June cut remains priced in.
Germany reported soft January retail sales. Sales came in at -0.4% m/m vs. 0.4% expected and a revised -0.5% (was -1.6%) in December. The y/y rate improved slightly to -1.4%. Elsewhere, February unemployment rate came in a tick higher than expected at 5.9% and remains at the cycle highs. Germany remains the weak link in the eurozone and is unlikely to recover much this year.
U.K. reported January money and credit data. Demand for credit points to a recovery in consumer spending activity. Net mortgage approvals for house purchases (an indicator of future borrowing) rose 7.2% m/m in January and consumer credit growth quickened to 8.9% y/y vs. a revised 8.6% (was 8.5%) in February, the strongest since August 2018. Bottom line: given the recent strength in the economic data, we doubt the BOE will be in a rush to move to less restrictive policy settings which is GBP supportive.
The U.K. Treasury named Clare Lombardelli as Bank of England Deputy Governor for monetary policy. She is currently chief economist at the OECD and will replace Ben Broadbent, whose term is ending. Before the OECD, Lombardelli was the Treasury’s chief economic adviser. She will begin her five-year term on July 1, with women then making up a majority of the MPC for the first time ever.
Switzerland reported Q4 GDP data. GDP grew by a modest 0.3% q/q vs. 0.1% expected and a revised 0.4% (was 0.3%) in Q3. Growth was driven by private and public consumption as well as exports, while equipment and software investments were the major drags on growth. For 2023, the Swiss economy expanded by 0.6%, which is lower than the SNB’s 1% projection. Bottom line: we expect the SNB to cut the policy rate by 25 bp at its March meeting, which is earlier than market pricing for a June cut. Inflation in Switzerland has been running under the SNB’s 2% per annum target since June 2023 and economic growth is soft.
Sweden reported soft Q4 GDP data. GDP came in at -0.1% q/q vs. 0.1% expected and a revised -0.1% (was -0.3%) in Q3. That means the economy contracted for a second consecutive quarter, joining the U.K. and Japan. Overall, Sweden’s economic slowdown suggests the Riksbank has room to cut rates in the first half of 2024. Indeed, the market is pricing in 50 bp of easing over the next six months.
Hungary central bank warned that its independence is at risk. Governor Matolcsy said, “The government’s plan to amend the central bank law would constitute a significant attack against the MNB’s independence and autonomy.” Finance Minister Varga denied it, saying that the government only wants to improve transparency and prudent management at the bank. Of note, planned legislation by the government would seek to broaden the scope and influence of the central bank’s supervisory board, which includes several government appointees. Between political risks and aggressive rate cuts, the forint is likely to continue underperforming.
ASIA
Bank of Japan officials continue to hint at liftoff. Board member Takata said “There are uncertainties for Japan’s economy, but my view is that the price target is finally coming into sight,” adding that he economy is “at a juncture for a shift in the entrenched belief that wages and inflation won’t rise.” Most importantly, Takata said “We need to consider flexible and nimble steps including for an exit, for instance, the end of the yield curve control framework, negative interest rate and what to do with the overshooting commitment.” While June liftoff remains priced in, odds of a March move have risen to 25% and those for an April move have risen to 85%.
Japan reported January retail sales, IP, and housing starts. IP came in at -1.5% y/y vs. -1.6% expected and -1.0% in December, sales came in at 2.3% y/y vs. 2.0% expected and 2.3% in December, and housing starts came in at -7.5% y/y vs. -7.8% expected and -4.0% in December. The economy was clearly in a soft patch in Q3 and Q4 and appears to be extending into Q1. Bloomberg consensus sees Q1 growth at 0.5% SAAR vs. -0.4% in Q4 but we see downside risks.
Australia reported January retail sales data. Sales came in at 1.1% m/m vs. 1.5% expected and a revised -2.1% (was -2.7%) in December. The y/y rate picked up slightly to 1.1% vs. 0.8% in December, but the slowing trend remains largely intact. Elsewhere, private sector credit growth picked up a tick to 4.9% y/y but here too, the overall slowing trend remains intact. Lastly, private new capital expenditure (capex) rose 0.8% q/q in Q4 vs. a revised 0.3% (was 0.6%) in Q3 and is consistent with the RBA’s Q4 GDP growth projection of 1.5%.
February ANZ Business Outlook survey for New Zealand was reported. Business confidence dipped to 34.7 from a multi-year high of 36.6 the previous month, while the forward-looking activity outlook indicator rose to 29.5, the highest level since June 2021. Overall, the readings seem to validate the RBNZ’s less hawkish bias, which led to a dramatic fall in market expectations for another hike to zero. The ANZ February consumer confidence index tomorrow is the next domestic data highlight.
