• Fed officials have maintained a consistent message of caution; January PCE came in as expected; there has been a bit of a kerfuffle about the CPI data; February ISM manufacturing PMI will be the data highlight; Q1 growth remains robust
  
• Eurozone February CPI data came in slightly higher than expected; data suggest the ECB will remain cautious at next week’s meeting; final February eurozone manufacturing PMIs improved; U.K. housing market activity continues to recover; SNB President Jordan will step down in September
  
• BOJ Governor Ueda sounded less hawkish than his colleagues; Japan reported January labor market data; Governor Orr reiterated the RBNZ’s dovish message; China reported solid official February PMIs; Korea reported soft February trade data

The dollar is soft as the new month begins. DXY is trading slightly lower near 104.084. The yen is the worst performing major after BOJ Governor Ueda pushed back against hawkish comments from his colleagues (see below), with USD/JPY trading higher near 150.35. The euro is trading higher near $1.0820 as February CPI data surprised to the upside (see below), while sterling is trading higher near $1.2645. 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 dollar is soft as the new month begins. Of note, SEK was the only major currency to gain (0.2%) against the dollar in February, while CHF and JPY were the worst performers at -2.6% and -2.0%, respectively. We expect the dollar rally to continue in March due to the same fundamental drivers that have held all year. That is, the U.S. economy continues to outperform while the Fed continues to take a cautious stance to easing. Indeed, the Swiss National Bank could be the first of the major central banks to cut rates at its March 21 meeting.

Fed officials have maintained a consistent message of caution. Daly said, “There is no imminent risk to the economy faltering. We are ready to make moves and adjust as the data demands us to do.” Bostic said, "It'll probably be appropriate, if things go the way I expect, to see us to start to reduce rates in the summertime," adding that his view would remain "data dependent." Mester said “It doesn’t really change my view that inflation is going to be going down to our 2% goal over time, but it does show you that there’s a little more work for the Fed to do here.” Barkin, Goolsbee (twice), Waller, Logan, Bostic, Daly, and Kugler all speak today.

Market expectations have finally adjusted to the Fed’s expected rate path. Three cuts this year are priced in while the odds of a March cut are basically zero now after being fully priced in at the start of this year. The odds of a May cut are around 25% while the June cut that was fully priced in at the start of last week has seen those odds fall to around 85%. It's all going to depend on how the data continue to come in but if we had to pick a side, we think the risks of a cut are tilted towards coming later than June, not sooner.

January PCE came in as expected. Headline fell two ticks as expected to 2.4% y/y, while core fell a tick as expected to 2.8% y/y. Of note, the 0.4% m/m gain for core PCE was the largest since last January. Super core picked up to 3.5% y/y vs. 3.3% in December, while the 3-month annualized rate for headline picked up to 2.2% y/y vs. 2.0% in December. Looking ahead to February, the Cleveland Fed’s Nowcast model projects headline and core PCE at 2.4% and 2.7%, respectively. Overall, the data warrant a cautious approach to easing and that’s what the Fed is taking.

There has been a bit of a kerfuffle about the CPI data. Earlier this week, the BLS sent an email to so-called data “super users” that pointed out that a reweighting of the Owners Equivalent Rate (OER) in the CPI basket was the main reason for the upside miss in January. This raised more questions than answers even after the BLS sent out an additional email that noted “In January 2024, the proportion of OER weighted toward single-family-detached homes increased by approximately 5%.” If this is indeed a structural change as the BLS implies, we can expect OER inflation to remain elevated in 2024. Of note, the Cleveland Fed’s inflation Nowcast model estimates February headline CPI inflation at 3.1% y/y and core at 3.7% y/y.

Personal income and spending remain surprisingly firm. Nominal and real spending came in as expected at 0.2% m/m and -0.1% m/m, respectively, while income jumped 1.0% m/m vs. 0.4% expected. In y/y terms, the slowdown was fairly insignificant. Nominal spending rose 4.5% vs. 5.9% in December, real spending rose 2.1% vs. 3.2% in December, and income remained steady at 4.8%. Compare this to the retail sales control group, which slowed sharply to 2.5% y/y vs. 5.3% in December. Bottom line: consumption remains relatively robust and is likely to be supported by ongoing income gains.

February ISM manufacturing PMI will be the data highlight. Headline is expected at 49.5 vs. 49.1 in January. Keep an eye on prices paid, which at 52.9 in January was the highest since April 2023. The improvement in the S&P Global manufacturing PMI to 51.5 vs. 50.7 in January reported last week suggests upside risk to the ISM manufacturing print, which has been in contractionary territory since November 2022. However, Chicago PMI came in yesterday at 44.0 vs. 48.0 expected and 46.0 in January and argues for some caution.

Q1 growth remains robust. The Atlanta Fed’s GDPNow model is now tracking Q1 growth at 3.0% SAAR vs. 3.2% previously. Next update comes today after the data. Construction spending will also be reported and is expected at 0.2% m/m vs. 0.9% in December. Elsewhere, the New York Fed's Nowcast model is tracking Q1 growth at 2.8% SAAR and will also be updated today. This model could start estimating Q2 growth today.

EUROPE/MIDDLE EAST/AFRICA

Eurozone February CPI data came in slightly higher than expected. Headline came in at 2.6% y/y vs. 2.5% expected and 2.8% in January, while core came in at 3.1% y/y vs. 2.9% expected and 3.3% in January. Italy also reported CPI and its EU Harmonized inflation came in steady at 0.9% y/y vs. 1.0% expected. While the disinflationary process remains on track, the February readings suggest the path will not be a straight line down.

The data suggest the European Central Bank will remain cautious at next week’s meeting. To wit, Holzmann said today that “We watched inflation data coming in from European and country level, and what we see is that they confirm my view that we have to wait, have to be attentive and cannot rush to a decision. What I’ve seen so far it confirms my view.” He echoes other official comments that continue to point to a June cut as the most likely. We expect that message to be emphasized by the policy statement, President Lagarde’s press conference, and the updated macro forecasts. The market sees virtually no odds of a cut next week, rising to around 25% April 11, and fully priced in June 6.

Final February eurozone manufacturing PMIs improved. Headline rose four ticks from the preliminary to 46.5. Looking at the country breakdown, Germany improved two ticks from the preliminary to 42.5 while France improved three ticks to 47.1. Italy and Spain reported for the first time and came in at 48.7 and 51.5, respectively. This was the first reading above 50 for any of the four largest eurozone economies since March 2023. Final services and composite PMIs will be reported next Tuesday.

U.K. housing market activity continues to recover. In turn, this bodes well for the consumer spending outlook. February Nationwide house prices rose for a second consecutive month by 0.7% m/m, while the y/y rate improved to 1.2% vs. -0.2% in January. This was the first y/y gain for this series since January 2023. Bottom line: we doubt the BOE will be in a rush to move to less restrictive policy settings, which is GBP-supportive. The market still sees August 1 as the most likely timing for the first cut. BOE Chief Economist Huw Pill speaks today.

Swiss National Bank President Jordan will step down in September. He has been president since April 2012 and has overseen what can only be described as seismic changes in Swiss monetary policy. As Bloomberg points out, Jordan has presided over the move to negative rates in 2014, the removal of the floor on EUR/CHF in 2015, and most recently facilitating the UBS takeover of rival Credit Suisse. No word on who his successor will, but early speculation centers on Vice President Schlegel. Of note, we do not think his planned exit will impact the timing of the first cut by the SNB, which we believe could come as early as this month. We believe the ongoing rise in EUR/CHF reflects this and the pair remains on track to test the November high near 0.96851.

ASIA

Bank of Japan Governor Ueda sounded less hawkish than his colleagues. Specifically, he said “We are not yet in a position to foresee the achievement of a sustainable and stable inflation target. We will continue to seek confirmation whether the virtuous cycle between wages and price began to turn.” This seems to be direct pushback against board member Takata, who said earlier this week that “There are uncertainties for Japan’s economy, but my view is that the price target is finally coming into sight.” Ueda added that wage negotiations will be key and sounded positive as he sees reason to expect positive results.

Japan reported January labor market data. The unemployment rate fell a tick to 2.4% from a revised 2.5% (was 2.4%) in December, while the job-to-applicant ratio remained steady as expected at 1.27. Wage growth remains the missing piece of the puzzle for the BOJ, and the relatively tight labor market suggests upward pressures will pick up in the spring wage negotiations. That is a big reason why liftoff is still expected in June.

RBNZ Governor Adrian Orr reiterated the dovish message from the February Monetary Policy Statement. In line with the updated policy rate forecasts, Orr said he expects to begin normalizing policy next year “as inflation is back inside its range and expectations are anchored.” Indeed, Orr emphasized that it was “really critical” to the RBNZ that “all measures of inflation expectations have come down.” A hike is no longer priced in, while there are now 70% odds of a cut August 14 and fully priced in October 9.

China reported solid official February PMIs. Manufacturing came in at 49.1 vs. 49.0 expected and 49.2 in January, while non-manufacturing came in at 51.4 vs. 50.7 expected and actual in January. However, the composite PMI remained steady at 50.9. Elsewhere Caixin reported its manufacturing PMI at 50.9 vs. 50.7 expected and 50.8 in January. The PMIs add to evidence of stabilizing economic activity. However, a sustained pick-up in growth is unlikely without policies that shift growth from unproductive debt-fueled investment towards consumption.

Korea reported soft February trade data. Exports came in at 4.8% y/y vs. 1.4% expected and 18.0% in January, while imports came in at -13.1% y/y vs. -11.7% expected and a revised -7.9% (was -7.8%) in January. Much of the recent recovery in exports has been due to low base effects, as regional growth and activity remain subdued overall. The key JPY/KRW cross has been falling this year, making Korea’s exports less competitive compared to Japan’s.