The major currencies were down across the board last week as the broad-based dollar rally continued on the back of strong U.S. data. SEK, GBP, and NOK outperformed, while AUD, JPY, and CHF underperformed. After last Friday’s PCE shocker, we expect Fed officials to come out swinging this week and maintaining a very hawkish tone. As such, the dollar should continue to gain.
Markets are still digesting last week’s PCE shocker. Of note, super core PCE came in at 4.6% y/y vs. a revised 4.3% (was 4.1%) in December and is the highest since October. So it turns out that even after stripping out a lot of the categories that take up a huge part of household budgets, we still have inflation nearing 5%. The main takeaways remain the same as last week: 1) inflation is proving to be much stickier than many expected; 2) the U.S. economy remains robust in Q1 so far, and 3) the Fed will have to go higher for longer. Markets are repricing Fed expectations and the key investment themes remain higher yields, lower equity markets, and a stronger dollar.
For FX, 2023 is looking a lot like 2022. Every major currency is down YTD against the dollar, as it was last year. Best performers in 2023 so far are CAD, SEK, and GBP while the worst ones are NOK, JPY, and NZD. For 2022, the best were CHF, EUR, and AUD while the worst were SEK, JPY, and GBP and so there has been a bit of a rotation going on.
It’s a very similar story for EM FX, though some are up YTD against the dollar. Best performers in 2023 so far are MXN, HUF, and CLP while the worst ones are ARS, ZAR, and KRW. For 2022, the best were BRL, MXN, and PEN while the worst were ARS, TRY, and COP. We expect EM FX to continue weakening because of the current global environment. EM is a cyclical play and the cycle is still moving against EM and risk. Of note, MSCI EM is trading at the lowest level since January 4 and is on track to test the 2023 low near 945 and then the late November low near 923.
Fed tightening expectations remain elevated. WIRP suggests 25 bp hikes in March, May, and June are priced in that takes Fed Funds to 5.25-5.50%. Right now, odds are running over 30% of a fourth hike in July but this should rise if the data continue to run hot. Strangely enough, an easing cycle is still expected to begin in Q4, albeit at much lower odds. Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing. There are plenty of Fed speakers this week and we expect them to tilt heavily hawkish. Jefferson speaks Monday. Goolsbee speaks Tuesday. Kashkari speaks Wednesday. Waller and Kashkari speak Thursday. Logan, Bostic, and Bowman speak Friday.
Data highlights will be centered around February PMI readings. Chicago PMI will be reported Tuesday and is expected at 45.3 vs. 44.3 in January. ISM manufacturing PMI will be reported Wednesday and the headline is expected at 48.0 vs. 47.4 in January. Keep an eye on prices paid and employment, which stood at 44.5 and 50.6 in January, respectively. ISM services PMI will be reported Friday and the headline is expected at 54.5 vs. 55.1 in January. Keep an eye on prices paid and employment, which stood at 67.8 and 50.0 in January, respectively. Preliminary S&P Global PMI readings last week suggest potential for upside surprises this week. Manufacturing came in at 47.8 vs. 47.2 expected and 46.9 in January, services came in at 50.5 vs. 47.3 expected and 46.8 in January, and the composite PMI came in at 50.2 vs. 47.5 expected and 46.8 in January.
Regional Fed surveys for February will continue rolling out. Dallas Fed reports its manufacturing index Monday and is expected at -9.3 vs. -8.4 in January. Richmond Fed reports its manufacturing index Tuesday and is expected at -5 vs. -11 in January. Dallas Fed also reports its services index Tuesday. The manufacturing sector is clearly slowing, as is the housing sector. However, the services sector has remained strong enough to keep the economy humming along. The Atlanta Fed’s GDPNow model is currently tracking 2.7% SAAR growth in Q1, up from 2.5% previously. The next model update comes Monday after the data.
Other minor data will be reported. January durable goods orders (-4.0% m/m expected) and pending home sales (1.0% m/m expected) will be reported Monday. Wholesale and retail inventories, advance goods trade, December FHFA and S&P house price indices, and February Conference Board consumer confidence (108.5 expected) will all be reported Tuesday. January construction spending (0.2% m/m expected) and February vehicle sales (14.78 mln annualized expected) will be reported Wednesday.
Weekly jobless claims Thursday will be of interest. That is because continuing claims will be for the BLS survey week containing the 12th of the month, and are expected at 1.672 mln vs. 1.654 mln last week. Initial claims are expected at 197k vs. 192k last week, which was for the BLS survey week. The 4-week moving average ticked higher last week to 191k but this is still lower than what was during the survey week for January (207k), December (221k), November (227k), and October (212k). In fact, this average hasn't been this low for a BLS survey week since last April (178k). Bloomberg consensus for NFP is currently at 200k vs. 517k in January, which would be another solid number. Bottom line: the labor market is showing no signs of weakness despite the highly publicized layoffs in tech and finance.
Canada highlight will be Q4 and December GDP data Tuesday. Growth is expected at 2.7% y/y in December and at 1.6% SAAR in Q4. Q4 current account data will be reported Monday and a deficit of -CAD11.0 bln is expected vs. -CAD11.1 bln in Q3. February S&P Global manufacturing PMI will be reported Wednesday. January building permits and Q4 labor productivity will be reported Friday.
Bank of Canada expectations have picked up after the second straight blowout jobs report. If data continue to come in firm, the bank will find it harder and harder to justify its pause. No change is expected at the next meeting March 8 but WIRP suggests a final 25 bp hike to 4.75% is mostly priced in for Q3.
Eurozone highlight will be February CPI data. France and Spain report Tuesday. French EU Harmonised CPI is expected to pick up a tick to 7.1% y/y, while Spain’s is expected to fall to 5.5% y/y vs. 5.9% in January. Germany reports Wednesday and its EU Harmonised CPI is expected to fall two ticks to 9.0% y/y. Italy reports Thursday and its EU Harmonised CPI is expected to fall to 9.5% y/y vs. 10.7% in January. Eurozone also reports Thursday. Headline is expected at 8.2% y/y vs. 8.6% in January while core is expected to remains steady at 5.3%. January M3 data will be reported Monday and is expected to slow two ticks to 3.9% y/y. January PPI will be reported Friday and is expected at 17.7% y/y vs. 24.6% in December.
ECB tightening expectations are drifting higher. WIRP suggests a 50 bp hike March 16 is nearly 85% priced in. Looking further ahead, a 50 bp hike May 4 is over 60% priced. Another 25 bp hike June 15 is fully priced in, as is a 25 bp hike July 27 that would result in a peak policy rate near 3.75%, up from 3.5% at the start of last week. There are some odds of one final 25 bp hike in Q4 but these expectations are likely to drift lower if continued disinflation gives the doves the upper hand again. For now, however, it appears that the hawks remain in the driver’s seat. De Cos and Lane speak Monday. Vujcic speaks Tuesday. Villeroy, Nagel, and Visco speak Wednesday. The ECB published the account of its February policy meeting Thursday. Schnabel also speaks Thursday, followed by Holzmann, Vasle, Muller, and Wunsch Friday.
There is a full slate of eurozone data. Final eurozone February PMI readings will be reported. Manufacturing will be reported Wednesday. Italy and Spain report for the first time and are expected to improve to 51.0 and 49.0, respectively. Services and composite PMIs will be reported Friday. Eurozone countries will report key real sector data as well. Germany reports February unemployment Wednesday and is expected at -10.0k vs. -22.0k in January, while January trade data will be reported Friday. France reports January consumer spending Tuesday (0.4% m/m expected) and IP (0.3% m/m expected) will be reported Friday.
The U.K. has a quiet week. January consumer credit and mortgage approvals will be reported Wednesday. Final February PMI readings will be reported, with manufacturing Wednesday followed by services and composite PMIs Friday.
BOE tightening expectations have crept higher. WIRP suggests a 25 bp hike March 23 is priced in. After that, a 25 bp hike is about 85% priced in for May 11 while a hike August 3 is priced in. The odds of one last 25 bp hike September 21 top out near 25% and so the expected terminal rate has drifted higher to 4.75% vs. 4.5% at the start of this week. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. There are plenty of BOE speakers. Broadbent speaks Monday. Cunliffe, Pill, and Mann speak Tuesday. Bailey speaks Wednesday. Pill speaks again Thursday, followed by Hauser Friday. With the exception of Mann, most are likely to tilt dovish in their comments.
Japan highlight will be February Tokyo CPI data Friday. Headline is expected at 3.4% y/y vs. 4.4% in January, core (ex-fresh food) is expected at 3.3% y/y vs. 4.3% in January, and core ex-energy is expected to pick up a tick to 3.1% y/y. The drop in headline and core is expected as some of Prime Minister Kishida’s energy subsidies kick in. However, the fact that core ex-energy remains so high suggests that broad-based price pressures are being felt and that a policy response is warranted soon.
Yet expected BOJ liftoff is not imminent. Next BOJ policy meeting March 9-10 will be the last one under current Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests over 20% odds of liftoff April 28, rising to nearly 45% June 16 and then 0ver 80% for July 28. That said, the actual tightening path is seen as very mild as the market is pricing in 20 bp of tightening over the next 12 months followed by only 30 bp more over the subsequent 24 months. That is why we expect the knee-jerk drop in USD/JPY after liftoff to be fairly limited. BOJ Governor-elect Ueda suggested no imminent policy shift in his confirmation hearings last week. Nakagawa speaks Wednesday and Takata speaks Thursday.
Other key data will be reported. January IP, retail sales, and housing starts will be reported Tuesday. IP is expected at -2.9% m/m vs. 0.3% in December, while sales are expected at 0.7% m/m vs. 1.1% in December. Final February manufacturing PMI will be reported Wednesday. Q4 capital spending and company profits and sales will be reported Thursday. January labor market data and final services and composite PMIs will be reported Friday. Unemployment is seen steady at 2.5% while the key job-to-applicant ratio is seen up a tick to 1.36. Early wage agreements announced so far point to some upward pressure in wages, something that the BOJ wants to see along with the firm labor market.
Australia highlight will be January CPI Wednesday. Headline is expected at 8.1% y/y vs. 8.4% in December. If so, it would be the first deceleration since October but still well above the 2-3% target range. January retail sales and private sector credit data Tuesday will also be important. Sales are expected at 1.5% m/m vs. -3.9% in December.
There is still pressure on the RBA to continue tightening. WIRP suggests over 80% odds of a 25 bp hike at the next meeting March 7, while the swaps market is pricing in a peak policy rate near 4.35% over the next 12 months followed by an easing cycle over the subsequent 12 months, highlighting the “higher for longer” theme.
Key Q4 data will also be reported. Current account data will be reported Tuesday, with the balance expected to move back into a AUD6.0 bln surplus from a deficit of -AUD2.3 bln in Q3. GDP data will be reported Wednesday, with growth expected at 0.7% q/q vs. 0.6% in Q3.