• Market expectations for Fed easing have converged with the Fed; Chicago Fed reports its weekly measure of financial conditions; we get a revision to Q4 GDP data even as Q1 growth remains robust; Banco de Mexico releases its quarterly inflation report
  
• Eurozone sentiment weakened in February; BOE may take a different approach to QT than its peers; we get some central bank speakers; Nigeria delivered a hawkish surprise
  
• Australia reported soft January CPI data; RBNZ delivered a dovish hold; market expectations for another hike have evaporated; China policymakers continue their attempts to support the local equity market

The dollar is trading higher as a dovish RBNZ hold weighs on the foreign currencies. DXY is trading higher for the first time since February 13 just above 104. Kiwi is the worst performing major after the RBNZ decision (see below) and is on track to test the year’s low near 0.6040. The euro is trading lower near $1.0850, while sterling is trading lower near $1.2655. USD/JPY trading higher near 150.65. 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.

AMERICAS

Market expectations for Fed easing have converged with the Fed. The market is now pricing in only 75 bp of total easing in 2024, down from 150 bp seen at the start of the year. This finally matches the Fed’s December Dot Plot. If the data continue to come in firm, we see scope for Fed expectations to adjust even further. Of note, the odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen below 20%. More importantly, the June cut that was fully priced in at the start of last week has seen those odds fall below 75%. 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. In turn, a later start would call into question whether the Fed will cut three times this year, or two. Bostic, Collins, and Williams speak today.

The Chicago Fed reports its weekly measure of financial conditions. Conditions loosened for the 17th straight week through the week ended February 16 and are the loosest since January 2022. With yields falling, spreads narrowing, and equities rising, we most likely got an 18th straight week when conditions for last week are reported today.

We get a revision to Q4 GDP data. Growth is expected to remain steady at 3.3% SAAR, with consumption expected to slow a tick to 2.7% SAAR. Of course, this is old news as markets look ahead to Q1 and beyond. January advance goods trade and retail and wholesale inventories will also be reported today.

Q1 growth remains robust. The Atlanta Fed’s GDPNow is tracking Q1 growth at 3.2% SAAR and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.8% and will be updated Friday. This model also starts estimating Q2 growth starting in early March.

The drop in February Conference Board consumer confidence bears watching. Headline came in at 106.7 vs. 115.0 expected and a revised 110.9 (was114.8) in January. Expectations came in at 79.8 vs. a revised 81.5 (was 83.8) in January, while present situation came in at 147.2 vs. a revised 154.9 (was 161.3) in January. Final February University of Michigan consumer sentiment will be reported Friday and there are clear downside risks to the preliminary 79.6 headline reading after the Conference Board report.

Banco de Mexico releases its quarterly inflation report. We expect the report to lay the groundwork for an eventual cut after minutes from the February 8 meeting tilted dovish and some policymakers expressed concern that policy was too restrictive, and others began talking about rate cuts. Next meeting is March 21 and a 25 bp cut then seems likely. The swaps market is pricing in 75 bp of easing over the next six months, followed by another 100 bp of easing over the subsequent six months. Within Latin America, Banco de Mexico is likely to remain the most hawkish and so the peso should continue to outperform.

EUROPE/MIDDLE EAST/AFRICA

Eurozone sentiment weakened in February. The broad Economic Sentiment index (ESI) unexpectedly dipped to 95.4 vs. 96.6 expected and a revised 96.1 (was 96.2) in January. This reading remains consistent with unimpressive economic activity in the eurozone. The ESI’s fall was driven by worsening confidence across the board for services, manufacturing, retail trade, and construction. Bottom line: the risk is that the ECB cuts policy interest rates sooner than June, which should limit EUR relief rallies.

The Bank of England may take a different approach to Quantitative Tightening than its peers. Deputy Governor Ramsden, who is charged with overseeing financial markets, said the bank may continue running down its QE portfolio even after hitting its so-called preferred minimum range of reserves (PMRR). In the past, the BOE has estimated the PMRR in a range of GBP335-495 bln. However, Ramsden said “The Monetary Policy Committee could unwind the APF fully, if it judged necessary for policy reasons, and the level of the PMRR should not affect this judgment. Our approach differs from other central banks, notably the Federal Reserve, which aims to maintain its QE portfolio at a level that will back an ‘ample’ level of reserves.” Of note, Ramsden said the BOE could then use different liquidity instruments to meet commercial bank demand for reserves. A more aggressive QT path for the BOE would tend to be sterling-positive but it remains to be seen whether this can and will be carried out.

We get some central bank speakers. However, we don’t expect new policy guidance from either ECB Governing Council member Muller or hawkish BOE MPC member Mann. The market still sees the first cut from the ECB in June and the first cut from the BOE in August.

Nigeria central bank delivered a hawkish surprise. It hiked rates 400 bp to 22.75% vs. 250 bp expected. This was the first hike since July 25 and long overdue as inflation continues to climb. Real rates remain deeply negative and so more needs to be done to rein in inflation and stabilize the naira. The bank also tightened liquidity by hiking the cash reserve ratio to 45% vs. 32.5% previously. Governor Cardoso said the bank decision was based on based on “the current inflationary and exchange rate pressures, projected inflation and rising inflation expectations.” He added that “Members were concerned about the persistent raise in the level of inflation and emphasized the committee’s commitment to reverse the trend as the balance of risks lean to rising inflation.”

ASIA

Australia reported soft January CPI data. Headline inflation was steady at 3.4% y/y vs. 3.6% expected, while trimmed mean inflation slowed to 3.8% y/y, the lowest since March 2022. There was little impact on RBA easing expectation, however, as the market sees 80% odds that the first cut comes in August vs. 75% seen at the start of this week. The swap market also still sees roughly 40 bp of total easing this year. Next policy meeting is March 19.

Reserve Bank of New Zealand delivered a dovish hold. It kept rates steady at 5.5%, as expected, and reiterated that interest rates “needs to remain at a restrictive level for a sustained period of time.” However, the message was diluted by the updated macro forecasts in its Monetary Policy Statement. The updated OCR projections imply a lower probability (40% versus 75% previously) of another 25 bp hike. The RBNZ also slashed near-term GDP growth projections and made minor downward adjustment to near-term inflation forecasts. That said, the RBNZ still anticipates headline CPI inflation to return to the 1-3% target band in Q3 and to the 2% midpoint later in 2025. Governor Orr noted during his press conference that a rate hike was discussed. He added that central banks may have to hold rates higher than markets expect. Orr speaks again Friday.

Market expectations for another hike have evaporated. The market has significantly curtailed odds of another rate hike this year to less than 10% from roughly 60% earlier this month, when a major bank called for two more hikes from the RBNZ this year. We were skeptical then and even more so now, as recent weakness in the economy should preclude any further tightening. Furthermore, inflation expectations are falling while the policy rate is well above the RBNZ's estimate of the neutral rate (2.5%), suggesting monetary policy is tight enough to rein in inflation back to target.

China policymakers continue their attempts to support the local equity market. Reports suggest regulators have instructed quant funds that manage so-called “Direct Market Access” products to stop accepting new money and to gradually phase out their existing products. These funds are highly leveraged and have been blamed for recent equity market volatility. While the gradual phase out is meant to limit the market impact, Chinese equities fell today on concerns of forced selling by these quant funds. As we’ve said many times before, these equity support measures are unlikely to have any lasting impact until the underlying causes (weak economic growth, huge debt overhang) are addressed.