Quiet Day Ahead Of A Volatile Week

March 18, 2024

Quiet Day Ahead Of A Volatile Week

  • Second-tier economic data are released today and should not generate material financial market volatility.
  • Policy rate announcements by the FED, BOJ, RBA, BOE, Norges Bank and, SNB are this week’s highlights.
  • China’s monthly data release remains consistent with a tepid cyclical economic recovery.

USD is holding on to last week’s gains triggered by signs the progress on US inflation may be stalling, suggesting the Fed can be patient before loosening policy. Indeed, Fed funds futures have trimmed the probability of June rate cut to around 60% (from over 70% earlier this month) but still imply roughly 75bps of easing this year.

In our view, there is scope for Fed funds rate expectations to adjust higher in favour of a firmer USD because underlying US price pressures are still high, and the economic growth outlook remains encouraging. It's a jam-packed week ahead with policy rate announcements by the FED, BOJ, RBA, BOE, Norges Bank and, SNB. Additionally, the preliminary March PMIs for the major economies will offer a timely update on the economic outlook.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week. Overall, we see upside risk for USD and Treasury yields as the Fed’s new funds rate projection will likely imply less easing. NOK is vulnerable to the downside because we expect the Norges Bank to bring forward the timing of when the terminal rate is reached. CHF will likely underperform because we expect the SNB to start easing. JPY can edge lower as our base case is for the BOJ to keep the policy rate steady. AUD should remain supported as the RBA sticks to a hawkish hold. Finally, GBP will likely trade heavy because the risk is the BOE MPC voting turns less hawkish.

Second-tier US economic data are released today and should not generate material financial market volatility. The recovery in the New York Fed services business activity index likely stalled in March (12:30pm London) and the US NAHB housing market Index of builder sentiment is expected to stay at a six-month high in March (2:00pm London).

GBP ignored more evidence of favourable UK housing market activity. The UK Rightmove national asking price rose 1.5% in March (biggest monthly increase since May 2023) to be up 0.8% year-over-year (the highest since June 2023). Improving UK housing market activity supports a recovery in consumption spending and reduces the likelihood of an aggressive BOE easing cycle.

NOK is outperforming most major currencies on higher crude oil prices. NOK brushed-off the pick-up in Norwegian economic activity. Mainland GDP unexpectedly grew 0.4% m/m in January (consensus: 0%) after contracting by 0.3% the previous month. Wholesale and retail trade contributed the most to growth.

Brent crude oil prices edged up to its highest level since November 2023 supported by faster than anticipated recovery in Chinese manufacturing activity. Stabilizing global economic activity (the global manufacturing PMI printed at 50.3 in February up from 50.0 in January) and OPEC+ production cutbacks will continue to underpin firm crude oil prices.

China’s monthly data release remains consistent with a tepid cyclical economic recovery. From January to February, industrial production and fixed-asset investments growth topped expectations rising by 7% (consensus: 5.2%) and 4.2% (consensus: 3.2%) YTD, respectively. However, retail sales growth was softer than anticipated (actual: +5.5%, consensus: 5.6%) and the property slump remains a big drag on consumer spending. In fact, residential property investment fell 9.7% YTD in the January-February period (the most since September 2021) and cumulative new home sales by value plunged 32.7%. Overall, China’s inability to rebalance the economy away from unproductive investment-led growth towards consumption is an ongoing structural headwind to the economy.

AUD/USD is consolidating near recent lows around 0.6565 weighed down in part by weak iron ore prices. Iron ore prices on the Dalian and Singapore exchanges are down over 20% year-to-date. China’s property slump continues to undermine iron ore prices as the property sector accounts for almost 40% of China’s steel consumption. Meanwhile, iron ore inventories at Chinese ports increased in mid-March to a one year high.

NZD/USD is holding above key support at the 200-day moving average (0.6081). New Zealand's services PSI rose to a 9-month high of 53 in February suggesting the economy is on track to recover from last year’s sluggish growth. On Wednesday, New Zealand real GDP is expected at 0.1% q/q in Q4 2023 vs. -0.3% in Q3, while the RBNZ projects GDP to be flat.

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