Getting Into Full Service Mode
- US services sector growth momentum is projected to slow in February.
- China confirmed a GDP growth target of around 5% for 2024 (same target as in 2023) and there was no big fiscal stimulus push.
- Money markets raised the probability of a March BOJ rate hike.
USD recovered some of its recent losses ahead of the US ISM Services index (3:00pm London). Headline is expected at 53.0 vs. 53.4 in January. The risks are skewed to the downside because the S&P Global preliminary February services PMI came in at 51.3 vs. 52.3 expected and 52.5 in January.
Recall, USD and Treasury yields fell sharply on Friday following the deeper than expected contraction in US manufacturing activity and the downward revision to the University of Michigan consumer expectations survey. USD and Treasury yields would likely follow a similar path if the slowdown in service sector growth momentum is more pronounced than anticipated.
Beyond the short-term, the US economy is outperforming most major economies and interest rate differentials favour a firmer USD over the next three to six months. Interestingly, Federal Reserve Bank of Atlanta President Raphael Bostic (2024 voter) warned yesterday of the upside risk to the US economic and policy outlook, calling it “pent-up exuberance”. According to Bostic, if this risk scenario were to unfold “it holds the potential to unleash a burst of new demand…that would create upward pressure on prices”. Bottom line: the risk is Fed funds futures adjust higher in favour of USD.
China confirmed a GDP growth target of around 5% for 2024 (same target as in 2023) and there was no big fiscal stimulus push. The deficit-to-GDP ratio for 2024 was set at 3% (same target as early last year, which was eventually lifted to 3.8%), 3.9 trillion yuan of special-purpose bonds for local governments will be issued (an increase of 100 billion yuan over last year), and 1 trillion yuan of ultra-long special treasury bonds will be issued to address funding shortages facing some major projects.
Our view is that a sustained pick-up in Chinese economic growth is unlikely without policies that cause growth to shift from unproductive debt-fueled investment-led growth to consumption. While China’s government emphasized again it will promote steady growth in consumer spending, no concrete measures were announced.
USD/CNH is trading in tight range around 7.2100. China’s services Caixin PMI unexpectedly dipped 0.2pts in February to 52.5 (consensus: 52.9) and remains consistent with stabilising economic activity.
USD/JPY is range-bound around 150.50. But JPY is outperforming most major currencies as Japan’s OIS curve brought forward the timing of a first BOJ rate hike following the pick-up in the Tokyo CPI print (a leading indicator of Japan’s CPI data). Annual headline Tokyo CPI inflation quickened to 2.6% in February (consensus: 2.5%) from 1.8% in January. Annual core ex-fresh food and core ex-fresh food, energy also rose in February to 2.5% (prior: 1.8%) and 3.1% (prior: 3.3%), respectively (in line with consensus). Japan’s OIS curve now implies a 53% probability of a 10 bp BOJ policy rate increase in March versus 36% yesterday. Nonetheless, Japan’s inflation backdrop and soft economic activity suggest the BOJ’s normalisation process will be gradual and brief which remains a headwind for JPY.
GBP/USD is lower on USD strength. GBP and UK Gilts ignored the more modest than expected increase in BRC total retail sales. BRC retail sales (not adjusted for prices) rose by 1% m/m in February following a 1.4% m/m rise the previous month. The increase in February was less than expected (1.6% m/m) but remains consistent with a recovery in UK consumer spending activity. Bottom line: the diverging growth outlook between the Eurozone and UK favours a weaker EUR/GBP. The UK 2024 Spring Budget tomorrow is this week’s domestic highlight.
EUR/USD is trading heavy near 1.0850. The Eurozone January PPI print (10:00am London) will not generate much financial market volatility. PPI is expected to fall by 0.1% m/m in January to be down 8.1% year-over-year from -10.6% the previous month.
AUD is underperforming most major currencies perhaps because of the unimpressive Chinese fiscal stimulus outlook. Australia’s economic data released overnight are in large part supportive of AUD. In Q4 2023, the current account surplus (seasonally adjusted, current price) widened to A$11.8bn (consensus: A$5bn) from the revised surplus of A$1.3b the previous quarter, and the terms of trade increased 2.2% q/q. The Q4 2023 GDP print is up next (tomorrow, 00:30am London). Market participants anticipate real GDP to increase at a quarterly pace of 0.2% (or 1.4% year-over-year), roughly in line with the RBA’s projection.
