Will Growth Stay or Will It Go?
- This week’s US economic data will either fuel growth concerns or ease them. Check out our Drivers for the Week report for the key data previews. February ISM manufacturing is up next.
- Eurozone February CPI to show the disinflation process remains on track. ECB widely expected to trim rates Thursday.
- China economic activity edged up in February. But the growth outlook remains unimpressive.
USD retraced Friday’s gains triggered by the disastrous Oval Office confrontation. Encouraging geopolitical developments emerged over the weekend. UK Prime Minister Keir Starmer and French President Emmanuel Macron are promoting a new path for a Ukraine-Russia peace deal. The first part is a one-month ceasefire covering air, sea, and infrastructure sites to help establish confidence on both sides. The second part is for Ukraine President Volodymyr Zelenskiy to sign the revenue-sharing minerals deal with the US.
USD is buffeted by US trade tariff uncertainty and concerns over the US growth outlook. Barring a last-minute delay, tariffs on Chinese imports will double to 20% effective March 4. Also, 25% tariffs on Canada and Mexico imports (with a reduced 10% rate for Canadian energy) are planned to come into force from March 4. The tariffs on Canada and Mexico were originally expected to be implement on February 4 but were ultimately delayed 30 days to March 4. Tariff jitters are USD supportive.
Meanwhile, concerns over the US growth outlook limits near-term USD upside potential and can further weigh on Treasury yields. The Atlanta Fed Q1 GDPNow model is tracking at -1.5% SAAR, down from 2.3% on February 19, after real personal spending declined more than anticipated in January (actual: -0.5% m/m, consensus: -0.1%, prior: 0.5%). The model will be updated today. For now, we remain constructive on the household spending outlook in large part because the US labor market remains robust. Friday’s February non-farm payrolls data will shed more light.
Today, the February ISM manufacturing index takes the spotlight (3:00pm London). Headline is projected at 50.8 vs. 50.9 in January. The regional Fed ISM manufacturing prints suggest risk are balanced. Of note, the US S&P Global manufacturing PMI increased 0.4pts to 51.6 in January, matching the June 2024 high. St. Louis Fed President Alberto Musalem (FOMC voter) speaks on the US economy and monetary policy (5:35pm London).
EUROZONE
EUR/USD bounced back above 1.0400 after testing lows around 1.0360 on Friday. The Eurozone February preliminary CPI is due today (10:00am London). Headline CPI is projected at 2.3% y/y vs. 2.5% in January and core CPI is forecast at 2.5% vs. 2.7% in January. The already released regional EU harmonized CPI prints were mixed. Germany was a tick higher than expected at 2.8%y/y vs. 2.8% in December, France was two ticks lower than anticipated at 0.9% y/y vs. 1.8% in January while Spain matched consensus at 2.9% y/y vs. 2.9% in January.
Overall, the Eurozone disinflation process remains on track and the ECB has scope to deliver on rate cut expectation. The ECB is widely seen lowering the policy rate 25bps to 2.50% Thursday. The ECB is also expected remove reference that monetary policy remains restrictive because the policy rate is getting close to neutral rate territory. ECB staff estimate the neutral rate at 1.75%-2.25%. Scrapping the restrictive reference would signal limited scope to ease policy more than is currently priced-in and offer EUR support.
CHINA
USD/CNH is up above 7.3000 and stocks in China are trading on the defensive ahead of new US tariffs tomorrow. China economic activity edged up in February. The composite PMI increased to a two-month high at 51.1 vs. 50.1 in January as the manufacturing sector unexpectedly returned into growth and services activity ticked-up. The manufacturing PMI rose 0.3 point to 50.2 (consensus: 49.9) and the non-manufacturing PMI matched consensus at 50.4 vs. 50.2 in January. The private sector Caixin manufacturing PMI also improved more than anticipated to a three-month high at 50.8 (consensus: 50.4) vs. 50.1 in January.
However, the growth outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity: low household income levels, high precautionary savings, and high levels of household debt. China’s annual “Two Sessions” National People's Congress meeting begins Wednesday. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives.
AUSTRALIA
AUD/USD stabilized near a one month low above 0.6200. Australia’s labor market remains resilient and argues for a cautious RBA easing cycle. Australia’s ANZ-Indeed job ads declined -1.4% m/m in February, but this follows an upwardly revised 1.3% m/m in January (prior: 0.2%). The next 25bps cut is not fully priced in until July.
NEW ZEALAND
NZD/USD is heavy near 0.5600. New Zealand’s terms of trade index overshot expectations rising 3.1% q/q in Q4 (consensus: 1.4%) vs. 2.5% in Q3 to the highest level since Q2 2022. A higher terms of trade has a positive net wealth effect on the economy and raises the fundamental value of NZD. Nonetheless, NZD needs to keep trading at a deep discount to fundamental equilibrium (which we estimate at around 0.6600) to attract foreign investments and recycle the country’s large current account deficit (-6.4% of GDP).
