Yen Firm After Upside Miss to Japan CPI

February 27, 2024
  • Fed officials remain cautious about easing too soon; February Conference Board consumer confidence will be the highlight; the economy remains robust; Brazil reports mid-February IPCA inflation
  • Eurozone reported January money supply data; Hungary is expected to cut the base rate 100 bp to 9.0%
  • Japan January national CPI data ran a little hot; RBNZ decision will be announced overnight; Taiwan reported solid January export orders

The dollar is treading water as markets await fresh drivers. The yen is outperforming, with USD/JPY trading lower near 150.25 after Japan reported higher than expected CPI data (see below). DXY is trading flat near 103.787 and a clean break below 103.694 sets up a test of the February low near 102.901. The euro is trading flat near $1.0850, while sterling is trading flat near $1.2680. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon and the markets are finally coming around to our view. The 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

Fed officials remain cautious about easing too soon. Schmid said “With inflation running above target, labor markets tight, and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy. I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won.” Schmid became president of the Kansas City Fed last August, but he is not a voter this year. Barr speaks today.

Markets are finally beginning to listen. The odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen to around 15%. More importantly, the June cut that was fully priced in at the start of last week has seen those odds fall to 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.

February Conference Board consumer confidence will be the highlight. Headline is expected to rise two ticks to 115.0 and would be the highest since December 2021. Final February University of Michigan consumer sentiment will be reported Friday. Both measures have been on the rise, which is consistent with continued strength in consumption.

Housing data will remain in focus. December FHFA and S&P CoreLogic house prices are both expected to rise m/m as the modest housing recovery continues. Yesterday, January new home sales came in at 1.5% m/m vs. 3.0% expected and a revised 7.2% (was 8.0%) in December. Pending home sales will be reported Friday and are expected at 1.3% m/m vs. 8.3% m/m in December. Mortgage rates have been rising in February and so the housing sector recovery may be at risk.

Regional Fed surveys for February will continue rolling out. Dallas Fed services index will be reported today. Yesterday, its manufacturing index came in at -11.3 vs.-14.0 expected and -27.4 in January. Richmond Fed manufacturing (-9 expected vs. -15 in January) and services indices will also be reported today. So far, the February regional Fed manufacturing surveys have come in stronger than expected and corroborates the recent improvement in the wider manufacturing PMI surveys for the U.S.

The economy remains robust. The Atlanta Fed’s GDPNow is tracking Q1 growth at 2.9% SAAR and will be updated today after the data. January durable goods orders (-5.0% m/m expected) will be reported. We get a revision to Q4 GDP data tomorrow and growth is expected to remain steady at 3.3% SAAR. Of course, this is old news as markets look ahead to Q1 and beyond. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.8% SAAR and will be updated Friday. This model also starts estimating Q2 growth starting in early March.

Brazil reports mid-February IPCA inflation. Headline is expected at 4.54% y/y vs. 4.47% in mid-January. If so, it would be the first acceleration since mid-October and just above the 1.5-4.5% target range. Next COPOM meeting is March 20 and another 50 bp cut to 10.75% is expected. The swaps market is pricing in 150 bp of total easing over the next six months that would see the SELIC rate bottom at 9.75%. Of note, the expected terminal rate has risen in recent weeks as the fiscal outlook deteriorates.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported January money supply data. M3 growth came in at 0.1% y/y vs. 0.3% expected and a revised 0.2% (was 0.1%) in December. This was the first deceleration since the August trough. More importantly, the contribution to M3 growth from private sector credit remains muted, reflecting the lack of aggregate growth in bank lending. Indeed, credit to the private sector rose just 0.4% y/y in January, unchanged from December. The monetary developments are consistent with sluggish economic activity and contained inflation pressures. As a result, the risk is that the ECB cuts policy interest rates sooner than June, which would tend to limit EUR relief rallies. Elderson speaks today.

National Bank of Hungary is expected to cut the base rate 100 bp to 9.0%. Stagnant economic activity and strong disinflationary pressures (CPI inflation slowed to a three-year low of 3.8% y/y in January) leave plenty of room for the MNB to ease aggressively. Indeed, Deputy Governor Barnabas Virag recently said that this week’s rate decision will again be between 75 bp and 100 bp cuts. The swaps market is pricing in 375 bp of total easing over the next 12 months that would see the policy rate bottom at 6.25%.

ASIA

Japan January national CPI data ran a little hot. Headline came in at 2.2% y/y vs. 1.9% expected and 2.6% in January, while core (ex-fresh food) came in at 2.0% y/y vs. 1.9% expected and 2.3% in January. This is the first time that core is at or below the 2% target since March 2022. Core ex-energy came in 3.5% y/y vs. 3.3% expected and 3.7% in January. The yen and JGB yields rose after the data, with the 2-year trading at the highest since 2011. When all is said and done, however, disinflation continues and so we believe that the BOJ can afford to be patient with policy normalization. Liftoff is still seen as most likely coming in June, but we still believe that the risk is that it comes later rather than sooner.

The RBNZ decision will be announced overnight. The bank is expected to leave the Official Cash Rate (OCR) at 5.50% and reiterate “that interest rates will need to remain at a restrictive level for a sustained period of time.” Markets see over 20% probability of a 25 bp rate hike, rising to top out near 50% in May. Nonetheless, the focus will be on the updated macro projections. The RBNZ currently forecasts the OCR to peak around 5.69% in Q3 2024, implying nearly 75% probability of another 25 bp rate hike. We doubt the revised RBNZ projections will rule out an additional policy rate increase because of stronger than expected non-tradable inflation and private sector wage growth over Q4 2023. As such, NZD risks are skewed to the upside.

Taiwan reported solid January export orders. Orders rose 1.9% y/y vs. -3.6% expected and -16.0% in December. This was the strongest reading since August 2022. However, much of the recent recovery in export orders is due to low base effects, as regional growth and activity remain subdued overall.  

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction