Yen Firm After Upside Miss to Japan CPI

February 27, 2024

Win Thin

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.

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