Markets to Watch: Price Pressures Piling Up for Fed

Summary

• A data-rich week in the US sees the Fed’s preferred measure of inflation (PCE) and Q4 GDP come out. Expect both to be too hot for the Fed’s liking.
• EZ inflation data will likely undershoot ECB expectations, while BoE and ECB speakers could indicate policy outlooks.
• In the $-bloc, expect a hawkish pause from the RBNZ. Meanwhile, Australia gets inflation data – will it keep the RBA on a hawkish track?
• In EM, China PMIs may undershoot as the composite index appears too high versus high-frequency data. We also expect the NBH to accelerate easing at Tuesday’s policy meeting.

US: Growth, Inflation to Remain Too Hot for the Fed

Last week, Fed speakers continued to signal cuts are not imminent. The minutes were noticeably more hawkish than the 31 January presser, conveying greater uncertainty on the path of disinflation. That said, Dominique disagrees with suggestions that the next Fed move will be a hike. With a low risk of a 2024 recession, she expects the Fed to start cutting in June.

Key data this week includes:

• PCE (Thursday): we agree with the consensus that already prices in the latest CPI and PPI, expecting limited additional information on the inflation trend from PCE.
• Q4 GDP, second estimate (Thursday): we expect growth unchanged and still too hot for the Fed. The first estimate of Q4 corporate profits is due – a key indicator of the risks of overheating or recession.
• personal income and spending (Thursday): in line with retail sales, the consensus expects slower consumption, which seems reasonable. We expect continued acceleration of real income growth and a recovery in the savings rate.

Elsewhere, we get manufacturing PMIs and real estate data throughout the week, plus jobless claims on Thursday.

Markets We Are Watching

• We’re bearish on US treasuries. We think higher term premia and more cuts being priced out of the curve could lead to the 10-year UST yield hitting 4.4% in the coming weeks. With around 10bps to go, this remains our focus.
• Nvidia delivered. The firm beat consensus earnings and revenue estimates while also raising its guidance for Q1. Following a 10% rally to new highs after earnings, we watch for further signs of follow-through.
• Watch S&P High Beta stocks vs S&P Low Vol (SPHB vs. SPLV). This ratio typically performs when the market is feeling risk-on and growth prospects are rising. Recently, it has put in a double top, so we need to see if it breaks down, which could be a bearish signal for the broader market.
• The US dollar moved against us last week after falling by 0.3%. It has now broken below its upward channel and is trading around its 200dma at 103.71. This will be a key level to hold.

Europe & UK: Inflation Undershoot?

We still expect both the ECB and BoE to cut in June. Market pricing for both remains almost entirely driven by that for the Fed. This will likely diverge once cutting begins. In general, we see room for less dovishness in ECB pricing than BoE pricing.

• EZ CPI (Thursday) will be the main release of the week. It is likely to undershoot ECB expectations, but Henry sees upside risk versus consensus expectations of +2.9% for core YoY.
• ECB and BoE speakers are due this week. Expect little new from the former, but BoE speakers could signal more dovishness following Bailey’s comments at the TSC last week.

Markets We Are Watching

• 10-year Gilts look set to move higher after rising above 4.1% last week. UK soft data continues to come in stronger than expected despite officially being in recession. Another 20bps move higher would reverse the decline seen during the end of last year.
• European equities (Stoxx 600) closed last week at an all-time high. The equity market has largely shrugged off relatively weak data and instead seen the positives, namely that Euro area growth could be bottoming.

$-Bloc and Rest of G10 Europe: Another Hawkish Pause From RBNZ

In Canada, Thursday’s GDP numbers will reveal if the consumer has held on, while CFIB details could indicate further labour market tightness. Meanwhile, Riksbank’s Thedeen speaks on Tuesday but is unlikely to provide much new information. We also get Australian inflation data and a rate decision from the RBNZ.

• Australian inflation data (Wednesday): we expect the RBA to remain on a stubbornly hawkish track, but this rides on more strong outturns in core and services inflation. We watch the core CPI monthly release especially, given its increasing momentum.
• RBNZ rate decision (Wednesday): strong labour market and inflation data has markets pricing a 25% chance of a hike, but we think the RBNZ will stay on hold for three reasons:

1. A large portion of the latest inflation beat was driven by one-offs.
2. Employment no longer forms part of the RBNZ’s mandate.
3. Speakers (particularly Conway and Orr) have so far refused to signal a hike.

Emerging Markets: China PMIs the Focus in Asia

Asia sees no central bank meeting this week, leaving the focus squarely on Korea exports and China PMIs. Elsewhere, we get two central bank meetings (BoI today; NBH on Tuesday) and inflation data in Brazil tomorrow.

• China PMIs (Thursday): we expect a pullback, with manufacturing staying in contraction and services expanding more slowly. This is because the composite PMI appears too high versus higher-frequency indicators.
• South Korea trade data (Friday): early data show exports rose 9.9% per day in the first 20 days of the month. Chip shipments surged 39.1% year on year. The trade surplus will likely jump to a surplus over USD2bn, which should support KRW.
• National Bank of Hungary (Tuesday): expect rate cuts to accelerate now that inflation is back within the central bank’s target range and the currency is showing signs of stability.

Markets We Are Watching

• The combination of stronger Asian growth led by semis, and equity inflows into South Korea have failed to boost the won. We look a break below 1328 vs USD to signal a trend change in USD/KRW.
• Chinese equities continue to rebound after the implementation of a short selling ban and the recent 25bps LPR cut. We look for a break above $24 on FXI the iShares China ETF.

Key Market Movers From Last Week

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)