Markets to Watch: Bonds Beware as QRA Emerges

Summary

• In the US, the Fed meets on Wednesday. We expect them to hold rates steady while preparing markets for a cut in March.
• In the UK, the BoE will likely hold rates unchanged on Thursday, taking a more dovish profile in the near term.
• January CPI is the main release of the week for the Eurozone. A downside surprise is possible, but we think the ECB can wait until June to cut.
• Elsewhere, Sweden’s Riksbank meets on Thursday, CPI data is due in Australia, and we expect two rate cuts from NBH and BCB in emerging markets.

US: Fed to Prepare Markets for a March Cut

Last week’s data remained consistent with a March cut: continued strong growth and disinflation. Specifically, Q4 GDP surprised on the upside, and core PCE was in line with consensus but above Dominique’s expectations. The key event this week is Wednesday’s FOMC, then labour market data (NFP) on Friday.

• FOMC meeting (Wednesday). Dominique expects the Fed to stay on hold but prepare markets for a March cut by removing the reference to further hikes from the statement and conveying greater confidence in inflation returning to 2%. For March, she has a 50bp cut as a 45% probability, 25bp at 50%, and no cut at 5%.
• January NFP (Friday): Dominique agrees with the consensus of 185k. The more important parts of the release from the Fed’s perspective will be data on the supply/demand balance, especially unemployment and wages.
• Q4 ECI (Wednesday): This is the Fed’s preferred measure of wage growth because it considers changes in the composition of employment. We agree with the consensus 1% QoQ SA, which aligns with the Atlanta Fed monthly median wage.

Outside of the usual data, we are also watching for this week’s Treasury Quarterly Announcements (QRA). Further coupon issuance in the current environment of still-negative term premium could push long end yields higher, mainly in the 10s and 30s sector.

Markets We Are Watching

• We watch long end yields this week, particularly 10- and 30-year treasuries for signs of widening term premium after the QRA. The last two announcements have been market moving so a bearish surprise today could lead to much higher yields over the next couple of months.
• We’re also watching the broad dollar index. USD has been correlated with real yields over the last few months (as well as equities), so a bearish QRA could also lead to a much stronger dollar.
• In equities, there are several important earnings this week including AMD, Alphabet, Microsoft, and more. Earnings expectations are lofty, so the pressure on these firms to deliver is high!

Europe & UK: BoE to Take Dovish Profile

The BoE rate decision and Eurozone CPI will be the two key events this week. However, we will also get a slew of manufacturing data from across Europe and hear several ECB speakers, including Lane on Tuesday and again on Thursday. The BoE’s Huw Pill also speaks on Friday following the policy decision.

• The BoE sets policy (Thursday): Henry expects the BoE to hold rates unchanged, taking a more dovish profile as votes for a hike reduce. Mann could be left alone backing a hike as Haskel and Greene shift to pause. In the MPR forecasts, wage expectations and inflation will need downward revision due to recent misses (Charts 1 and 2). We still position for more BoE dovishness than currently priced.
• Eurozone CPI is due (Thursday): Volatility is possible due to index reweighting and the end of energy subsidy payments. Markets expect +2.7% headline and +3.2% core, but Henry sees downside risks (with low conviction given the volatility). We still expect the ECB can wait until June to cut.

Markets We Are Watching

• Ryanair reports today. As Europe’s best run budget airline, it will provide the best indication as to the flying intentions of the consumer.
• In rates, we’re watching ECB ESTR after CPI. We think markets will use this week’s print as an opportunity to further push back on April rate cuts.

$-Bloc and Scandies: Aussie Inflation Data to Undershoot

This week is all about inflation data for Australia, with Q4 CPI to give an important read on price pressures for the RBA. In New Zealand, the RBNZ’s chief economist will also digest last week’s inflation data. Finally, Sweden’s Riksbank meet on Thursday where, absent new forecasts, language will be the focus.

• Australian CPI (Wednesday): Consensus expects +0.9% against the RBA forecast of +1.0%. However, Ben thinks the data could even undershoot consensus given increased rental assistance will slow rental inflation while goods disinflation is expected to play catch-up versus the RoW. An undershoot would let the RBA turn more neutral.
• RBNZ’s Conway likely to speak (Monday): last week’s CPI revealed non-tradables inflation was stronger than the RBNZ had forecasted. This should enable the central bank to remain stubbornly hawkish despite the details (especially food disinflation) being more promising.
• Riksbank set policy (Thursday): Ben expects them to rotate their language. In their first no-forecast meeting, they are likely to express their happiness regarding SEK strength and core CPI progress, while saying no more hikes are likely needed. There is a risk (albeit small) that they talk about future easing.

Emerging Markets: NBH, BCB to Cut Rates

Following MAS over the weekend, this week sees central banks in Brazil and Hungary set policy rates. We also get a broad range of manufacturing data, including China’s NBS and Caixin PMIs.

• NBH to accelerate easing (Tuesday): Deputy Governor Virag recently said there is now more scope to cut rates by 100bps, suggesting accelerated easing. The MPC discussed this in December but instead stuck with 75bps. December’s 5.5% CPI print is the main rationale for a larger cut. Weak growth is another. Recent forint weakness leaves some risk of a smaller cut.
• BCB to cut 50bp (Wednesday): this would align with recent guidance. Going forward, we expect the BCB to cut again in March then possibly step down to 25bp cuts from the May meeting on the likely revision of fiscal targets for 2024 on 22 March. The statement may hint at slower easing as well.

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.)