Markets to Watch: Will Rates Shrug Off PCE?

Note: Due to the upcoming holidays, this week’s Markets to Watch covers an extended period, from 25 March to 5 April.

Summary

• US: Friday’s core PCE should support the Fed’s belief in continued disinflation, while NFP (5 April) should show cooling wage growth but strong employment.
• Europe: preliminary inflation figures out over the next fortnight could modestly overshoot ECB expectations. We stay hawkish on the ECB.
• $-Bloc and Rest of G10: Aussie CPI, heavily services oriented, should be key for the RBA, while markets have likely priced a dovish Riksbank outcome.
• EM: regional PMIs will indicate the state of the global manufacturing recovery, while the RBI, NBH, SARB, and NBP all set rates.

US: It Is a Dove World

The Fed stuck to a positive view on disinflation and three 2024 cuts at last week’s policy meeting. The outcome was more dovish than Dominique expected, adding to her conviction for a first cut in June. Post FOMC, speakers are likely to socialize Powell’s view that disinflation is continuing if on a slower, bumpier path.

Key data over the next fortnight:

• Core PCE (29 March): Powell suggests the Fed has a MoM estimate well below 30bp. That would support their view that January’s high inflation was a bump in the disinflation road.
• NFP (5 April): Powell says the balance between demand and supply rather than just demand is key, so focus on wages and unemployment. Expect unemployment at 3.8% and wage growth at 0.3%, which are consistent with the Fed’s narrative. We look for real wage bill growth above 3% YoY as a signal of strong growth momentum.
• Income and spending (29 March): A stable savings rate around 3.75% should signal continued strong consumption growth. A large increase in the savings rate (not our expectation) could signal rising consumer credit delinquencies are starting to impact growth.

Markets We Are Watching

• We got a higher median dot for 2025 as highlighted last week, yet SOFR Z4-Z5 spreads remain at wides and continue to point towards 100bp of cuts in 2025. We continue to watch this spread and think strong data will put pressure on the market to ease up on medium-term rate cut expectations.
• Following the Fed, we saw the 10y UST yield ease off a bit to below 4.20% on Friday. A scenario where the Fed proceeds with rate cuts despite sticky inflation should lead to the 10y yield selling off and therefore higher yields. Since the start of the year, the 10y has made higher highs and higher lows. We think this will continue in the weeks ahead.

Europe & UK: A Quiet Couple of Weeks?

Last week’s BoE was a dovish surprise due to comments in the statement, minutes, and from Governor Bailey. We think the BoE are shifting towards cutting, with our base case still that the data will force a cut in June and more dovish forecasts in May. There is little important UK data over the next two weeks:

• The DMP survey on 4 April will provide updated insights into price setting (expect it to keep normalising).
• Mann’s comments on 25 March could provide hawkish caveats to her last-minute shift to a pause at the last meeting.

Turning to the ECB, preliminary inflation figures will dominate. This week brings Spain, Italy, and France, with EZ aggregate data on 3 April. We pencil in EZ core inflation at +3.0% YoY, but with upside risk. That would constitute +1.15% MoM, typical for March but to the topside of ECB forecasts (Chart 1).

We therefore see risk of the market trimming June ECB cut probabilities – keep an eye on the trend in services, which has been ticking up (Chart 2).

Markets We Are Watching

• EUR/GBP broke out recently as it closed above 0.86 following last week’s dovish UK CPI data. So far this year, this cross has been stuck in a narrow range, so we are watching for continuing follow-through this week.
• In the UK, we are watching the ratio of the FTSE-100 vs. FTSE 250. We are seeing tentative signs that the UK economy could be bottoming, which could provide a boost for the UK’s more domestically sensitive stocks in the FTSE 250. A stronger GBP would also help in this regard.
• Elsewhere in Europe, we are watching the Lo-spread. The spread between BTPs and Bunds has narrowed to 1.32%, the lowest since the end of 2021. It looks like we may have seen a local bottom, as the ECB embarks on its rate cutting cycle.

$-Bloc, Rest of G10: Can Riksbank Surprise?

Australia and Sweden take center stage over the next fortnight. Australia gets two monthly inflation prints, while the Riksbank sets policy.

• Australian CPI on 27 March: the second monthly CPI print of the quarter focuses on services components. Having kept their options open at the last meeting, the RBA will now get a key read on disinflation. Currently, they see goods disinflation continuing as services remain stickier.
• Riksbank meeting on 27 March: the Riksbank has been the most dovish G10 central bank, touting they could cut the policy rate as soon as May (or June). This claim became even more credible when inflation inched below forecasts. Now, at the upcoming meeting, a dovish surprise is hard.

Emerging Markets: Has the Manufacturing Recovery Continued?

The next two weeks hold several central bank meetings in EM, including the RBI, NBH, SARB, and NBP. Meanwhile, Asian PMI data should indicate whether the global manufacturing recovery has extended.

• RBI meet on 5 April: we expect rates unchanged at 6.5%. The central bank has repeatedly surprised markets by sticking to its hawkish bias. While a shift in stance to neutral is approaching, we do not expect that at the April policy meeting.
• NBH meet on 26 March: we expect a shift back to 75bp cuts, taking the policy rate to 8.25%. However, continued forint depreciation leaves uncertainty.
• SARB meet on 27 March: inflation and inflation expectations suggest another hawkish hold. Inflation is at a four-month high (5.6% YoY), and the latest inflation expectations survey shows CPI above the target’s mid-point several years ahead.
• NBP meet on 4 April: we expect rates unchanged at 5.75%, with Glapinski previously saying the path remains ‘clear’ until June.

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.)