Weekly Market Recap (18-22 March)

Monday

ECB’s de Cos (dove
– voter) over the weekend reiterated the willingness of the ECB to start
cutting rates in June:

• If our macroeconomic
  forecasts are met in the coming months, it is normal that we will start
  cutting rates soon and June could be a good date to start.
• Current degree of
  consensus is very high, and I hope this will continue to be the case.

The New Zealand
Services PMI improved further in February:

• Services PMI 53.0
  vs. 52.2 prior (revised from 52.1).

BNZ comment:

• “When we combine the
  PMI and PSI together to get an indicator of activity, there is a strong
  suggestion of growth returning later this year. The turnaround occurs a
  little stronger and earlier than we are forecasting but, whatever the
  case, it is a heartening sign”.

The Chinese February Industrial Production beat
expectations by a big margin:

• Industrial
  Production Y/Y 7.0% vs. 5.0% expected and 6.8% prior.

The Chinese February Retail Sales beat expectations:

• Retail Sales Y/Y
  5.5% vs. 5.2% expected and 7.4% prior.

The Chinese Unemployment Rate increased to 5.3% vs.
5.2% prior.

The Canadian February PPI beat expectations by a big
margin:

• PPI M/M 0.7% vs.
  0.1% expected and -0.1% prior.
• PPI Y/Y -1.7% vs.
  -2.9% prior.
• Raw materials prices
  M/M 2.1% vs. 0.8% expected and 1.2% prior.
• Raw materials prices
  Y/Y -4.7% vs. -6.5% prior.

The US NAHB Housing Market Index increased further in
March:

• NAHB 51 vs. 48
  expected and 48 prior.

Details:

• Single family 56 vs. 52 prior.
• Next six months 62
  vs. 60 prior.
• Traffic of
  prospective buyers 34 v.s 32 prior.

ECB’s Centeno (dove –
voter) continues to support a rate cut in June:

• Cutting rates may
  help prevent a recession.

Tuesday

The RBA left the Cash
Rate unchanged at 4.35% as expected dropping the tightening bias:

• Board remains
  resolute in its determination to return inflation to target.
• Inflation continues
  to moderate but remains high.
• Recent information
  suggests that inflation continues to moderate.
• Services inflation
  remains elevated and is moderating at a more gradual pace.
• Board is not ruling
  anything in or out on interest rates.
• The data are
  consistent with continuing excess demand in the economy and strong
  domestic cost pressures, both for labor and non-labor inputs.
• Higher interest
  rates are working to establish a more sustainable balance between
  aggregate demand and supply in the economy.
• The board expects
  that it will be some time yet before inflation is sustainably in the
  target range.
• Accordingly,
  conditions in the labor market continue to ease gradually, although they
  remain tighter than is consistent with sustained full employment and
  inflation at target.
• While recent data
  indicate that inflation is easing, it remains high. While there are
  encouraging signs that inflation is moderating, the economic outlook
  remains uncertain.

Moving on to the Governor
Bullock’s Press Conference:

• We’re making
  progress in fight against inflation.
• But inflation remains high.
• Recent data suggests
  we’re on the right track.
• We need greater
  confidence in seeing inflation return to target in a reasonable timeframe.
• Risks to the outlook
  are finely balanced.
• It is too soon to
  rule anything in or out.
• We have changed
  language on guidance based on data.
• Not confident enough
  to say that we can rule out certain interest rate changes.
• But we are on the
  path to achieving goals set out on the inflation front.
• We are responding to
  data as the data comes out.
• On the one hand, we
  still have inflation above target.
• Services inflation
  is still elevated.
• On the other hand,
  we are conscious that consumption is slowing.
• And also tightness
  in labour market conditions is easing.
• We can’t rule
  anything in or out.
• Need to be much more
  confident on inflation coming down to consider a rate cut.

The BoJ has finally
exited the negative interest rates policy hiking rates by 10 bps to 0.00-0.10%
as expected. Moreover, the central bank scrapped the yield curve control and
ETF purchases while maintaining QE:

• Short-term policy
  rate at around 0.00% to 0.10%.
• Voting majority of
  7-2 on interest rates (Asahi and Toyoaki dissented).
• Upper bound of 1% on
  10-year JGB yields removed i.e. yield curve control scrapped.
• To continue JGB
  purchases with broadly same amount as before.
• In case of rapid
  rise in yields, BoJ will make nimble response such as increasing JGB
  purchases.
• Voting majority of
  8-1 on JGB purchases (Toyoaki dissented).
• To discontinue
  purchases of ETFs and J-REITs.
• To gradually reduce
  corporate bond purchases and discontinue them in about one year.
• Voting was unanimous
  on discontinuing ETF purchases.
• Japanese economy has
  recovered moderately, although some weakness has been seen in part.
• It is highly likely
  wages will continue to increase steadily this year.
• Virtuous cycle
  between wages and prices has become more solid amid recent data.
• BoJ judges it came
  in sight that price stability target would be achieved in a sustainable
  and stable manner towards the end of the projection period as outlined in
  January outlook report.

Moving on to the Governor Ueda’s Press Conference:

• We will carry out
  ‘regular’ monetary policy.
• Not thinking of a
  name for new policy framework, since it is a ‘regular’ setting.
• We will set
  short-term interest rates just like any other central bank.
• Interest rate levels
  will be determined by markets.
• Accommodative
  conditions remain in place and will firmly underpin economy, prices.
• Will consider
  options for easing policy if needed, including ones used in the past.
• There is still a
  distance to 2% price target when looking at inflation expectations.
• The pace of further
  rate hikes depends on economy, price outlook.
• We will consider
  reducing JGB purchases at some point in the future.
• Likelihood of
  achieving 2% price target is rising but still not 100% guaranteed.
• We are at a phase
  where we can slowly proceed with possible rate hikes.
• If wage hike trend
  broadens, it is a consideration for further policy decisions.
• For now, not
  necessarily confident enough that wages at smaller firms will rise.

ECB’s de Guindos (neutral – voter) said that he’s
ready to discuss a rate cut in June but the evolution of wage growth for him is
key:

• Ready to discuss
  rate cut in June.
• We haven’t yet
  discussed anything about future rate moves.
• We need to gather
  more information.
• We are data-dependent.
• Evolution of wages
  is key.
• In June, we will
  have our new projections and we will be ready to discuss this.

The Canadian February CPI missed expectations across
the board by a big margin:

• CPI Y/Y 2.8% vs.
  3.1% expected and 2.9% prior.
• CPI M/M 0.3% vs.
  0.6% expected and 0.0% prior.
• Core CPI Y/Y 2.1% vs.
  2.4% prior.
• Core CPI M/M 0.1% vs. 0.1% prior.
• Trimmed Mean CPI Y/Y
  3.2% vs. 3.4% prior.
• Median 3.1% vs. 3.3% prior.
• Common 3.1% vs. 3.3%
  prior (revised from 3.4%).

The US February Housing Starts and Building Permits
beat expectations:

• Housing Starts 1521M
  vs. 1425M expected and 1374M prior (revised from 1331M).
• Housing Starts M/M
  10.7% vs. -12.3% prior (revised from-14.8%).
• Building Permits
  1518M vs. 1495M expected and 1489M prior.
• Building Permits M/M
  1.9% vs. -0.3% prior.

ECB’s Kazaks (hawk – voter) is supporting the current
market expectations:

• Comfortable with
  current market pricing on rates.
• It will take some
  time to get to neutral rate.

Wednesday

The PBoC left the LPR rates unchanged as expected:

• LPR 1 year 3.45%.
• LPR 5 year 3.95%.

The UK February CPI missed expectations across the
board:

• CPI Y/Y 3.4% vs.
  3.5% expected and 4.0% prior.
• CPI M/M 0.6% vs.
  0.7% expected and -0.6% prior.
• Core CPI Y/Y 4.5% vs.
  4.6% expected and 5.1% prior.
• Core CPI M/M 0.6%
  vs. 0.7% expected and -0.9% prior.
• Services Inflation
  6.1% vs. 6.0% expected and 6.5% prior.

ECB’s Lagarde (neutral – voter) is trying to manage
expectations for the ECB rate cuts path after the first move seen in June:

• Cannot commit to
  rate path even after first cut.
• We need to move
  further along the disinflationary path.
• Average wage growth
  in 2024 fell from 4.4% from January meeting to 4.2% in March meeting.
• Latest data suggests
  wages are growing in a way that is compatible with inflation reaching the
  ECB’s target.
• Will get a clearer
  picture in the coming months.
• Expect to have two
  important pieces of evidence to raise confidence level sufficiently for
  first policy move.
• If the data shows
  sufficient alignment between inflation path and ECB projections, then can
  dial back on current policy cycle.

The BoC released the Minutes of its March Monetary
Policy Meeting:

• Agreed conditions
  for rate cuts should materialize in 2024 if economy evolves as
  forecast.
• Council members had differing
  views on when there would likely be enough evidence to judge if
  conditions for a cut were in place.
• Members also had
  differing views on how to weigh risks to inflation outlook.
• Indicators of
  underlying inflation suggested slow progress getting inflation down to
  target.
• Expressed concern
  that housing continued to pose upside risks to the inflation outlook.
• Saw nothing in data
  that would change their view that CPI inflation will remain around 3% in
  the coming months.
• While house prices
  continued to fall in January, recent strength in resales could translate
  into pickup in house prices and stoke shelter inflation.
• Strength in equity
  markets could provide a boost to consumer sentiment.

The Fed held interest rates steady at 5.25-5.50% as
expected with no change to the statement:

• Dots continue to
  show 75 bps in cuts this year but show fewer in 2025 and 2026.
• 2024 core PCE median
  seen at 2.6% vs. 2.4% prior.
• Central tendency on
  PCE inflation edges up.
• No mention in the
  statement of the balance sheet or tapering.

Moving on to the Fed Chair Powell’s Press Conference:

• Risks are moving
  into better balance.
• Inflation has eased
  substantially but is still too high.
• Path forward is uncertain.
• Economy has made
  considerable progress.
• Risks are moving
  into better balance.
• Activity in the
  housing sector was subdued last year.
• GDP has been
  bolstered by strong consumer demand as well as healing supply chains.
• Longer-term
  inflation appears to remain well anchored.
• Inflation has eased notably.
• We’re likely to cut
  rates at some point this year.
• The economy is
  performing well.
• We continue to make
  good progress on bringing inflation down.
• We’re strongly committed
  to bringing inflation down to 2% over time but we stress ‘over time’.
• There is some
  confidence that lower market rents we’re seeing will show up but there’s
  uncertainty on the timing.
• There will be a
  combination of lower goods and services inflation bringing inflation down
  to 2% sustainably.
• The risks are really
  two-sided now.
• On the January PCE
  and CPI reports, we have reason to think there were seasonal adjustment
  effects there.
• If you take January
  and February together, I don’t think the story of bumpy but lower
  inflation is unfolding.
• I don’t think those
  numbers add to our confidence that inflation is coming down.
• I don’t think we
  know if rates will be higher in the longer run.
• We’re looking for
  data that confirms what we saw late last year that will give us higher
  confidence in inflation falling to 2%.
• It’s still likely in
  most people’s view that we will have rate cuts this year but depends on
  data.
• We do think
  financial conditions are weighing on economic activity.
• Wage growth is
  moderating to more sustainable levels.
• Labor market is in
  good shape.
• Initial claims are
  very, very low.
• We are closely
  watching layoffs but don’t see it.
• We don’t see cracks
  in the jobs market.
• Strong job growth,
  in and of itself, is not a reason to hold off on rate cuts.
• Fed is discussing
  the pace of balance sheet runoff, will have something ‘fairly soon’.
• I don’t think
  inflation was mostly caused by wages.

Nikkei reported that the BoJ was weighing the next
rate hike for July. The report also said that an October hike was considered
one of the most likely scenarios and that the timeline would “keep us from
coming off like we’re rushing to hike rates,” said a BOJ source. But an
early hike “leaves room for us to consider rolling out another increase
before the end of the year”.

Thursday

The New Zealand Q4 2023 GDP missed expectations:

• Q4 2023 GDP Q/Q
  -0.1% vs. 0.1% expected and -0.3% prior.
• Q4 2023 GDP Y/Y
  -0.3% vs. 0.1% expected and -0.6% prior.

The Australian March PMIs showed another downtick in
Manufacturing and uptick in Services:

• Manufacturing PMI
  46.8 vs. 47.8 prior.
• Services PMI 53.5
  vs. 53.1 prior.

The Australian February Labour Market report beat
expectations by a big margin with positive revisions to the prior figures:

• Employment change
  116.5K vs. 40K expected and 15.3K prior (revised from 0.5K).
• Unemployment rate
  3.7% vs. 4.0% expected and 4.1% prior.
• Participation rate
  66.7% vs. 66.8% expected and 66.6 prior (revised from 66.8%).
• Full-time
  employment 78.2K vs. 19.9K prior (revised from 11.1K).
• Part-time
  employment 38.2K vs. -4.6K prior (revised from 10.6K).

The Japanese March PMIs both improved further although
Manufacturing remains in contractionary territory:

• Manufacturing PMI
  48.2 vs. 47.2 prior.
• Services PMI 54.9
  vs. 52.9 prior.

BoJ Governor Ueda reaffirmed the patient stance for
the time being now that they exited the negative interest rates policy:

• BoJ expected to maintain
  accommodative monetary policy for the time being.
• Accommodative
  monetary policy likely to underpin the economy.
• Cost-push pressure
  on inflation dissipating but service prices continue to rise moderately.

• Recent wage
  negotiation data, hearing on companies confirmed wage-inflation cycle
  strengthening.
• Medium, long-term
  inflation expectations heading toward 2%.
• BoJ will support
  economy, prices by maintaining accommodative monetary conditions for time
  being.
• We could have waited
  until inflation stays at 2% for long time, before exiting massive stimulus
  but that could have led to sharp increase in upside risk to price outlook.
• Don’t think our
  latest decision will lead to sharp increase in mortgage loan rates, cost
  of corporate.

• Negative rate and
  other tools under BoJ’s massive stimulus had boosted demand by pushing
  down real interest rates, but had side-effects too such as on JGB market
  function.
• Preliminary wage
  negotiation outcome tends to be revised down but even so, we thought final
  outcome would be fairly strong number.

• Consumption was
  showing some weakness, but we were able to confirm strength in capex.
• We know some small
  firms might struggle to hike wages, but overall, small, midsized firms’
  profits are improving.
• As we end our
  massive stimulus, we will likely gradually shrink our balance sheet, and
  at some point, reduce JGB purchases.
• At present, we have
  no clear idea on timing of reducing JGB buying, scaling back size of
  balance sheet.
• We will take plenty
  of time examining how to reduce BoJ’s ETF holdings.

• In event of reducing
  BoJ’s ETF holdings, BoJ will come up with guidelines taking into account
  market developments at the time.
• In selling BoJ’s ETF
  holdings, we will do so in a way that minimises losses on BoJ, disruptions
  in markets.

The SNB “surprised” with
a 25 bps cut bringing interest rates to 1.50% vs. 1.75% prior:

• Easing of policy
  made possible as fight against inflation has been effective.
• Inflation likely to
  remain in the range below 2% over the next few years.
• Today’s easing
  ensures that monetary conditions remain appropriate.
• 2024 inflation seen at 1.4% (previously 1.9%).
• 2025 inflation seen at 1.2% (previously 1.6%).
• 2026 inflation seen at 1.1%.
• Will adjust its
  monetary policy again if necessary to ensure inflation remains within the
  range consistent with price stability over the medium-term.

Moving on to the Chairman Jordan’s Press Conference:

• Rate cut is not a
  parting gift.
• We always make brave
  decisions regarding the mandate.
• Our decisions are
  independent of what other central banks do.
• We give no forward
  guidance on future interest rates, we will see where we are in 3 months’
  time.
• Rate cut today is
  100% compatible with our framework.

The Eurozone March PMI showed Manufacturing falling
further in contraction and Services moving higher in expansion:

• Manufacturing PMI
  45.7 vs. 47.0 expected and 46.5 prior.
• Services PMI 51.1
  vs. 50.5 expected and 50.2 prior.

The UK March PMIs showed Manufacturing climbing
further but remaining in contraction with Services ticking lower:

• Manufacturing PMI
  49.9 vs. 47.8 expected and 47.5 prior.
• Services PMI 53.4
  vs. 53.8 expected and 53.8 prior.

The BoE left interest rates unchanged at 5.25% as
expected with the vote split showing everyone supporting the rate hold except
Dhingra voting for a 25 bps cut:

• Bank rate vote 8-0-1 vs. 7-1-1 expected (Dhingra
  voted to cut rates by 25 bps).
• Moving in the right direction but not yet at the
  point to cut interest rates.
• Inflation has continued to fall back relatively
  sharply.
• Restrictive monetary policy stance is weighing on
  activity in the real economy.
• That is leading to a looser labour market and is
  bearing down on inflation pressures.
• But key indicators of inflation persistence
  remain elevated.
• Monetary policy will need to remain restrictive
  for sufficiently long to return inflation to the 2% target.
• Prepared to adjust monetary policy as warranted
  by economic data to return inflation to the 2% target sustainably.
• Will keep under review for how long Bank Rate
  should be maintained at its current level.

The US Jobless Claims beat expectations once again:

• Initial
  Claims 210K vs. 215K expected and 212K prior (revised from 209K).
• Continuing
  Claims 1807K vs. 1820K expected and 1803K prior (revised from 1811K).

The US March PMIs showed Manufacturing climbing
further into expansion while Services missed slightly:

• Manufacturing PMI 52.5 vs. 51.7 expected and 52.2
  prior.
• Services PMI 51.7 vs. 52.0 expected and 52.3
  prior.

“A steepening rise in costs,
combined with strengthened pricing power amid the recent upturn in demand,
meant inflationary pressures gathered pace again in March. Costs have increased
on the back of further wage growth and rising fuel prices, pushing overall
selling price inflation for goods and services up to its highest for nearly a
year. The steep jump in prices from the recent low seen in January hints at
unwelcome upward pressure on consumer prices in the coming months.”

Friday

The Japanese February Core CPI came in line with
expectations:

• CPI Y/Y 2.8% vs.
  2.2% prior.
• Core CPI Y/Y 2.8%
  vs. 2.8% expected and 2.0% prior.
• Core-Core
  CPI Y/Y 3.2% vs. 3.5% prior.

BoE’s Bailey (neutral – voter) speaking to the FT
reaffirmed the central bank patient stance as they gather more information to
guide their rate cuts timing:

• Rate cuts this year is not unreasonable.
• All our meetings are in play, we take a fresh
  decision each time.
• Need to have confidence that wages are heading in
  the right direction.
• Don’t need to wait for inflation to drop to 2%
  before cutting rates.
• Recent economic developments are obviously good
  news.
• The job on inflation is not done but what we are
  seeing is encouraging.

The UK February Retail Sales beat expectations:

• Retail sales M/M
  0.0% vs. -0.3% expected and 3.6% prior (revised from 3.4%).
• Retail sales Y/Y
  -0.4% vs. -0.7% expected and 0.5% prior (revised from 0.7%).
• Retail sales ex
  autos, fuel M/M 0.2% vs. -0.1% expected and 3.4% prior (revised from
  3.2%).
• Retail sales ex
  autos, fuel Y/Y -0.5% vs. -0.9% expected and 0.5% prior (revised from
  0.7%).

ECB’s Nagel (hawk – voter) supports a rate cut in
June:

• The probability of a
  rate cut before the summer break is increasing.
• Does not see any
  automatism in rate cuts.
• A June rate cut has
  a higher probability than one in April.

The German March IFO beat expectations across the
board:

• IFO 87.8 vs. 86.0
  expected and 85.7 prior (revised from 85.5).
• Current conditions
  88.1 vs. 86.8 expected and 86.9.
• Expectations 87.5
  vs. 84.7 expected and 84.4 prior (revised from 84.1).

ECB’s Holzmann (uber hawk – voter) says that a rate
cut is in preparation as most ECB members are looking for a move in June:

• A rate cut is in
  preparation.
• But the timing of
  the rate cut is unclear.
• We are data dependent.
• There are many who
  believe that developments in June will be such that we can cut at the
  time.
• My view is that
  inflation is stickier than those people believe, which is why I am waiting
  for June data.

The Canadian January Retail Sales beat expectations:

• Retail Sales M/M -0.3% vs. -0.4% expected and
  0.9% prior.
• Retail Sales Y/Y 0.9% vs. 2.9% prior.
• Ex autos M/M 0.5% vs. -0.4% expected and 0.6%
  prior.
• Ex auto and gas M/M 0.4%.
• Sales were up in 6 of 9 subsectors.
• Advance
  February retail sales 0.1%.

The highlights for next week
will be:

• Tuesday: US Durable Goods Orders, US Consumer Confidence.
• Wednesday: Australia Monthly CPI, Fed’s Waller.
• Thursday: BoJ Summary of Opinions, Australia Retail Sales,
  Canada GDP, US Final Q4 GDP, US Jobless Claims.
• Friday: Japan Jobs data, Tokyo CPI, Japan Industrial
  Production and Retail Sales, US PCE, Fed Chair Powell.

That’s all folks. Have a nice weekend.

This article was written by Giuseppe Dellamotta at www.forexlive.com.