Weekly Market Outlook (03-07 March)

UPCOMING
EVENTS:

• Monday: China Caixin Manufacturing PMI, Switzerland
  Manufacturing PMI, Eurozone Flash CPI, Canada Manufacturing PMI, US ISM
  Manufacturing PMI.
• Tuesday: Eurozone Unemployment Rate, Canada-Mexico-China
  Tariffs Deadline, Trump Congress Speech.
• Wednesday: China Two-Sessions, Australia Q4 GDP, China
  Caixin Services PMI, Switzerland CPI, Eurozone PPI, US ADP, Canada
  Services PMI, US ISM Services PMI.
• Thursday: China Two-Sessions, Switzerland Unemployment
  Rate, Eurozone Retail Sales, ECB Policy Announcement, US Jobless Claims.
• Friday: Canada Employment Report, US Non-Farm Payrolls.

Monday

The Eurozone CPI
Y/Y is expected at 2.3% vs. 2.5% prior, while the Core CPI Y/Y is seen at 2.6%
vs. 2.7% prior. There’s some risk aversion in the markets, so a soft report
will likely ease some of those fears around inflation and give the ECB more
confidence to keep with the policy easing. Higher than expected figures though
would likely keep the markets on the edge. The market is expecting a total of
87 bps of easing by year-end.

The US ISM
Manufacturing PMI is expected at 50.8 vs. 50.9 prior. The recent S&P Global
US PMIs showed another uptick on the Manufacturing front with the index rising
to an 8-month high. The agency noted that many manufacturers also reported that
the rise in production and demand was in part linked to front-running potential
cost increases or supply shortages linked to tariffs, although future sentiment
remained relatively elevated in manufacturing by recent standards.

Wednesday

There’s no
consensus at the time of writing for the Switzerland CPI although the prior
release showed the Core measure rising to 0.9% vs. 0.7% prior. We haven’t got
any notable data point or comment from central bank officials, but the market
is certain of a 25 bps cut in March and is pricing around 60% probability of
another 25 bps cut by year-end.

The US ADP is
expected at 140K vs. 183K prior. This report will be seen in light of the
recent growth scare, so the market won’t like downside surprises. On the other
hand, strong data is likely to provide some support to the risk sentiment (all
else being equal).

The US ISM
Services PMI is expected at 52.9 vs. 52.8 prior. The S&P Global survey
showed some notable weakness in the Services sector with the index cratering to
a 25-month low. The agency noted that service providers commonly linked the
downturn in activity and worsening new orders growth to political uncertainty,
notably in relation to federal spending cuts and potential policy impacts on
economic growth and inflation outlooks. Optimism about the coming year slumped
to its lowest since December 2022.

Thursday

The ECB is
expected to cut interest rates by 25 bps bringing the policy rate to 2.50%. We
will get the Eurozone Flash CPI report a couple of days before the meeting so
that will likely shape their future sentiment. There’s been a growing concern
among some central bank officials about easing rates too fast amid high
services price inflation (which has been stuck around 4% since November 2023)
and tight labour market.

The US Jobless
Claims continue to be one of the most important releases to follow every week
as it’s a timelier indicator on the state of the labour market.

Initial Claims
remain inside the 200K-260K range created since 2022, while Continuing Claims
continue to hover around cycle highs although we’ve seen some easing recently.

This week Initial
Claims are expected at 235K vs. 242K prior, while Continuing Claims are seen at
1883K vs. 1862K prior.

Friday

The Canadian
Employment report is expected to show 17.5K jobs added in February vs. 76.0K in
January and the Unemployment Rate to tick higher to 6.7% vs. 6.6% prior. Jobs
data has been beating expectations by a big margin in the last couple of months
as the aggressive BoC easing gave the economy a boost. The CAD though remains
at the mercy of the tariffs threats with the markets watching what happens on
Tuesday as the deadline expires.

The US NFP is
expected to show 153K jobs added in February vs. 143K in January and the
Unemployment Rate to remain unchanged at 4.0%. The Average Hourly Earnings Y/Y
is expected at 4.1% vs. 4.1% prior, while the M/M figure is seen at 0.3% vs.
0.5% prior. The Average Weekly Hours Worked is seen at 34.2 vs. 34.1 prior.

I personally think
that the recent risk-off sentiment has been triggered by the jump to a 30-year
high in the long-term inflation expectations in the final University of
Michigan Consumer Sentiment report. That might have not caused the selloff in
the stock market if it wasn’t for weak US Flash PMIs released just 15 minutes
earlier.

So, it kind of
compounded the effect on expectations that the Federal Reserve could react too
slowly to a slowdown in the economy due to the constraint of high inflation
expectations which would eventually lead to more economic pain.

Therefore, the
best-case scenario would be benign employment data coupled with lower than
expected wage growth data. Conversely, weak employment data and high wage
growth figures would likely trigger another selloff in the stock market and
renewed risk-off flows.

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