Weekly Market Outlook (17-21 February)

UPCOMING
EVENTS:

• Monday: Japan GDP.
• Tuesday: RBA Policy Decision, UK Employment report, German
  ZEW, Canada CPI, US NAHB Housing Market Index, New Zealand PPI.
• Wednesday: Australia Wage Price Index, RBNZ Policy
  Decision, UK CPI, US Housing Starts and Building Permits, FOMC Minutes.
• Thursday: Australia Employment report, PBoC LPR, Canada
  PPI, US Jobless Claims.
• Friday: Australia/Japan/Eurozone/UK/US Flash PMIs,
  Japan CPI, UK Retail Sales, Canada Retail Sales.

Tuesday

The RBA is
expected to cut interest rates by 25 bps bringing the Cash Rate to 4.10%.
As a reminder, the RBA softened
further its stance
at the last policy decision as it prepared for the first rate cut. The
market is now seeing an 90% chance of a 25 bps cut at this week’s meeting with
a total of 75 bps of easing expected by year end.

These expectations
have been shaped by the recent inflation data. In fact, the Australian Q4
CPI missed
expectations across the board with the underlying inflation figures easing
further and now comfortably in the RBA’s target range on a 6-month annualised
basis.

The UK Unemployment
Rate is expected to tick higher to 4.5% vs. 4.4% prior. The Average Earnings
are expected at 5.9% vs. 5.6% prior, while the Ex-Bonus Earnings are seen at
5.9% vs. 5.6% prior. Analysts continue to caution against the employment data
reliability and therefore it’s unlikely to influence interest rate
expectations much. The market is currently pricing 55 bps of easing by year-end.

The Canadian CPI
Y/Y is expected at 1.8% vs. 1.8% prior, while the M/M reading is seen at 0.0%
vs. -0.4% prior. The Trimmed-Mean CPI Y/Y is expected at 2.6% vs. 2.5% prior,
while the Median CPI Y/Y is seen at 2.5% vs. 2.4% prior.

Inflation has been
inside the target band for almost a year and the BoC at the last policy
decision acknowledged that absent the threat of tariffs, the risks to the
inflation outlook are roughly balanced. This implies that the central bank is
now in neutral stance and the pace of easing will be much slower.

The economic
data out of Canada has been picking up after the aggressive easing in monetary
policy and the CAD has been held back only by trade uncertainty. This
uncertainty has eased recently, and the Loonie got the green light to finally
appreciate.

Wednesday

The RBNZ is
expected to cut interest rates by 50 bps bringing the OCR to 3.75%. The central
bank will likely signal a slower pace of easing going forward. At the
last policy decision, Governor Orr said that they expected to reach the neutral
rate by the end of 2025 putting the neutral rate around 2.5-3.5%.

Therefore, dovish
surprises could come from a 75 bps cut (although that will likely imply a long
pause) or the central bank willing to reach the neutral rate by mid-2025. On
the other hand, a “hawkish” surprise could come from just a 25 bps cut or an
upward revision to the neutral rate.

The UK CPI Y/Y is
expected at 2.8% vs. 2.5% prior, while the M/M reading is seen at -0.3% vs.
0.3% prior. The Core CPI Y/Y is expected at 3.6% vs. 3.2% prior, while
Services CPI Y/Y is seen at 5.2% vs. 4.4% prior.

These would be all
disappointing figures for the BoE which failed to obtain the same progress
against inflation like the other central banks. The market is pricing 55 bps
of easing by year-end but if further progress fails to materialise in the
next months, then the market will likely need to scale back the rate cuts
expectations.

Thursday

The Australian
Employment report is expected to show 20K jobs added in January vs. 56.3K in December,
and the Unemployment Rate to tick higher to 4.1% vs. 4.0% prior. The unemployment
rate has been stable around 4.0% for a year after the gradual pick up from the
2022 lows.

This report is
unlikely to influence interest rates expectations much but (although unlikely) a
more marked deterioration in the labour market going forward should see the
market pricing in a more aggressive pace of easing for the RBA.

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 215K vs. 213K prior, while Continuing Claims are seen at
1863K vs. 1850K prior.

Friday

The Japanese Core
CPI is expected at 3.1% vs. 3.0% prior. As a reminder, at the last policy
decision, the BoJ hiked interest rates by 25 bps but didn’t offer much in terms
of forward guidance apart from the usual “will raise policy rate if economic,
price conditions continue to improve”. Since then, we’ve got very strong
wage growth data and some hawkish comments from BoJ officials. As a result,
the market started to price in some chances of a third rate hike this year.

Friday will also be
the Flash PMIs Day for the Eurozone, the UK and the US. These are generally
market moving releases and they might influence the markets expectations for
interest rates. The European data in particular (France, Germany and
Eurozone) will likely see bigger moves as the market is slowly starting to rethink
its downbeat expectations.

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