The Week Ahead
The main event for markets last week was the Fed’s favoured inflation print, the PCE deflator, which came broadly in-line with expectations in February. The PCE deflator rose 0.3%mom, and 2.4%yoy (prev 2.6%), while the core readings were 0.4%mom and 2.8%yoy (prev 2.9%). Ahead of the US PCE release we heard from a number of Fed speakers. Bowman said she is in no hurry to cut rates, given the upside surprises for inflation in January, she also mentioned that she is open to rate hikes. Later, Goolsbee said we shouldn’t get carried away with one set of data, adding that the supply factors which helped push inflation lower last year are still at work, he also cautioned on housing inflation. Daly said she advocates for rate cuts ahead of inflation reaching 2%. Mester stated that although there is a little more work to be done in taming inflation, three cuts for 2024 “is about right”.
Away from inflation, US data was mixed, durable goods witnessed the largest decline since April 2020, falling 6.1% (exp -5%, prev. -0.3%). The Conference Board Consumer Confidence also slipped. The second reading for Q4’23 was marginally lower at 3.2%, however, personal consumption was strong at 3% (exp. 2.7%). Both the headline and core price indexes rose marginally, while personal income beat market expectations at 1% (exp. 0.4%, prev. 0.3%). The MNI Chicago PMI fell further into contraction, and missed expectations at 44 (exp. 48, prev. 46). Moreover, the US ISM manufacturing contracted further to 47.8, from 49.1, prices paid eased, new orders fell into contraction, and employment moved lower, to 45.9, from 47.1.
US Treasury yields backed-up following the mixed data, the 10-year benchmark yield 7bps to 4.18%, while the 2-year closed 16bps lower at 4.53%. Meanwhile, equity markets enjoyed the broadly robust Q4’23 earnings, and the tech frenzy saw the NASDAQ Index and the S&P Index soar to new highs. Oil pushed higher over the week, with Brent gaining 2.36% to $83.55pb. Over the weekend, OPEC+ announced an extension to the voluntary cuts of 2.2mbp into the second quarter.
G20 finance ministers stated that inflation has receded in most economies, adding that "risks to the global economic outlook are more balanced," although uncertainty remains high. The consensus for a soft landing has increased. Challenges highlighted included downside to global activity resulting from wars and escalating conflicts; geoeconomic fragmentation; rising protectionism; disruptions through trade routes.
In China, the yield on the 30-year benchmark fell below 2.5% on Wednesday, a rally to an all-time low. It also marked the first time it fell below the 1-year MLF rate of 2.5%. China's long-term yields have sharply declined, highlighting worries about the real estate sector's lacklustre rebound in property transactions. The manufacturing PMI was marginally lower at 49.1 in February, typical for the Chinese New Year period with lower production. In contrast, the non-manufacturing PMI rose notably to 51.4, propelled by robust holiday spending underpinning the services PMI. Despite reports of post-holiday construction resurgences, the construction PMI edged down 0.4, to 53.5, possibly due to seasonal or deleveraging factors. Ongoing tracking of construction PMIs will be key to gauging infrastructure investment's recovery pace. Last week’s Politburo meeting chaired by President Xi approved the draft Government Work Report focusing on continuing proactive fiscal and monetary policies, enhancing macro policy consistency for stability, while the two sessions starting today will monitor growth targets, fiscal stimulus, monetary policy easing, consumption incentives, youth unemployment, property market curbs, and new growth drivers. Market observers will be watching seven critical areas during the upcoming parliamentary meetings to gain insight into China's 2024 economic policies and prospects influencing investor sentiment.
This week the US primaries, US employment report (Friday), Fed Chair Powell’s congressional testimonies (Wednesday and Thursday), China’s National People’s Congress (Tuesday) and ECB policy meeting and corporate earnings will all be watched very closely by markets. On Tuesday we have China’s Caixin services PMI, UK and US S&P Global services PMIs, US factory orders and ISM services. Target’s earnings will also give a clue as to the consumers' appetite. Wednesday sees eurozone retail sales, US S&P Global construction PMI and USD ADP employment and wholesale inventories. UK Jeremy Hunt’s budget will be scrutinised closely, and we have the Fed’s Beige Book release. China’s trade date hit the screens on Thursday morning, Germany factory orders and US trade and initial jobless claims will also garner market interest. Eurozone GDP, and US employment figures will take focus on Friday. The non-farm payroll is currently expected at 200k, while employment will likely remain at 3.7%, and average hourly earnings is expected to ease to 0.2%mom and 4.3%yoy.
Central bank activity includes chatter from ECB governor Holzmann and the Fed’s Harker today. Also today, the Swiss National bank publishes its 2023 results. The BoJ’s Ueda speaks on Tuesday. On Wednesday Powell’s testimony before the House financial Services Committee will be watched closely, and we will hear from the Fed’s Kashkari and Daly. Thursday’s key focus will be the ECB meeting and Lagarde’s press conference, and Powell's testimony to the Senate Banking Committee. We will also hear from the Fed’s Mester and BoJ’s Nakagawa. The Fed’s Williams and ECB’s Holzmann speak on Friday.
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