The Week Ahead
Bond markets appeared to tread water ahead of Fed Chair Powell testimonies, and China’s 2024 economic plan did little to boost global economic sentiment. However, the indication from Powell that the Fed is “not far” from gaining confidence that inflation is trending to target, gave markets an excuse to rally. The gains were further fuelled by the mixed employment report for February, which showed a cooling labour market with slower job and wage growth, giving the Fed room to cut interest rates this year. The yield on the 10-year UST rallied 11bps to 4.08%. Meanwhile, the S&P Index fell 0.26%, and the dollar tumbled; the DXY Index fell 1.11%. Brent Crude also fell 1.76%, to $82.08pb.
Earlier in the week the Fed’s Bostic commented that it will likely be appropriate for two quarter-point rate cuts by the end of this year. He did, however, highlight the risk of inflation staying above the 2% target or higher from "pent-up exuberance”. Once rate cuts commence, he said he does not envision them being "back-to-back," with the pace depending on "how participants in the markets, business leaders and families respond”. Focus quickly shifted to Powell who stated that rate cuts will “likely be appropriate” later this year “if the economy evolves broadly as expected.” He maintained that the central bank would remain data-dependent and will require further evidence of sustained deflation, adding that the Fed is in no rush to cut rates given the strength of the economy. Mester cautioned on the risks to the economy, saying: “While labor markets are currently strong and are expected to only gradually moderate, we need to remain attentive to the possibility that conditions could deteriorate faster than expected”.
US data remained mixed, S&P Global Services and Composite PMIS edged higher in February, next factory orders, durable goods and wholesale inventories and sales prints were weaker-than-expected. The ISM figures were surprisingly weak, the services figure fell to 52.6 (from 53.4), prices paid eased to 58.6, down from 64, and the employment reading well into contraction, at 48, from 50.5. All eyes then shifted to the employment figures, the ADP employment change reading disappointed at 140k (exp. 150k, prev. 111k), the JOLTS was, however, above consensus calls. The week ended with the employment figures, with non farm payrolls beating estimates for +200k jobs, coming in at +275k, and January's reading received a hefty downward revision (to +229k, from +353k). Interestingly, unemployment rose to a two year high of 3.9%, and wage gains slowed.
In a similar move to the Fed, the ECB also suggested rate cuts are close, after standing pat at the policy meeting. The central bank signalled the first hike will not come before June. The central bank lowered its inflation forecasts from 2.7%, to 2.3% for 2024. We are making good progress towards our inflation target, and we are more confident as a result,” stated ECB president Lagarde. She went on to caveat the statement, saying: “But we are not sufficiently confident. We clearly need more evidence and more data. We will know a little more in April, but we will know a lot more in June.”
Elsewhere, China's 2024 budget revealed an assertive approach to reflating the economy and achieving the ambitious "around 5%" growth target, which implies a nominal GDP growth of around 7.4%; a significant acceleration from 2023. Despite maintaining the fiscal deficit target at 3% of GDP, the central government plans to leverage up by financing the entire CNY 180bn increase in the deficit and issuing CNY 1tn in ultra-long term special bonds annually. This allows for greater fiscal spending power to support growth. Efforts will focus on creating over 12 million new urban jobs, ensuring income growth synchronises with economic expansion, and providing subsidies to boost consumption of consumer goods. Notably, China aims to enhance policy consistency by integrating non-economic factors into macroeconomic assessments before introducing new measures, establishing coordination mechanisms across government agencies. Over the weekend China's CPI surprised to the upside at +0.7%yoy, while PPI fell 2.7% you, in February.
In what is expected to be a fairly quiet post-payroll, and Fed blackout week, the key events for markets include further US presidential primaries, the US budget (Monday) and US CPI (Tuesday). Current estimates for February's headline and core CPI report are 3.1%yoy and 3.7%yoy, respectively. The UK Financial Policy Committee quarterly meeting, and chatter from the BoE’s Mann and ECBs Holzmann will garner some interest. Eurozone and UK industrial production figures follow on Wednesday, and we will hear from the ECB’s Stournaras. US PPI, retail sales, initial jobless claims and business inventories will grab market focus on Thursday. China’s property price data, the BoE’s inflation survey, and US industrial production, empire manufacturing and Uni. of Michigan consumer sentiment will grab market attention on Friday.
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