Weekly Market Recap (26-01 March)

ECB’s Lagarde
(neutral – voter) reaffirmed her patience stance with the usual focus on wage
growth:

• We are not there yet
  on inflation.
• We have to get to 2%
  inflation sustainably.
• ECB must play its
  role in climate transition.
• There are increasing
  signs of a bottoming-out in growth and some forward-looking indicators
  point to a pick-up later this year.
• Wage pressures,
  meanwhile, remain strong.
• The current
  disinflationary process is expected to continue, but the governing council
  needs to be confident that it will lead us sustainably to our 2% target.
• Labour cost
  increases are partly buffered by profits and are not being fully passed on
  to consumers.
• We expect inflation
  to continue slowing down, as the impact of past upward shocks fades and
  tight financing conditions help to push down inflation.
• Our restrictive
  monetary policy stance, the ensuing strong decline in headline inflation,
  and firmly anchored longer-term inflation expectations act as a safeguard
  against sustained wage price spiral.

The Japan January
CPI beat expectations although the inflation rates eased from the prior
figures:

• CPI Y/Y 2.2% vs. 2.6%
  prior.
• Core CPI Y/Y 2.0% vs.
  1.8% expected and 2.3% prior.
• Core-Core CPI Y/Y 3.5% vs. 3.7% prior.

Fed’s Schmid (hawk
– non voter) can be put on the top of the FOMC hawks after his comments
although he’s not a voting member this year:

• No need to pre-emptively
  adjust the stance of policy.
• Fed should be
  patient, wait for convincing evidence that inflation fight has been won.
• In ‘no hurry’ to
  halt the ongoing reduction in size of Fed’s balance sheet.
• We are not out of
  the woods yet on ‘too high’ inflation.
• How much further Fed
  can shrink its balance sheet ‘an open question’.
• Don’t favour ‘overly
  cautious’ approach to balance sheet runoff; some interest-rate volatility
  should be tolerated.
• Fed should minimize
  its footprint in the financial system, particularly as relates to Fed’s
  balance sheet.
• Returning inflation
  to 2% will likely require restoring balance in labour markets, moderating
  wage growth.
• Reducing Fed’s
  balance sheet should be a priority once crisis has passed.
• Large Fed balance
  sheet can create unintended consequences, including on bank lending,
  liquidity.
• January CPI
  inflation data argues for caution.
• Large Fed balance
  sheet can create asset-price distortions.
• Bank regulators
  should take tailored approach.
• Silicon Valley Bank
  was a bit of a canary in a coal mine.
• Fed’s Discount
  Window should be part of a bank’s ‘strategic stack’ funding.
• it would be a
  mistake to consider cryptocurrency as a currency.

The US January Durable
Goods Orders missed expectations:

• Durable Goods Orders
  M/M -6.1% vs. -4.5% expected and -0.3% prior (revised from 0.0%).
• Non-defense capital
  goods orders ex-air M/M 0.1% vs. 0.1% expected and -0.6% prior (revised
  from 0.3%).
• Ex transport M/M
  -0.3% vs. 0.2% expected.
• Ex defense M/M -7.3% vs. 0.5% prior.
• Shipments M/M -0.9%.

BoE’s Ramsden (neutral –
voter) supports the current patient approach as he would like to see more
evidence that inflation is going back to their 2% target sustainably.

• Key indicators of
  inflation persistence remain elevated.
• I support the
  more-balanced outlook on risks to inflation set out in the MPC’s latest
  forecast.
• I am looking for
  more evidence about how entrenched this persistence will be and therefore
  about how long the current level of bank rate will need to be maintained.

The US February Consumer Confidence missed expectations
by a big margin with negative revisions to the prior readings:

• Consumer Confidence
  106.7 vs. 115.0 expected and 110.9 prior (revised from 114.8).
• Present situation
  index 147.2 vs.154.9 prior (revised from 161.3).
• Expectations 79.8 vs.
  81.5 prior (revised from 83.8).
• 1 year Inflation 5.2% vs. 5.2% prior.
• Jobs hard-to-get 13.5%
  vs. 11.0% prior (revised from 9.8%).

“The decline in consumer
confidence in February interrupted a three-month rise, reflecting persistent
uncertainty about the US economy,” said Dana Peterson, Chief Economist at The
Conference Board. “The drop in confidence was broad-based, affecting all income
groups except households earning less than $15,000 and those earning more than
$125,000. Confidence deteriorated for consumers under the age of 35 and those
55 and over, whereas it improved slightly for those aged 35 to 54.”

Fed’s Bowman (hawk – voter) maintains her patient
stance with no fear of raising rates further if inflation progress were to
stall:

• Will remain cautious
  on monetary policy.
• If inflation moves
  sustainably to 2% goal, it will eventually be appropriate to cut interest
  rates; not yet there.
• Reducing policy rate
  too soon could result in need for future rate hikes.
• She remains willing
  to raise policy rate if inflation progress stalls or reverses.
• Latest inflation
  data suggests slower progress on inflation.
• Economic activity
  and consumer spending are strong, labour market ‘tight’.

Reuters reported that OPEC+ may consider extending
their voluntary output cuts into Q2 or even into year-end.

The Australian January Monthly CPI missed
expectations:

• CPI Y/Y 3.4% vs.
  3.6% expected and 3.4% prior.
• Trimmed Mean CPI Y/Y
  3.8% vs. 4.0%.

The RBNZ left the OCR unchanged at 5.5% and dropped
the tightening bias:

RBNZ forecasts:

• Sees official cash
  rate at 5.59% in June 2024 (prior 5.67%).
• Sees official cash
  rate at 5.47% in March 2025 (prior 5.56%).
• Sees twi nzd at
  around 71.5% in March 2025 (prior 70.7%).
• Sees annual CPI 2.6%
  by March 2025 (prior 2.4%).
• Sees official cash
  rate at 5.33% in June 2025 (prior 5.42%).
• Sees official cash
  rate at 3.16% in March 2027.

Statement:

• The OCR needs to
  remain at a restrictive level for a sustained period.
• The New Zealand
  economy has evolved broadly as anticipated by the committee.
• The committee
  remains confident that the current level of the OCR is restricting demand.
  
• Core inflation and
  most measures of inflation expectations have declined, and the risks to
  the inflation outlook have become more balanced.
• However, headline
  inflation remains above the 1 to 3 percent target band, limiting the
  committee’s ability to tolerate upside inflation surprises.
• A sustained decline
  in capacity pressures in the New Zealand economy is required to ensure
  that headline inflation returns to the 1 to 3 percent target.
• With high
  immigration and weaker demand growth, capacity constraints in the New
  Zealand labour market have eased.

From
the minutes to the meeting:

• Ongoing restrictive
  monetary policy settings are necessary to guard against the risk of a rise
  in inflation expectations.
• Capacity pressures
  have eased significantly over the past year.
• The committee agreed
  that interest rates need to remain at a restrictive level for a sustained
  period of time.
• The committee noted
  that aggregate demand is now better matched with the supply capacity of
  the economy.
• The starting point
  for capacity pressures in the New Zealand economy is only slightly lower
  than previously assumed.
• The committee is
  conscious that the economy has limited capacity to absorb further upside
  inflation surprises.
• Recent drops in core
  inflation and business inflation expectations are encouraging, but they
  remain above the 2 percent mid-point of the committee’s target band.

Moving on to the Governor Orr’s Press Conference:

• Central banks may
  have to hold rates higher than markets expect.
• New Zealand economy
  has evolved ‘broadly’ as expected.
• Discussed rate hike,
  but strong consensus that rates were sufficient.
• Domestic price
  pressures are easing as expected.
• Comforting to see
  inflation expectations decline.
• Data has given us
  more confidence in the outlook than in November.
• We are in a
  disinflation period.
• Economy faces a
  soft-landing scenario.

ECB’s Kazimir (hawk – non voter in March) is clearly
signalling a rate cut in June, all else being equal:

• Market’s rate cut
  pricing now “more realistic”.
• Pleased with recent
  shift in expectations.
• Headline
  disinflation is going quicker than expected but core prices still remain
  uncertain.
• Prefers June rate
  cut, then “smooth and steady cycle of policy easing”.

The 2^nd reading for the US Q4 2023 GDP
missed slightly expectations with higher figures for consumer spending and
inflation:

• US Q4 2023 GDP 3.2%
  vs. 3.3% expected.

Details:

• Consumer spending 3.0% vs. 2.8% advance.
• Consumer spending on
  durables 3.2% vs. 4.6% advance.
• GDP final sales 3.5%
  vs. 3.2% advance.
• GDP deflator 1.7% vs. 1.5% advance.
• Core PCE 2.1% vs.
  2.0% advance.
• Business investment 0.9% vs. 2.1% advance.

Fed’s Collins (neutral – non voter) echoed her
colleagues in supporting a patient stance as they gather more information:

• Repeats it will
  likely become appropriate to begin easing policy later this year.
• Recent economic data
  highlight that progress toward the Fed’s goals could continue to be bumpy.
• More time is needed
  to discern if the economy is sustainably on the path to price stability
  and a healthy labour market.
• States the need to
  see more evidence that the disinflationary process will continue before
  starting to carefully normalize policy.
• Expecting all of the
  data to speak uniformly is too high a bar; shouldn’t overreact to
  individual data readings.
• The return to 2%
  will likely require demand growing at a more moderate pace this year.
• Wants to see
  continued evidence that wage growth is not contributing to inflationary
  pressures.
• In assessing
  inflation progress, will look for inflation expectations remaining well
  anchored and an orderly moderation in labour demand.
• Wants to see
  continued declines in housing inflation and non-shelter services
  inflation.
• The threat of
  inflation remaining above 2% has receded.
• I see risks is more
  balanced between cutting too early and too late.
• We should be taking
  time on policy.
• We expect we will
  see more of a decline in reserves, and will be paying attention to what
  point it might be appropriate to revisit QT.
• Too early to tell if
  we are extracting the right signal from housing inflation data.

Fed’s Williams (neutral – voter) reiterated the
patient approach as the Fed will be guided by the incoming economic data:

• Still some ways to
  go before hitting the 2% inflation target.
• Fully committed to achieving
  the Fed’s 2% inflation target.
• Will let incoming
  economic data determine the monetary policy path.
• Sees likely uneven
  path back to 2% inflation.
• Inflation pressures
  have fallen a lot amid broad-based improvement.
• Risks to outlook
  exist on up and down sides.
• Inflation to hit
  2%-2.25% this year, 2% in 2025.
• Growth at 1.5% this
  year, unemployment up to around 4%.
• Economy, job market
  strong, imbalances waning.
• Current 3.7%
  unemployment rate around long-term level.
• Risks to Fed job,
  inflation mandates moving into better balance.
• Fed likely to cut
  rates later this year.
• Will watch data to
  drive decision over cutting rates.
• Fed has time to take
  in data before cutting rates.
• Pandemic aftermath
  still affecting economy, but optimistic about outlook.
• 3 interest-rate cuts
  in 2024 reasonable for US central bank officials to debate.
• Data will drive one
  federal cut rates.
• Current US economy
  is similar to where it was during December policy meeting.
• It is unclear what
  impact potential US government shutdown would have on economy.

Fed’s Bostic (hawk – voter) repeated the comments from
other members as they all support a patient approach:

• There is still work
  to do on inflation.
• Has not declared
  victory just yet.
• Is comfortable being
  patient on policy.
• Will not be a fast march
  to 2% inflation.

ECB’s Nagel (hawk – voter) wants to see wage growth to
moderate before supporting rate cuts:

• It would be fatal if
  ECB cut rates too early only for inflation to rebound.
• ECB needs
  confirmation that wage growth is moderating to a level that will let
  inflation fall back to target in 2025.

BoE’s Mann (hawk – voter) blamed consumers for the
slow progress on inflation:

• Lack of consumer
  discipline complicates policy.
• BoE is struggling to
  bring inflation back to target because price rises are increasingly driven
  by people who are immune to the pressures of higher interest rates.
• There is lack of
  consumer discipline to rein in business’s pricing power in areas of the
  services sector where prices were often sticky.

The Japanese January Industrial Production missed
expectations:

• Industrial
  Production Y/Y -1.5% vs. -0.7% prior.
• Industrial
  Production M/M -7.5% vs. -7.3% expected and 1.4% prior.

The Japanese January Retail Sales came in line with
expectations:

• Retail Sales Y/Y
  2.3% vs. 2.3% expected and 2.4% prior (revised from 2.1%).
• Retail Sales M/M
  0.8% vs. -2.9% prior.

BoJ’s Takata delivered
some hawkish comments that sent the Yen higher across the board:

• Momentum is rising
  in spring wage talks.
• Many companies are
  offering higher-than-2023 wage hikes.
• Achievement of 2%
  inflation target is becoming in sight despite uncertainty of economic
  outlook.
• Japan’s economy is
  in inflection point of changing ‘norm’ that people think wages, prices are
  not rising.
• Exit measures should
  include abandoning yield curve control framework, ending negative rates,
  overshoot commitment.
• I would call for a
  gear shift in policy, but not one that is going backwards.
• Moderate recovery
  trend intact despite slowdown in capex, consumption.
• Monetary policy
  needs to remain consistent with the real economy, financial environment.
• Have not made up
  mind yet on monetary policy decision.
• Wage hikes are
  broadening stronger than last year.
• Need to watch outcome
  of spring wage talks after mid-March.
• Not thinking of
  raising rates one after another.
• Don’t want to single
  out any policy step in mentioning “nimble responses”.
• Gradual steps will
  be needed amid mixed circumstances surrounding smaller firms.
• We need to keep some
  easing measures to some extent.
• But important for
  exit strategy to not be too complicating.

The Switzerland Q4 2023
GDP beat expectations:

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

The US Jobless Claims
missed expectations:

• Initial Claims 215K
  vs. 210K expected and 202K prior (revised from 201K).
• Continuing Claims
  1905K vs. 1874K expected and 1860K prior (revised from 1862K).

The US January PCE came
in line with expectations:

• PCE Y/Y 2.4% vs.
  2.4% expected and 2.6% prior.
• PCE M/M 0.3% vs.
  0.3% expected and 0.1% prior.
• Core PCE Y/Y 2.8%
  vs. 2.8% expected and 2.9% prior.
• Core PCE M/M 0.4%
  vs. 0.4% expected and 0.1% prior (revised from 0.2%).

Consumer
spending and consumer income for January:

• Personal income 1.0%
  versus 0.4%. Prior month 0.3%.
• Personal spending
  0.2% versus 0.2% expected. Prior month 0.7%
• Real personal
  spending -0.1% vs 0.6% last month revised from 0.5%).

The Canadian Q4 2023 GDP
beat expectations:

• Q4 GDP Q/Q 0.3% vs. ­-0.1%
  prior (revised from -0.3%).
• Annualised GDP Q/Q
  1.0% vs. 0.8% expected and -0.5% prior (revised from -1.1%).
• December GDP M/M
  0.0% vs. 0.2% expected and 0.2% prior.

Fed’s Goolsbee (dove –
non voter) continues to see progress in disinflation:

• We’ve had very
  substantial progress over a long-term basis on inflation.
• Even with January
  PCE data showing a month of rebound, should be careful to extrapolate.
• There is element of
  truth that disinflation of 2023 was supply chain repair.
• Should be careful
  with the argument that supply change is now fixed.
• Should not expect
  more benefit in 2024.
• Impact on supply
  shock on inflation takes time.
• Suggests benefits of
  supply chain disinflation are still to come.
• Lags on supply shock
  from labour on inflation are probably long.
• As of labour supply
  shocks probably have a longer lasting effect on inflation then supply
  chain shocks.
• If substantial
  productivity growth continues, that would have an impact on monetary
  policy.
• What I’m watching
  the most is why hasn’t housing inflation improved more than it has.
• There is a risk of
  betting against the Fed being committed on doing what it says.
• Rates are pretty restrictive.
• I still think the
  question is how long we want to remain in this restrictive.
• External shocks are
  the things I worry about most.
• 2023 was a golden year.
• If golden path is to
  continue in 2024, would rely on lagged effect of the past positive supply
  shocks.
• If you stay quite
  restrictive, you will eventually have to think about impact to employment.

Fed’s Bostic (hawk –
voter)

• Inflation came down
  much faster than expected.
• The last inflation
  number shows that inflation’s decline will be a bumpy one.
• Fed must stay
  vigilant and intensive.
• Over the long arc inflation
  is still coming down.
• It is probably
  appropriate to reduce the fed funds policy rate in the summertime.
• Economic data will
  be the guide for the Fed on when rate cards are made.
• Degree of risk
  exposure in the nonbanking sector worries me.
• Calls the US banking
  sector sound and strong.
• Range of risks that
  has to think about has become more complex.
• Geopolitical risks
  are currently high.
• I expect things are
  going to be bumpy on inflation.
• It is useful to use
  a range of different approaches to assess inflation.

Fed’s Daly (neutral –
voter) repeated that the current policy stance is appropriate:

• Fed policy is in a
  good place.
• Fed can cut rates if
  needed.
• The Fed wants to
  avoid holding rates all the way to 2% inflation.
• There is no imminent
  risk of the economy faltering.
• If Fed were to cut
  too quickly, inflation can get stuck.
• Risks of persistent
  inflation and economic downturn are even.

Fed’s Mester (hawk –
voter) continues to support the patient stance guided by incoming economic
data:

• January PCE data was
  not too surprising.
• January PCE reading
  does not change view that inflation is going downward.
• There is a little
  more work for the Fed to do on inflation.
• It’s all about risk
  management until we get to 2% inflation goal.
• Monetary policy is
  restrictive, demand should cool.
• We can’t rely on
  pace of disinflation last year to continue this year.
• Demand will
  moderate, growth this year will not be as strong as last year.
• Does not want to
  focus on timing of the rate cut but the data.
• Expects some
  slowdown in employment growth.
• That slowing in
  employment growth is what we need to see to ease policy.
• We do need to be
  more confident that inflation is on that downward path.
• Baseline is we will
  see moderation in the labour market, but it will still healthy.
• Need to see
  continued disinflation.
• Baseline forecast of
  three rate cuts still seems about right.
• Economy and monetary
  policy is in a good spot.

BoJ’s Ueda basically
retracted what Takata said yesterday as he cast doubt on the achievement of the
2% target and wasn’t upbeat on wage negotiations:

• The recent recession
  in Japan follows previous strong quarters.
• Japan’s economy will
  continue recovering gradually.
• Japan firms’ capex
  plan is strong, which likely to be implemented eventually.
• Japan’s economy not
  yet in situation where sustained achievement of 2% inflation can be
  foreseen.
• In judging whether
  sustained achievement of 2% inflation target can be foreseen, this
  year’s annual wage negotiation outcome is key.
• Compared with when
  we announced our January report, labour unions have demanded wage growth
  higher than last year, big firms seem keen to hike wages.
• Want to look at
  collective outcome of wage talks, as well as hearings we conduct on firms.

RBNZ Hawkesby reaffirmed
the central bank patient stance:

• Restrictive policy
  needed to ensure inflation expectations anchor at 2%.
• Policy is going to
  stay restrictive for some time yet.
• Policy will need to
  stay restrictive even when the output gap is negative.
• We think the output
  gap now is around zero, if not a bit negative.
• We don’t have a lot
  of room to manoeuvre when it comes to future inflation shocks.
• We are on the right
  path with inflation, have to hold our course.
• Not in a mindset to
  cut rates now, will be cutting sometime down the track.

The Japanese Unemployment
Rate came in line with expectations:

• Unemployment rate
  2.4% vs. 2.4% expected and 2.4% prior.

RBNZ Governor Orr
reaffirmed the central bank’s patient stance:

• Economy is evolving
  as anticipated.
• Inflation expectations have fallen.
• Inflation is still
  too high but is falling.
• Monetary policy
  needs to stay restrictive for some time.
• Expect to begin
  normalising policy in 2025.
• Expect economic
  growth to begin picking up in 2024.

Fed’s Williams (neutral –
voter) reiterated that he sees progress on inflation and rate cuts this year:

• Says 2023 was an
  amazing year for the economy.
• Current business
  cycle is not a normal one.
• Much of what
  happened in the economy is a reversal of the pandemic hit.
• The resilience of
  the US economy is remarkable.
• The Federal Reserve
  is dealing a strong economy, adding lots of jobs.
• Wants inflation back
  to 2% and sees progress on that.
• I do expect us to
  cut interest rates later this year.
• Doesn’t see sense of
  urgency to cut rates.
• Rate hike is not
  part of base case.
• Current outlook
  doesn’t suggest another hike is needed.

The Chinese February PMIs
showed Manufacturing remaining in contraction and Services improving further:

• Manufacturing PMI
  49.1 vs. 49.1 expected and 49.2 prior.
• Services PMI 51.4
  vs. 50.9 expected and 50.7 prior.

The Chinese February Caixin
Manufacturing PMI beat expectations:

• Caixin Manufacturing
  PMI 50.9 vs. 50.6 expected and 50.8 prior.

Caixin PMI summary:

• Production and new
  orders grew faster in February.
• New export business
  expanded for the second consecutive month due to an improvement in
  underlying global demand conditions.
• Inventories of
  purchased items increased at the fastest pace since late-2020.
• Stocks of finished
  items fell for the first time since June last year.
• Employment fell for
  the sixth successive month.
• Factory gate prices
  down for the second month, with the rate of discounting being the quickest
  since July 2023.

The Switzerland February
Manufacturing PMI missed expectations:

• Manufacturing PMI 44.0
  vs. 44.4 expected and 43.1 prior.

The Eurozone February CPI
beat expectations:

• CPI Y/Y 2.6% vs.
  2.5% expected and 2.8% prior.
• Core CPI Y/Y 3.1% vs.
  2.9% expected and 3.3% prior.

The Eurozone Unemployment
Rate remained unchanged at 6.4%.

Fed’s Barkin (hawk –
voter) seems to be getting a bit uncomfortable as he even questioned rate cuts
this year:

• Yesterday was a high
  inflation report.
• We’re still a world
  of prices increasing at higher levels.
• Says he tried to not
  take too much out of January economic figures in general.
• PCE data yesterday
  is consistent with the story he is hearing with regards to services
  inflation.
• Inflation is coming
  down, but we have to see how much more has to happen to get it to 2%.
• I am not in a hurry
  to cut rates.
• I still see wage and
  inflation pressures.
• We’ll see if there
  are rate cuts this year.
• It all depends on
  progress on inflation.
• Economy will tell us
  what to do on policy.

BoE’s Pill (neutral –
voter) stressed that even if they cut monetary policy will remain restrictive:

• My baseline is that
  the time for cutting rates is some ways off.
• I need to see more
  compelling evidence that the underlying persistent component of UK CPI
  inflation is being squeezed down.
• Maintaining
  restrictiveness does not necessarily mean leaving bank rate unchanged.
• Real interest rates
  will rise as inflation and short-term inflation expectations ease.
• Monetary policy
  stance remains restrictive even after a cut.

The Canadian
Manufacturing PMI improved further in February:

• Manufacturing PMI 49.7
  vs. 48.3 prior.

The US February ISM
Manufacturing PMI surprisingly missed expectations:

• ISM Manufacturing
  PMI 47.8 vs. 49.5 expected and 49.1 prior.

Details:

• Prices paid 52.5 vs. 52.9 prior.
• Employment 45.9 vs. 47.1 prior.
• New orders 49.2 vs. 52.5 prior.
• Inventories 45.3 vs. 46.2 prior.
• Production 48.4 vs. 50.4 prior.

The
highlights for next week will be:

• Monday: Switzerland CPI.
• Tuesday: Tokyo CPI, China Caixin
  Services PMI, Eurozone PPI, US ISM Services PMI.
• Wednesday: Australia GDP, Eurozone
  Retail Sales, US ADP, BoC Policy Decision, US Job Openings, Fed Chair Powell
  Testimony.
• Thursday: Japan Wage data,
  Switzerland Unemployment Rate, ECB Policy Decision, US Jobless Claims, Fed
  Chair Powell Testimony.
• Friday: US NFP, Canada Labour
  Market report.

That’s all folks. Have a
nice weekend.