Weekly Market Recap (11-15 March)

Over the weekend,
the Chinese Inflation data beat expectations by a big margin:

• CPI Y/Y 0.7% vs.
  0.3% expected and -0.8% prior.
• CPI M/M 1.0% vs.
  0.7% expected and 0.3% prior.
• Core CPI Y/Y 1.2%
  vs. 0.4% prior.
• Core CPI M/M 0.5% vs. 0.3% prior.

China National Bureau of
Statistics (NBS) on the CPI rise:

• “It was
  primarily food and service prices that rose more”.
• “During the
  Spring Festival period, consumer demand for food products grew, in
  addition to rainy and snowy weather in some regions affecting supply”.

JiJi Press
reported that the BoJ was considering scrapping its Yield Curve Control (YCC)
program:

• The Bank of Japan is
  considering scrapping its yield curve control program and instead
  indicating in advance the amount of government bonds it plans to purchase,
  Jiji Press reported, without saying where it got the information.
• It will stop its
  program to guide benchmark 10-year government bond yields to around 0%, as
  part of its efforts to normalize monetary policy, according to Jiji.
• New framework would
  target the volume of purchases, rather than the yield, according to Jiji.
• The bank will decide
  on that and ending negative interest rates as soon as the next policy
  meeting concluding on March 19, the report said.

The Japanese Final
Q4 GDP invalidated the technical recession as the number was revised
substantially higher:

• Final Q4 GDP 0.1%
  vs. 0.3% expected and -0.8% prior.
• Annualised 0.4% vs.
  -0.4% preliminary.
• Private consumption
  -0.3% vs. -0.2% preliminary (down for the third straight quarter).
• Capex 2.0% vs. -0.1% preliminary.

ECB’s Kazimir (hawk – voter) reaffirmed his preference
for a June rate cut as he awaits more data:

• Should wait until
  June for first rate cut.
• Rushing the move is
  not smart nor beneficial.
• Upside risks to inflation
  are “alive and kicking”.
• Need more hard
  evidence on inflation outlook.
• Only in June will we
  reach the confidence threshold on that.
• But discussions on
  easing should ready start, will use the weeks ahead for that.

ECB’s Makhlouf (dove – non voter in April) supports a
gradual policy easing:

• Gradual changes are
  best rather than a sudden decision.
• Large individual
  cuts “probably unlikely” because “data is never that
  definitive”.

BoE’s Mann (hawk – voter) reiterated that she still
sees a long way to go before inflation normalises around their 2% target:

• Our forecast on
  service inflation looks aggressive.
• We have a long way
  to go for inflation pressures to be consistent with 2% target.

RBA’s Hunter sees the economy progressing as per their
forecasts:

• Q4 GDP largely in
  line with forecasts.
• Recent inflation
  data also consistent with forecasts.
• Inflation the
  biggest drag on household consumption (“For some households, interest
  rate hikes are also challenging and difficult, but inflation is the single
  biggest drag.”)
• Households are
  clearly struggling at present.

BoJ’s Ueda reaffirmed once again that wage growth is
of utmost importance for the central bank:

• Japan’s economy is
  recovering moderately, although some weak data are seen.
• Consumption is
  improving moderately on easing cost-push pressure, with hopes for higher
  wages.
• Some firms appear to
  be delaying investment, though capital expenditure plans remain firm.
• We have seen various
  data since January, and more data will come out this week. We will look
  at these comprehensively in reaching an appropriate monetary policy
  decision.
• We are focusing on
  whether a positive wage-inflation cycle is kicking off, in judging whether
  sustained, stable achievement of our price target is coming into sight.
• When
  achievement of 2% inflation is stably and sustainably in sight, we will seek
  exit from negative rates, yield curve control and other large scale monetary
  easing steps.
• As
  for the order of phasing out these various tools, it will depend on the
  economic, price, and financial conditions at the time.
• It
  is possible to control short-term rates at appropriate level by paying interest
  on reserves parked with the BoJ.
• If
  inflation accelerates and warrants monetary tightening, it is possible to do so
  by raising rates without scaling back on BoJ bond holdings.

The UK February Jobs data missed expectations across the board:

• Unemployment rate
  3.9% vs. 3.8% expected and 3.8% prior.
• January employment
  change -21K vs. 10K expected and 72K prior.
• January average
  weekly earnings 5.6% vs. 5.7% expected and 5.8% prior.
• January average
  weekly earnings (ex bonus) 6.1% vs. 6.2% expected and 6.2% prior.
• February payrolls
  change 20K vs. 15K prior (revised from 48K).

The US NFIB Small Business Optimism Index fell further
in February:

• NFIB 89.4 vs. 90.7
  expected and 89.9 prior.

“Twenty-three percent of small
business owners reported that inflation was their single most important
business problem in operating their business, up three points from last month
and replacing labor quality as the top problem. Reports of labor quality as the
single most important problem for business owners decreased five points to 16%,
the lowest reading since April 2020. “While inflation pressures have eased
since peaking in 2021, small business owners are still managing the elevated
costs of higher prices and interest rates. The labor market has also eased
slightly as small business owners are having an easier time attracting and
retaining employees”, said NFIB Chief Economist Bill Dunkelberg.

The US February CPI beat expectations across the
board:

• CPI Y/Y 3.2% vs. 3.1%
  expected and 3.1% prior.
• CPI M/M 0.4% vs.
  0.4% expected and 0.3% prior.
• Core CPI Y/Y 3.8%
  vs. 3.7% expected and 3.9% prior.
• Core CPI M/M 0.4%
  vs. 0.3% expected and 0.4% prior.
• Shelter M/M 0.4% vs. 0.6% prior.
• Shelter Y/Y 5.7% vs.
  6.0% prior.
• Services less rent
  of shelter M/M 0.6% vs. 0.6% prior.
• Real weekly earnings
  0.0% vs. -0.4% prior (revised from -0.3%).
• Food M/M 0.0% vs.
  0.4% prior.
• Food Y/Y 2.2% vs.
  2.6% prior.
• Energy M/M 2.3% vs.
  -0.9% prior.
• Energy Y/Y -1.9% vs.
  -4.6% prior.
• Rents M/M 0.5% vs.
  0.4% prior.
• Owner’s equivalent
  rent M/M 0.4% vs. 0.6% prior.

BoE’s Bailey (neutral –
voter) reiterated that the question policymakers are facing now is for how long
they need to keep rates at the current levels:

• Question of policy
  restrictiveness is now key.
• Question is now for
  how long do we need to be restrictive?
• World remains more
  uncertain place than we have been used to.
• Monetary policy is
  doing its job.
• Inflation
  expectations appear to be well anchored.
• We have seen limited
  evidence so far of rising unemployment as a condition to reduce inflation.
• Concerns about
  embedding of second-round effects have been reduced.

ECB’s Wunsch (hawk – non
voter in April) supports a rate cut soon despite the risks of services
inflation and wage growth:

• We are going to have
  to make a bet at some point.
• Felt the Bank should
  act “before so long”, without specifying a month.
• He said the ECB was
  getting to a point where it could react to inflation heading in the right
  direction. But it will remain a cautious move on the basis of what I know
  today because of the problem that has been commented again and again and
  again that service inflation and wage developments are still running at
  levels that are ultimately not compatible with our objective.
• We are not going to
  wait until we see wage development at 3% before we cut rates. I guess
  we’ll do it before and that’s why I say it’s important we need to take a
  bet.

BoJ’s Ueda delivered some
vague comments and repeated that policy tweaking will come once their
conditions fall into place:

• Says will consider
  policy changes once achievement of price target is in sight.
• We must scrutinise
  whether positive wage-inflation cycle emerges.
• That will determine
  whether conditions for phasing out stimulus are falling into place.
• This year’s wage
  talks is critical in deciding timing on exit from stimulus.
• We will scrutinise
  wage talks outcome as well as other data in making decision.
• Will consider
  tweaking negative rates, YCC and other monetary easing tools if sustained
  achievement of price target comes into sight.

Bloomberg reported that
the BoJ was considering scrapping ETF purchases with inflation target in sight.
The report says that the Japanese central bank is mulling such a move as
policymakers see little need to keep buying ETFs to limit risk premiums in a
market that is looking rather frothy.

ECB’s Villeroy (neutral –
non voter in April) places higher chances on a June rate cut although he keeps
a door open for an earlier move:

• It is more likely a
  rate cut will happen in June than in April.
• A spring rate cut remains
  probable.
• We remain vigilant
  on the inflation front but victory is within sight.
• We are winning the
  battle against inflation.

The UK January GDP came
in line with expectations:

• January GDP M/M 0.2%
  vs. 0.2% expected and -0.1% prior.
• GDP 3M/3M -0.1% vs.
  -0.1% expected and -0.3% prior.
• Services M/M 0.2%
  vs. 0.2% expected and -0.1% prior.
• Industrial output
  M/M -0.2% vs. 0.0% expected and 0.6% prior.
• Manufacturing output
  M/M 0.0% vs. 0.0% expected and 0.8% prior.
• Construction output
  M/M 1.1% vs. -0.1% expected and -0.5% prior.

The Eurozone January
Industrial Production missed expectations by a big margin:

• Industrial Production M/M -3.2% vs. -1.5%
  expected and 1.6% prior (revised from 2.6%).
• Industrial Production Y/Y -6.7% vs. -2.9%
  expected and 0.2% prior (revised from 1.2%).

ECB’s Stournaras (dove –
voter) called for the start in rate cuts soon and added that he sees four rate
cuts in total as reasonable this year:

• We need to start
  rate cuts soon.
• Should not
  exaggerate the risk of a wage-price spiral.
• Does not buy the
  argument that the ECB cannot cut rates before the Fed.
• Four rate cuts in
  2024 seem reasonable.
• We have to cut rates
  twice before the summer break.

ECB’s Knot (hawk – voter)
expressed his preference for a June rate cut as most of other ECB members
already did:

• Expect first cut in
  June.
• Further cuts most
  likely in September and December.
• Interim meetings
  would also be available for rate cuts if incoming data tells us we should
  do more.

The US February PPI beat
expectations across the board:

• PPI M/M 0.6% vs.
  0.3% expected and 0.3% prior.
• PPI Y/Y 1.6% vs.
  1.1% expected and 1.0% prior (revised from 0.9%).
• Core PPI M/M 0.3%
  vs. 0.2% expected and 0.5% prior.
• Core PPI Y/Y 2.0%
  vs. 1.9% expected and 2.0% prior.

The US February Retail
Sales missed expectations across the board with negative revisions to the prior
figures:

• Retail Sales M/M
  0.6% vs. 0.8% expected and -1.1% prior (revised from -0.8%).
• Retail Sales Y/Y
  1.5% vs. 0.0% prior (revised from 0.6%).
• Ex-autos M/M 0.3%
  vs. 0.5% expected and -0.8% prior (revised from -0.6%).
• Control group M/M 0.0%
  vs. 0.4% expected and -0.3% prior (revised from -0.4%).
• Retail sales ex gas
  and autos M/M 0.3% vs. -0.5% prior.

The US Jobless Claims
beat expectations with a huge positive revision to the Continuing Claims
figures following the annual BLS revisions and a new model to seasonally adjust
the data:

• Initial Claims 209K
  vs. 218K expected and 210K prior (revised from 217K).
• Continuing Claims
  1811K vs. 1900K expected and 1794K prior (revised from 1906K).

JiJi Press reported that
the BoJ was arranging to end negative interest rates policy at the next week’s
meeting. After a brief spike, the JPY gave back all the gains given the strong
US data and the fact that the market has already priced in a March exit.

ECB’s de Guindos (neutral
– voter) reaffirmed that the central bank will have more info in June for a
rate cut and expressed some concern about the high financial assets valuations:

• I see Europe’s
  economy picking up in H2 2024.
• In June we’ll have
  sufficient level of info to make decisions on monetary policy.
• Financial asset
  valuations are very high.

The PBoC left its MLF
rate unchanged at 2.50% as expected.

• MLF
  2.50% vs. 2.50% expected and 2.50% prior.
• Injects
  cash via MLF for the 16th month in a row.
• Adds
  CNY 387bn vs. the 500bn yuan maturing.

The New Zealand
Manufacturing PMI improved in February although the index remains in
contraction:

• Manufacturing PMI 49.3
  vs. 47.3 prior.

BNZ’s Catherine Beard:

• Improved February
  result showed signs of a gradual turnaround in the sector.
• The key sub-index of
  Production (49.1) was at its highest level since January 2023, while
  Deliveries (51.4) was at its highest point since March 2023. However, New
  Orders (47.8) has now remained in contraction for nine consecutive months
  and likely needs to get much closer to the 50-point mark to edge the
  sector back into expansion.

BNZ’s Stephen Toplis:

• New Zealand’s
  manufacturing sector is still in recession, but this month’s PMI indicates
  there is light at the end of the tunnel. The 49.3 reading is within a
  smidgen of “breakeven” and the new orders to inventory differential
  provides support for an increase in production. Moreover, New Zealand’s
  underperformance against the rest of the world is narrowing quickly.

Japan’s Rengo, the
largest trade union, said that preliminary data showed an average of 5.28% of
wage hike this year. That compares with the 3.80% seen in fiscal year 2023. And
for added context, the above represents the largest pay hike in more than 30
years. With this data the conditions for the BoJ to exit the NIRP were met.

ECB’s Rehn (neutral – non
voter in April) said that the central bank already started to discuss rate cuts
but the inflation data will be key for the timing:

• Started discussion
  about reducing the restrictive dimension of monetary policy.
• Talk relates to when
  it is appropriate to start cutting interest rates.
• If inflation
  continues to fall, can slowly start easing the foot off the brake pedal of
  monetary policy.

The US February
Industrial Production beat expectations with negative revisions to the prior
figures:

• Industrial
  Production M/M 0.1% vs. 0.0% expected and -0.5% prior (revised from -0.1%).
• Industrial Production
  Y/Y -0.2 vs. -0.3 prior (revised from 0.0%).
• Manufacturing
  production M/M 0.8% vs. 0.3% expected and -1.1% prior (revised from
  -0.5%).
• Manufacturing production
  Y/Y -0.7% vs. -1.1% prior (revised from -0.9%).
• Capacity utilization
  78.3% vs. 78.5% expected and 78.3% prior (revised from 78.5%).

The US February
University of Michigan Consumer Sentiment survey came basically in line with
expectations across the board:

• Consumer Sentiment 76.5
  vs. 76.9 expected and 76.9 prior.
• Current conditions
  79.4 vs. 79.2 expected and 79.4 prior.
• Expectations 74.6 vs.
  75.1 expected and 75.2 prior.
• One-year inflation
  3.0% vs. 3.0% prior.
• Five-year inflation
  2.9% vs. 2.9% prior.

The
highlights for next week will be:

• Monday: China Retail Sales and
  Industrial Production, Canada PPI, US NAHB Housing Market Index.
• Tuesday: BoJ Policy Decision,
  RBA Policy Decision, Eurozone Wage data, Eurozone ZEW, Canada CPI, US Housing
  Starts and Building Permits.
• Wednesday: PBoC LPR, UK CPI, FOMC
  Policy Decision, New Zealand GDP.
• Thursday:
  Australia/Japan/Eurozone/UK/US Flash PMIs, Australia Labour Market report, SNB
  Policy Decision, BoE Policy Decision, US Jobless Claims.
• Friday: Japan CPI, UK Retail
  Sales, Canada Retail Sales.

That’s all folks. Have a
nice weekend!