Weekly Market Recap (25-29 March)

Fed’s Bostic (hawk
– voter) late Friday said that he changed his view and now expects just one
rate cuts this year vs. two previously:

• Economy has proved
  more resilient than anticipated so much so that he’s doubled his expected
  GDP growth estimate to 2%.
• Sees little or no
  change in the current 3.9% unemployment rate.
• Says 3.9%
  unemployment was considered an inflationary level not too long ago.
• Says inflation is
  falling but more slowly than anticipated, with many items recording
  outsized price increases.
• If we have an
  economy that is growing above potential, and we have an economy where
  unemployment is at levels that were deemed to be unimaginable without
  pricing pressures, and if we have an economy where inflation is moderating…those
  are good things…That gives us space for patience.

ECB’s Panetta
(dove – voter) just reiterated that there’s a consensus for a rate cut, which
is expected in June:

• There is growing
  consensus on a possible rate cut.
• Inflation is quickly
  falling towards the 2% target.

ECB’s Lane (dove – voter)
just reaffirmed the central bank’s focus on wage growth and that they want it
to return to normal levels to reverse the monetary policy:

• We’re confident that wage growth is returning to normal.
• It
  is desirable, inescapable that we do have several years of wage increases above
  normal.
• But
  what we need to make sure is that it returns to normal.
• And
  I would say we’re confident that it is on track.
• If that assessment is confirmed, we can start to look to reverse the
  rate hikes we have made previously.

Fed’s Goolsbee (dove –
non voter) reaffirmed his expectation for three rate cuts this year but he
would like to see more progress on inflation:

• Expects three rate
  cuts this year.
• Asked if June is on
  the table, said everything is on the table but depends on data.
• We are in historic
  restrictive territory.
• Latest reports do
  not change the overall picture on inflation.
• Says in a bit of a
  murky picture on inflation.
• Wants to see more
  progress on inflation.
• Main puzzle is about
  housing inflation.

Fed’s Cook (dove – voter)
supports careful easing of the monetary policy as inflation moves towards
target to preserve labour market strength:

• Path of disinflation
  has been bumpy and uneven, as expected.
• Careful approach to
  easing policy over time can ensure inflation returns sustainably to 2%
  while striving to maintain a strong labour market.
• Employment and
  inflation goals moving into better balance.
• Inflation has fallen
  considerably; labour market has remained strong.
• Wage growth
  differential between job switchers and those staying in jobs has narrowed.
• Strong productivity
  growth could mean faster pace of wage growth that’s not inflationary.
• Not sure if neutral
  rate is higher or not.
• We’ll only know if
  neutral rate is higher after-the-fact.
• It will be left to
  Congress, fiscal authority, to address impact of AI on workers and wages.
• End of negative
  rates in Japan will be studied for its impacts, as are other overseas
  policy developments.

BoE’s Mann (hawk – voter)
explained her reasoning for moving away from rate hikes but cautioned against
the aggressive market pricing:

• It was time to move
  away from a rate hike.
• Discretionary
  services inflation has started to soften in the past month.
• The change of voting
  intention is due to consumers disciplining firms pricing, thus changing
  dynamic in labour markets and also the financial market curve.
• Markets are pricing
  in too many rate cuts.
• In February, I
  thought markets were easing too much.
• There is complacency
  about how long the BoE will hold rates.
• In some ways, the BoE
  does not have to cut because the market already has done so.
• The market curve in
  the UK is also importantly affected by the decisions of the ECB and Fed.

ECB’s Muller (hawk – non
voter in April) reaffirmed the central bank’s intention to deliver the first
rate cut in June:

• We are closer to the
  point to start cutting rates.
• Data may confirm
  inflation trend going into June meeting.

The US February Durable
Goods Orders beat expectations across the board:

• Durable goods orders
  M/M 1.4% vs. 1.1% expected and -6.9% prior (revised from -6.2%.
• Non-defense capital
  goods orders ex-air M/M 0.7% vs. 0.1% expected and -0.4% prior (revised
  from 0.0%).
• Ex transport M/M
  0.5% vs. 0.4% expected.
• Ex defense M/M 2.2% vs. -7.9% prior.
• Shipments M/M 1.2%
  vs. -0.8% prior.

The US March Consumer
Confidence missed expectations although the labour market data improved:

• Consumer Confidence
  104.7 vs. 107.0 expected and 104.8 prior (revised from 106.7).
• Present situation
  index 151.0 vs. 147.6 prior.
• Expectations index 73.8 vs. 76.3 prior.
• Jobs hard-to-get
  10.9 vs. 12.7 prior.
• 16.5% of consumers
  expect their incomes to increase, from 16.3% last month.
• 12-month inflation 5.3% vs. 5.2%.

The Australian February
Monthly CPI missed expectations slightly although the Trimmed Mean measure
ticked higher:

• CPI Y/Y 3.4% vs. 3.5%
  expected and 3.4% prior.
• CPI M/M 0.5% vs. 0.4% prior.
• CPI Trimmed Mean Y/Y
  3.9% vs. 3.8% prior.

BoJ’s Tamura said that
the current monetary policy is likely to remain in place for the time being:

• Based on current
  economic, price outlook, BoJ likely to maintain accommodative monetary
  conditions for time being.
• Will guide monetary
  policy appropriately in accordance with economic, price, financial
  developments.
• Not there yet to
  allow market forces to fully drive long-term interest rate moves.
• Despite our tweak to
  monetary policy framework, there are side-effects remaining.
• Our monetary easing
  had some effect in underpinning economic growth.
• Japan’s economy is
  showing some signs of weakness but is recovering moderately.
• Rises in services
  prices pushing up overall inflation.
• Positive
  wage-inflation cycle is likely to continue.
• Will not comment on
  specific FX moves.
• Impact of FX moves
  on the economy can vary.
• Can’t say with
  certainty how much BoJ will raise rates further.
• On scrapping yield
  curve control policy, “our understanding was that there was no longer
  a need to aggressively intervene in the bond market as we had done in the
  past”.

BoJ Ueda didn’t add
anything new on the monetary policy front:

• Household
  sentiment improving on expectations of wage hikes.
• Won’t
  rule out any options if economic, price developments worsen.
• FX
  moves have big impact on economy, prices.
• But
  won’t comment on specific FX moves, levels.
• It
  may take some time but likelihood of achieving price target is high.
• That
  considering the current short-term rate level, at 0% to 0.10%, is very low.
• At
  some point in the future, we would like to gradually reduce balance of our JGB
  holdings.

SNB’s Jordan explained
the rationale for their rate cut at the last monetary policy decision:

• Lower inflation
  pressure allowed us to lower interest rates.
• The bank looks at
  the exchange rate closely and intervenes in Forex when necessary.
• SNB has no set goal
  for the Franc rate.
• The bank has reduced
  the size of the balance sheet which has allowed us to tackle inflation.

Fed’s Waller (hawk –
voter) delivered on expectations as he was a bit more hawkish given the recent
data, but he balanced it keeping the door open for a rate cut soon if the next
two set of inflation reports were to be good:

• ‘Still no rush’ to
  cutting rates in current economy.
• Fed may need to
  maintain current rate target for longer than expected.
• Needs to see more
  inflation progress before supporting rate cut.
• Needs at least a
  couple of months of data to be sure inflation heading to 2%.
• Still expects Fed to
  cut rates later this year.
• Economy’s strength
  gives Fed space to take stock of data.
• Data suggests fewer
  rate cuts possible this year.
• Economy is growing
  at a healthy pace.
• Despite progress on
  inflation, recent data has been disappointing.
• Data has showed
  mixed messages on jobs front.
• Fed has made a lot
  of progress lowering inflation.
• Wage pressures have
  been easing.
• Unsure productivity
  will keep at current strong pace.
• Economy has
  supported Fed’s cautious approach.
• Case for hiking
  rates is very remote.
• Unclear if neutral
  rate has changed.
• Dollar is still the
  dominant currency by far.
• The economy is not
  giving the Fed a case to pursue big rate cuts.
• Supply chain issues
  have abated in positive inflation development.
• Baltimore port
  disaster is unlikely to cause big economic disruptions.
• Still expects
  inflation pressures to wane.
• Waller notes he
  looks through the loosening in financial conditions indexes because it’s
  mostly the stock market – specifically the Magnificent 7.
• Also notes tight
  credit spreads could just be the rise in private credit lending. He thinks
  conditions are tight because real rates remain high.
• Inflation adjusted
  interest rates seem to have gone back up since Christmas; lot of factors
  go into rate spreads.
• Want to see up to
  five months of good inflation data, so far have only two months; question
  is how much data you need.
• Fed is reacting to
  the data and not ‘overreacting;’ have two more inflation rates before may
  FOMC meeting.
• No evidence’
  quantitative tightening has been a reason rates have gone up; balance
  sheet has more effect during stress.
• Unemployment rate
  doesn’t have to stay at 3.7% to have a soft landing, if unemployment goes
  up no reason to panic.

The BoJ released the
Summary of Opinions of its March Monetary Policy Meeting:

• One member said YCC, negative rate,
  and other massive stimulus tools have accomplished their roles.
• One member said BoJ must guide
  monetary policy using short-term rate as main policy means, in accordance to
  economic, price, and financial developments.
• One member said shifting to ‘normal’
  monetary easing is possible without causing short-term shocks, may have
  positive impact on economy in medium-, long-term perspective.
• One member said chance of policy
  shift causing big market volatility is small.
• One member said future policy
  guidance very important so that BoJ can slowly but steadily proceed with policy
  normalization.
• One member said appropriate to give
  some room for allowance in BoJ’s bond buying operation.
• One member said appropriate to
  revise policy after confirming that smaller firms are able to sufficiently hike
  wages.
• One member said ending YCC and
  negative rate simultaneously could cause disruption in long-term rate,
  financial environment.
• One member said changing policy now
  could delay achievement of BoJ’s price target.
• One member said important to make
  use of expected outcome from BoJ’s policy review in future policy guidance.
• One member said Japan’s low natural
  rate of interest, lagged effect of monetary policy may be behind slow recovery
  pace of economy.
• One member said virtuous cycle
  between wages and prices has become more solid.
  
  One member said highly likely that mechanism behind price developments will be
  consistent with price target.
• One member said too early to say
  main factor behind recent rise in services prices is pass-through of rising
  labour costs.
• MoF representative said BoJ will
  continue to seek achieving 2% inflation target in sustainable, stable manner.
• MoF representative said while wage,
  capex showing positive signs, consumption lacks momentum and there are overseas
  risks.
• Cabinet office representative said BoJ
  must continue to support economy through monetary policy.

BoE’s Haskel (hawk –
voter) explained his reasoning for the vote change and stressed that what they
really care about is persistence in underlying inflation:

• Fall in headline
  inflation is very good news.
• But what we really
  care about is persistence and underlying inflation.
• Does not think
  headline inflation gives a good guide on persistence.
• Vote change is
  because there were improvements in critical indicators of inflation.

The Canadian January GDP
beat expectations:

• January GDP 0.6% vs.
  0.4% expected and 0.0% prior.
• Services industries 0.7%.
• Goods producing 0.2%.
• Manufacturing 0.9%,
  led by transportation equipment.
• February advance Canadian GDP 0.4%.

The US Jobless Claims
beat expectations:

• Initial Claims 210K
  vs. 215K expected and 212K prior (revised from 210K).
• Continuing Claims
  1819K vs. 1795K prior (revised from 1807K).

ECB’s Villeroy (neutral –
non voter in April) talked about making an insurance cut as inflation falls to
avoid a hard landing:

• Core inflation
  decline is rapid, but it still remains too high.
• 2% inflation target
  now within sight.
• We need to take out
  insurance against a hard landing by starting to cut rates.
• Whether in April or
  June, the exact date of first-rate cut is not or existentially important.
• First rate cut
  should come in spring and come independently of the US Federal Reserve
  timeframe.
• We will likely start
  with a moderate cut after that we don’t have to cut at each meeting though
  we should keep that option.

The Tokyo March CPI came
in line with expectations:

• CPI Y/Y 2.6% vs.
  2.6% prior.
• Core CPI Y/Y 2.4%
  vs. 2.4% expected and 2.5% prior.
• Core-Core CPI Y/Y
  2.9% vs. 3.1% prior (revised from 2.5%).

The Japanese Unemployment
Rate rose to 2.6% vs. 2.4% expected and 2.4% prior.

The Japanese February
Industrial Production missed expectations:

• Industrial
  Production M/M -0.1% vs. 1.4% expected and -6.7% prior.
• Industrial
  Production Y/Y -3.4% vs. -1.5% prior.

The Japanese February
Retail Sales beat expectations:

• Retail Sales Y/Y
  4.6% vs. 3.0% expected and 2.1% prior (revised from 2.3%).

The US February PCE came
in line with expectations:

• PCE Y/Y 2.5% vs.
  2.5% expected and 2.4% prior.
• PCE M/M 0.3% vs.
  0.4% expected and 0.4% prior (revised from 0.3%).
• Core PCE Y/Y 2.8%
  vs. 2.8% expected and 2.9% prior (revised from 2.8%).
• Core PCE M/M 0.3% vs.
  0.3% expected and 0.5% prior (revised from 0.4%).

Consumer
spending and consumer income for February:

• Personal income 0.3%
  vs. 0.4% expected and 0.3% prior.
• Personal spending 0.8%
  vs. 0.5% expected and 0.2% prior.
• Real personal
  spending 0.4% vs. -0.2% prior (revised from -0.1%).

The
highlights for next week will be:

• Monday: China Caixin
  Manufacturing PMI, US ISM Manufacturing PMI, BoC Business Outlook Survey.
• Tuesday: RBA Minutes,
  Switzerland Retail Sales, Switzerland Manufacturing PMI, German Inflation data,
  US Job Openings.
• Wednesday: China Caixin Services
  PMI, Eurozone CPI and Unemployment Rate, US ADP, Canada Services PMI, US ISM
  Services PMI.
• Thursday: Switzerland CPI,
  Eurozone PPI, US Challenger Job Cuts, US Jobless Claims.
• Friday: Eurozone Retail Sales,
  Canada Jobs data, US NFP.

That’s all folks. Have a
nice weekend and Happy Easter!