Weekly Market Recap (25-29 March)

Monday

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.

Tuesday

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%.

Wednesday

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.

Thursday

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.

Friday

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! This article was written by Giuseppe Dellamotta at www.forexlive.com.