UPCOMING EVENTS:
Tuesday: RBA Policy Decision, Fed Chair Powell.
Wednesday: US Job Openings, BoC Policy Decision
Thursday: US Challenger Job Cuts and Jobless Claims.
Friday: BoJ Policy Decision, US NFP.
Last week the ISM Manufacturing PMI missed expectations on the headline but new orders (proxy for demand) and especially the prices paid (proxy for inflation) sub-indexes surprised to the upside with the latter jumping back into expansion. This gave the US Dollar a boost as fear of inflation has returned in February and the market is looking at higher interest rates.
Next we had the ISM Services PMI on Friday and this one beat expectations and was hot almost across the board. The sub-indexes for employment and new orders increased further, but there was just a little downtick in the prices paid one, although it remains still elevated.
The market reaction to this report was really baffling with the stock market rallying hard, Treasury yields falling, and the US Dollar being offered. I think it’s a wrong reaction and may be just a squeeze because looking only at the little downtick in the prices paid and concluding it’s good news it’s a bit of a stretch.
Below you can see the updated chart of the US Dollar Index with all the recent catalysts. If we get another strong NFP report this week, especially with Average Hourly Earnings beating expectations, I would expect the high at 105.65 to break.
Tuesday: The RBA is expected to hike by 25 bps bringing the Cash Rate to 3.60%. Recent economic data has leant on the softer side as the unemployment rate rose and the CPI missed expectations. The central bank is expected to acknowledge the improvements while staying the course until the bank is confident that inflation is on its path to their 2-3% target range.
Fed Chair Powell will testify to congress this week, starting on Tuesday with the Senate Banking Committee and then on Wednesday with the House Financial Services Committee. Last time Powell spoke was after that blockbuster NFP report in February and he reiterated that it would take some time to get inflation back to their 2% target but strong labour market or inflation readings will require a higher terminal rate that projected previously.
Since then, we had many other economic reports and they’ve been all hot. Unfortunately, Powell will speak before the NFP and CPI report, so he may just maintain a hawkish rhetoric while repeating that they are data dependent and if they need to do more they will do so.
Wednesday: Since the Fed wants to see a softer labour market, jobs data should be on the top of the market focus. US Job Openings report is expected to show a downtick to 10.600M vs. the prior 11012M.
The Bank of Canada is expected to be the first major central bank to pause its tightening cycle with the rate held at 4.50% as the bank in its last meeting said that they expect “to hold the policy rate at the current level if economic developments evolve in line with their outlook”. Since then, GDP and inflation data missed expectations.
Thursday: Another set of US labour market data beginning with the Challenger Job Cuts followed by Jobless Claims expected at 195K vs. the prior 190K.
Friday: The Bank of Japan is expected to keep its policy unchanged with rates at -0.10% and YCC to flexibly target the 10yr JGB yields at 0%. This is the last meeting with Governor Kuroda as his term ends in early April and will be succeeded by Kazuo Ueda. Although inflation and wages are increasing in Japan, the BoJ has reiterated that it will keep with its ultra-loose monetary policy.
The US NFP report is expected to show 200K jobs added in February vs. the prior 517K (!) in January. That blockbuster report in January has been the topic of many discussions about seasonal factors affecting the number. The unemployment rate is expected to remain unchanged at 3.4%. Average Hourly Earnings are expected at 0.3% M/M and 4.7% Y/Y. Recent jobs data has been all hot, which may suggest that Friday’s report could be a good one.
This article was written by Giuseppe Dellamotta.