UPCOMING EVENTS:
Wednesday: US ISM Manufacturing PMI.
Thursday: US Jobless Claims.
Friday: US ISM Services PMI.
The market finished the last week on a sour note as the US PCE report came in much hotter than expected. We saw beats across the board with the Core readings being really troubling as the M/M showed a 0.6% increase. Fed Chair Powell’s preferred measure “Core PCE Services ex-Housing” also increased in January. To sum it up, Friday’s report showed that the Fed made very little progress on inflation and may have made another mistake by slowing too early.
The reaction in the markets was of course negative with losses in the stock and the bond markets and the USD jumping across the board. The market has now fully priced in another 25 bps hike in June and the odds of a 50 bps hike at the March meeting increased. The Fed though follows market pricing, so unless the market consensus shifts to a 50 bps hike for March, the Fed will keep the 25 bps pace. We will need another set of hot economic data to see that happening.
You can see the US Dollar Index (DXY) chart below with the recent bullish catalysts that erased almost all of the losses seen in January. As long as the market keeps on repricing the new “higher for longer” scenario, the USD is likely to appreciate and the 105.63 level should give way to a rally towards the 108.00 level.
Wednesday: The ISM Manufacturing PMI is expected to increase to 48.0 vs. the prior 47.4. Recently, economic data started to improve which prompted the market to revise its expectations on the Fed’s tightening path and this weighed on risk assets. Another beat, especially if big, wouldn’t be good news for the market as it raises even more the odds of higher rates and further reduces the chances of a soft landing scenario.
Thursday: The Fed is targeting a softer labour market as Powell made it clear in his recent speech. Thus, labour market reports may be even more important than those on inflation. Jobless Claims are expected at 197K vs. the prior 192K. Big deviations from the expected number should be market moving.
Friday: The ISM Services PMI is expected to decrease to 54.5 vs. the prior 55.2. The last month report was a real cold shower for those on the imminent hard landing camp. The services sector makes up for roughly 80% of the US economy, so the January dive into contraction was seen as another big data point supporting the hard landing scenario.
Everything’s changed in February when we saw a big jump back into expansion. There are talks of seasonal factors explaining the beats in economic data in February, so this month we should see if the market overreacted or the Fed may have indeed made a mistake slowing the pace of hikes.
This article was written by Giuseppe Dellamotta.
