It’s the start of a new month which means a plethora of flash PMI reports coming out of Asia Pacific, Europe and the US. Also coming up are the classic ISM report on US manufacturing and services business surveys, the quarterly Tankan survey for Japan, and the RBA and RBNZ central bank meetings. Closing out the week on Friday is the trader-favorite Nonfarm Payroll Report, preceded by the Job Vacancies (JOLTS), Initial Claims and ADP reports . Assuming no more bank failures, economic data and yields could be in charge again.
Weekly review
- US authorities increased credit facilities to strengthen regional banks’ balance sheets, prompting the First Citizen Bank prompted the purchase of the failed Silicon Valley Bank agree.
- China’s industrial profits fell by -22.9% in the first two months of the year, according to official government figures.
- Japan’s PPI for services rose 1.8% yoy in February, up from 1.6% previously.
- US consumer confidence edged up slightly with the ‘expectation index’ although the ‘present index’ was down.
- Fiscal year-end trading and news of a 22 trillion yen stimulus package pushed the yen higher on March 28 as companies reallocated cash to book profits.
- Fed member William Barr delivered a prepared speech to Congress on the collapse of the Silicon Valley bank, blaming the collapse on poor management and declaring that US banks remain sound.
- The governor of the BOE said that social media and the digital banking age have contributed to lightning-fast bank robberies as he discussed the collapse of the SVB.
- There are early signs that the US housing market slump is over as pending home sales rose for the third month and hit a 6-month high.
- Nonetheless, Bank of America has warned that global FX markets are vulnerable to a liquidity squeeze, echoing a request from a top Goldman Sachs trader over the weekend that we are heading for a credit crunch
- Australian inflation rose 6.8%, below forecasts of 7.1% and 7.4%, fueling calls for a pause from the RBA, although the business community appears to be split between a pause and a 25 basis point hike
- Alibaba-Shares soared as much as 16% in Asian trading after it was revealed the company intends to split into six companies, most of which are looking to raise capital or go public.
- China’s Purchasing Managers’ Index grew faster than forecast, sending the Composite Index to a record high of 57.
- Sentiment was further boosted on Friday as the Fed’s preferred measure of inflation (personal consumption spending) came in weaker than expected. the corePCE fell to 4.6% yoy and up 0.3% m/m (below 0.5% and 0.6% m/m forecasts) while PCE fell to 5% yoy (below forecasts 5.1% and 5.3%Mom), although it was also up 0.3%Mom (above forecast of 0.2% but below 0.6%Mom).
- US 1-year inflation expectations fell to 3.6%, the lowest level since May 2021.
- Canada’s GDP expected at 0.5% in January versus 0.3%.
- US core PCE came in a notch below estimates at 4.6%y/y.
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The coming week (major economic data):
- Nonfarm Payrolls
- Flash PMI data for Asia Pacific, Europe and US (and ISM reports for US)
- RBA decision on policy rate
- RBNZ Monetary Policy Report and OCR
Flash PMI data for the Asia Pacific, Europe and US region
PMI data is always closely monitored as it provides an outlook on growth potential. The flash data tends to be the more exciting release and can trigger more volatile market reactions, especially when it surprises with an expansion or contraction (above/below 50). However, the PMI records are more relevant than ever as investors try to interpret whether central banks are nearing the end of their monetary tightening stance.
A range of services, manufacturing and composite (services and manufacturing combined) data is available throughout the week, as well as the classic ISM US annual report. A common observation lately is that the PMI readings for the services sector are rising faster than forecast, while those for the manufacturing sector are falling more slowly. “Prices Paid” should also be looked at for inflationary pressures around the world, as well as New Orders which can provide a clue to the headline data.
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Non-farm Payrolls
Always a favorite of investors and as important as ever as market participants try to interpret whether the Federal Reserve will give in to market pressure and pause, cut or raise interest rates later in the year. Ultimately, the employment situation remains tight by historical standards, albeit not as tight as in the past. As for jobs growth, the last three NFP numbers were all above 239k, one above 300k and another above 500k. However, the 12-month trend is clearly pointing down as job growth slowly loses momentum. ADP numbers remain stable, labor force participation rates are rising, although there are early signs of a bottoming out in unemployment and underemployment. I doubt the Fed will even consider the word “cut” unless we see negative job growth and a much higher unemployment rate while inflation stays above 4%. And that leaves the USD vulnerable to buying pressure if the NFP report continues to come in good numbers.
RBA: Pause or Raise?
The debate on social media is hot as to whether the RBA will hike another 25 basis points on Tuesday or end its record string of tightening with a pause. To be fair, there are good arguments for both scenarios. Inflation is more than double the 2-3% target and is unlikely to fall fast enough. However, the governor himself has stated that policy is based on inflation expectations (which remain well anchored) rather than current inflation levels. Nonetheless, the labor market remains tight and spending is weaker but still expansionary. Personally, I’m leaning towards a hawkish stance, pausing on further weak inflation and keeping the option open to hike rates again in May if the quarterly numbers remain uncomfortably high. In this case, the raise or pause is probably less important than the message of the statement.
In addition, Governor Lowe will deliver a speech the next day in which he could refine any misunderstood message from the statement. So it could be a pivotal week for the Aussie, in which we’ll find out if recent talk of a possible ‘pause’ has once again been empty.
RBNZ: Rate hike or pause?
The RBNZ’s chief economist said last week that the overnight cash rate (OCV) is comfortably above neutral and is having the desired contractionary effect on the economy, along with welcome signs of weaker demand. Also, New Zealand appears to be headed for a mild recession, which in itself is deflationary. Is that enough to justify a pause at 4.75%? Maybe not, given that the RBNZ itself is forecasting 7.3% inflation for the first quarter, and that discussions at the February meeting were heavily focused on a 50 basis point hike and 25 basis points was not really considered became.
However, perhaps a 25 basis point hike next week is warranted as this is a good trade-off between a pause and another aggressive 50 basis point hike as recession speculation begins. The 1-month OIS stands at 4.96%, suggesting that money markets are strongly in favor of a 25 basis point hike. We’ll see what the economists endorse over the weekend.
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