Weekly Market Recap (19-23 February)

Over the weekend
the PBoC left the MLF rate unchanged at 2.50% as expected.

The New Zealand
Services PMI jumped back into expansion in January:

• Services
  PMI 52.1 vs. 48.8 prior.

The Canadian
January PPI came in line with expectations with a negative revision to the
prior figure:

• PPI M/M -0.1% vs.
  -0.1% and -1.6% prior (revised from -1.5%).
• PPI Y/Y -2.9% vs.
  -2.8% prior (revised from -2.7%).
• Raw materials prices
  M/M 1.2% vs. -4.9% prior.
• Raw materials prices
  Y/Y -6.4% vs. -7.9% prior.

The PBoC left the 1-year
LPR rate unchanged but delivered the biggest 5-year LPR cut on record:

• 3.45%
  for the one-year (previously 3.45%).
• 3.95%
  for the five-year (previously 4.20%).
• First
  cut to the 5-year since August, it was only 10bp that time.
• 25bp
  is the largest cut ever.

The RBA released the
Minutes of its February Monetary Policy Meeting:

• Board considered
  case to hike by 25 bps or to hold steady.
• Case to hold steady
  was the stronger one, appropriate given balanced risks to outlook.
• Data gave board more
  confidence inflation would return to target in reasonable timeframe.
• However, it would
  “take some time” before board could be confident enough on
  inflation.
• So, board agreed it
  was appropriate not to rule out another rise in rates.
• Board noted hiking
  rates would not prevent it from cutting should economy weaken.
• Noted forecasts of
  inflation back in target in 2025 assumed no further rate hikes.
• Goods inflation had
  fallen faster than expected service inflation still high.
• Data on labour
  market, consumption had been weaker than expected.
• High inflation,
  higher tax, and interest payments had weighed on consumption.
• Labour market
  relatively tight, wage growth slowing in some sectors.
• Financial conditions
  restrictive on some measures, less so on others.

The Eurozone Q4
wages data eased slightly from the prior quarter:

• Q4
  2023 Y/Y 4.5% vs. 4.7% prior.

The Canadian
January CPI missed expectations across the board by a big margin:

• CPI Y/Y 2.9% vs.
  3.3% expected and 3.4% prior.
• CPI M/M 0.0% vs.
  0.4% expected and -0.3% prior.
• Core CPI Y/Y 2.4%
  vs. 2.6% prior.
• Core CPI M/M 0.1% vs. -0.5% prior.
• Trimmed Mean CPI Y/Y
  3.4% vs. 3.6% expected and 3.7% prior.
• Median CPI Y/Y 3.3% vs.
  3.6% expected and 3.5% prior (revised from 3.6%).
• Common CPI Y/Y 3.4% vs.
  3.8% expected and 3.9% prior.

The US Leading
Economic Index (LEI) fell further in January:

• LEI
  M/M -0.4% vs. -0.3% expected and -0.2% prior (revised from -0.1%).

“The U.S. LEI
fell further in January, as weekly hours worked in manufacturing continued to
decline and the yield spread remained negative,” said Justyna Zabinska-La
Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.
“While the declining LEI continues to signal headwinds to economic activity,
for the first time in the past two years, six out of its ten components were
positive contributors over the past six-month period (ending in January 2024).
As a result, the leading index currently does not signal recession ahead. While
no longer forecasting a recession in 2024, we do expect real GDP growth to slow
to near zero percent over Q2 and Q3.”

The Australian Q4
Wage Index came in line with expectations:

• Q4
  Wage Index Q/Q 0.9% vs. 0.9% expected and 1.3% prior.
• Q4
  Wage Index Y/Y 4.2% vs. 4.1% expected and 4.1% prior (revised from 4.0%).

Fed’s Barkin
(neutral – voter) downplayed the January’s inflation data as the Fed is still
confident on the disinflationary trend and wants to see more evidence of that
in the next couple of months:

• The big picture of
  US data on inflation and jobs has been remarkable.
• Recent data on PPI
  and CPI have been ‘less good’, showing dependence of disinflation on goods.
• January data ‘made
  things harder’ but should not put too much weight on the month’s
  information given known seasonality issues.
• Ease of hiring is
  not yet back to normal, but conditions are improving.
• Productivity metrics
  are ‘poor’ and need to be viewed over longer time periods.
• It’s too soon to say
  there’s been a sea change in productivity, but firms are investing.
• Weaker growth
  overseas should not have much impact on the US recovery.
• The US still has a
  way to go to get a soft landing.
• The US is on the
  back end of its inflation problem, the question is how much longer it will
  take.

BoE’s Dhingra
(uber dove – voter) continues to support her case for rate cuts due to policy
lags and risks around overtightening:

• UK consumption
  remains below pre-pandemic in contrast to US and eurozone.
• We have a long way
  to go before coming to a finely tuned estimate of the medium-term resting
  place for bank rate.
• The outlook for
  headline inflation appears bumpy but downwards.
• Evidence to err on
  the side of overtightening is not compelling as it often comes with hard
  landings and scarring of supply capacity.
• Monetary policy
  needs to be forward-looking because moderation of the policy stance
  requires time to implement and to feed through to the real economy.
• Price developments
  strongly signal that inflation is already on a path of sustainably meeting
  our target over the medium term.

ECB’s Wunsch (hawk
– non voter in March) doesn’t expect early rate cuts due to tightness in the
labour market and high wages:

• May be too early to
  get hopes up on rate cuts.
• Cannot exclude
  policies to type for longer than seen.
• Wages are high,
  labour markets are tight.

The Federal
Reserve released the Minutes of its January Monetary Policy Meeting:

• Most participants
  noted the risks of moving too quickly to ease the stance of policy and
  emphasized the importance of carefully assessing incoming data in judging
  whether inflation is moving down sustainably to 2 percent.
• Members agreed that
  they did not expect that it would be appropriate to reduce the target
  range until they have gained greater confidence that inflation is moving
  sustainably toward 2 percent.
• Fed officials judged
  policy rate likely at its peak for this cycle.
• Participants
  highlighted the uncertainty associated with how long a restrictive
  monetary policy stance would need to be maintained.
• A couple of
  policymakers pointed to downside risks form maintaining overly restrictive
  policy for too long.
• Several emphasized
  communicating clearly about data-depending approach.
• Fed staff saw risks
  to economic forecast skewed to the downside.
• Staff placed ‘some
  weight’ on chance that further progress on inflation could take longer
  than expected.
• Staff economic
  outlook was slightly stronger than December projection.

Nvidia reported
earnings for Q4 2023, and it beat expectations by a big margin:

Q4 2023 Nvidia (NVDA) earnings:

• EPS a solid beat at
  $5.16 vs. $4.54 expected.
• Revenue beat $22.1B
  vs. $20.3B expected.
• Guides Q1 Revenue
  $24.0B (plus or minus 2%) vs. $21.5B expected.

More:

• Data Centre revenue 18.4bn (exp. 17.21bn).
• Gaming revenue 58% Y/Y
  to 2.9bn (exp. 2.72bn).
• Professional
  Visualization revenue 463mn (exp. 435.5mn).
• Automotive revenue
  -4.4% Y/Y to 281mn (exp. 272.1mn).
• Data centre sales to
  China fell significantly.

“Accelerated
computing and generative AI have hit the tipping point. Demand is surging
worldwide across companies, industries and nations.” – Co-founder & CEO,
Jensen Huang

The Australian
February PMIs showed Manufacturing falling into back into contraction while
Services jumping back into expansion:

• Manufacturing
  PMI 47.7 vs. 50.1 prior.
• Services
  PMI 52.8 vs. 49.1 prior.

The Japanese
February PMIs showed both Manufacturing and Services falling further:

• Manufacturing
  PMI 47.2 vs. 48.2 expected and 48.0 prior.
• Services
  PMI 52.5 vs. 53.1 prior.

BoJ’s Ueda
continues to sound optimistic on reaching their inflation target sustainably:

• Japan’s trend
  inflation heightening, will make appropriate monetary policy decision.
• Service prices
  continue to rise moderately.
• Expects positive
  cycle to strengthen in which tight labour market leads to higher wages,
  household income.
• Desirable for FX to
  move stably reflecting fundamentals.
• Won’t comment on FX
  levels.
• FX rates move on
  various factors.
• A 1% rise in
  interest rates will lead to 40 trillion yen worth of valuation loss on BoJ’s
  JGB holdings.

The Eurozone
February PMIs showed Manufacturing falling further and Services jumping back
into expansion:

• Manufacturing PMI
  46.1 vs. 47.0 expected and 46.6 prior.
• Services PMI 50.0
  vs. 48.8 expected and 48.4 prior.

The UK February
PMIs showed both Manufacturing and Services matching the prior readings:

• Manufacturing PMI
  47.1 vs. 47.5 expected and 47.0 prior.
• Services PMI 53.3
  vs. 53.1 expected and 53.3 prior.

The ECB released
the Accounts of its January Monetary Policy Meeting:

• Risk
  of cutting rates too early was still seen as outweighing that of cutting too
  late.
• Measures
  of underlying inflation had passed their peak.
• Latest
  economic activity and inflation consistent with current monetary policy stance.
• But
  further progress needed to be made in the disinflationary process.
• Continuity,
  caution and patience were still needed.

The Canadian
December Retail Sales beat expectations although the January advance reading
was soft:

• Retail Sales M/M
  0.9% vs. 0.8% expected.
• Retail Sales Y/Y
  2.9% vs. 1.8% prior.
• Ex autos 0.6% vs.
  0.7% expected and -0.5%.
• Ex auto and gas 0.5%
  vs. -0.6% prior.
• Q4 sales were up 1.0%.
• 2023 sales were up
  2.2% Y/Y led by autos.
• January advance estimate -0.4%.
• Strength in general
  merchandise (+2.8%), food & beverage (+1.5%) and supermarkets (+1.8%).
• Weakness was in
  furniture and electronics retailers (-2.7%) along with e-commerce -(3.6%).

The US Jobless
Claims beat expectations:

• Initial Claims 201K
  vs. 218K expected and 213K prior (revised from 212K).
• Continuing Claims 1862K
  vs. 1885K expected and 1889K prior (revised from 1895K).

The US February PMIs
showed both Manufacturing and Services improving further:

• Manufacturing 51.5
  vs. 50.5 expected and 50.7 prior.
• Services PMI 51.3
  vs. 52.0 expected and 50.7 prior.
• Input prices rose at
  the weakest pace since October 2020.
• The rate of cost
  inflation slowed at both manufacturers and service providers.
• The overall rise in
  output charges was historically muted, and the second slowest since June
  2020.

Fed’s Jefferson (neutral
– voter) continues to support a patient approach before cutting rates given the
uncertainty around inflation:

• CPI shows path down
  for inflation likely to be bumpy.
• Likely to be
  appropriate to begin cutting policy rate later this year.
• January CPI disappointing.
• Fed staff estimate
  PCE price index rose 2.4% over the 12 months ended in January.
• Three key risks are
  resilient consumer spending, employment weakening and geopolitical risks.
• Says he expects
  slower growth and output in 2024.
• He remains
  cautiously optimistic about progress on inflation, will review totality of
  data.
• Imbalance between
  labour supply/demand has narrowed.
• Fed needs to remain
  vigilant and nimble, should not be surprised by an unexpected shock.
• Most easing cycles
  start because of concern about slowing economic growth.
• Highlights the speed
  at which economic activity can weaken.
• Household balance
  sheets have weakened, over time they will normalize and be less of a
  factor in driving consumption.
• Labor market seems
  to be rebalancing in a way that is allowing lower inflation without
  unemployment.
• Recent rise in
  productivity suggests supply side healing form the pandemic.
• Perhaps potential
  GDP growth has risen.
• Will be looking at
  the totality of data in making rate cut call, wants to see evidence that
  inflation is ‘sustainably’ headed to target.

Fed’s Harker (neutral –
non voter) echoed his colleague in cautioning against premature rate cuts:

• We may be near the
  point of cutting rates but unsure of when it will happen.
• Recent CPI data
  shows uneven progress.
• Greatest risk is
  that Fed cuts too early.
• Concerned by rising
  credit delinquencies.
• There are multiple
  signs labour market coming into better balance.
• US GDP continues to
  be strong.
• Still wants more confidence
  that inflation is moving back to 2%.
• The Fed is in the
  last mile of heading down to 2%.
• Rise in layoffs not
  a sign of recession arriving.
• Fed can hold here on
  rates for now. No rush to cut.
• Future Fed actions
  will be driven by data.
• May rate cut is not
  current forecast.
• A couple more month
  data could convince on inflation.
• Wants to avoid
  premature cut, data will drive Fed actions.
• Rate cut timing
  possible for the second half of the year.
• Does not know what
  ample reserve level is. Market
  will reveal.
• No simple answer to
  what is right level of liquidity reserves level.
• Is unsure when Fed
  will taper balance sheet drawdown.

Fed’s Cook (dove – voter)
supports the current patient stance as she wants to see more data before
considering rate cuts.

• I would like to have
  greater confidence that inflation is converging to 2% before beginning to
  cut the policy rate.
• Believe risks to
  achieving employment and inflation goals are moving into better balance
  after being weighted toward excessive inflation.
• I now see two-sided
  risks in considering appropriate monetary policy.
• I am now weighing
  the possibility of easing policy too soon and letting inflation stay
  persistently high versus easing policy too late and causing unnecessary
  harm to the economy.
• Believe our current
  monetary policy stance is restrictive.
• Sees an eventual
  rate cut as adjusting policy to reflect a shifting balance of risks.
• Risk of persistently
  high inflation appears to have diminished but has not disappeared.
• At some point, as we
  gain greater confidence that disinflation is ongoing and sustainable, that
  changing outlook will warrant a change in the policy rate.
• Restrictive monetary
  policy and favourable supply developments have put us in a good position
  to achieve both sides of FOMC’s mandate.
• Should continue to
  move carefully, maintaining degree of policy restriction needed to
  sustainably restore price stability while keeping the economy on a good
  path.
• Disinflationary
  process has been, and may continue to be, bumpy and uneven, as highlighted
  by last week’s CPI & PPI.
• Intend to monitor
  incoming data closely for signs disinflation process is continuing.
• Forecast of 12-month
  PCE inflation converging to 2% target over time still seems reasonable as
  baseline outlook.
• Housing services
  inflation should keep slowing this year as slower observed rent increases
  pass into official data.
• Core services
  ex-housing inflation should keep easing over time as consumers
  increasingly resist price increases & labour costs grow more slowly.
• Core goods inflation
  looks likely to converge to modestly negative pre-pandemic trend.
• Strong supply-side
  recovery has contributed importantly to the recent disinflation.
• Labor market demand
  and supply appear in better alignment.
• Consumer spending
  generally has continued to show strong momentum in recent months.
• Growth in total
  labour income has slowed to near pre-pandemic rate of about 5% year, which
  should contribute to moderating consumption.
• Consumer spending
  growth may face headwinds from deteriorating household balance sheets.
• Likely that the post
  pandemic world could be characterized by greater volatility of supply.
• There is potential
  for Red Sea shipping disruptions to affect supply more than they have so
  far.

Fed’s Waller
(neutral – voter) stressed about being patient as the inflation progress could
stall with premature rate cuts:

• The start of policy
  easing, and the number of rate cuts will depend on incoming data.
• The Committee can
  wait a little longer to ease monetary policy.
• Puzzled by the
  narrative that delaying cuts for a meeting or two risks causing a
  recession.
• Supposed asymmetry
  of lagged effects of rate hikes vs rate cuts not supported by any model
  I’m aware of.
• In the absence of a
  major economic shock, delaying cuts by a few months should not have a
  substantial impact on the economy near term.
• Cutting too soon
  could squander inflation progress and risk considerable harm to the
  economy.
• Data received since
  the last speech on Jan 16 has reinforced the view that we need to verify
  inflation progress from the last half of 2023 will continue.
• There is no rush to
  begin cutting interest rates.
• The strength of the
  economy and recent inflation data mean it is appropriate ‘to be patient,
  careful, methodical, deliberative’… ‘whatever word you pick, they all
  translate to one idea: what’s the rush?’
• The CPI report last
  week is a reminder that ongoing progress on inflation is not assured.
• It’s not clear yet
  if the CPI was driven by odd seasonal factors & outsized housing cost
  increases or signals inflation is stickier than thought and will be harder
  to bring down to target.
• Need to see more
  data to know if January CPI was ‘more noise than signal’.
• This means waiting
  longer before having enough confidence that starting rate cuts will keep
  us on the path for 2% inflation.
• The strength of
  output and employment growth means there ‘is no great urgency’ to ease
  policy.
• Still expect to ease
  policy this year.
• Recent
  hotter-than-expected data validates Chair Powell’s ‘careful risk
  management approach’.
• The risk of waiting
  a little longer to ease is lower than the risk of acting too soon.
• Several indicators
  suggest some slowing in growth.
• Latest data on job
  openings and quits may indicate labour market moderation may have stalled.
• Based on CPI and
  PPI, January core PCE may be 2.8% at a 12-month rate, 2.4% at a 3-month
  rate, and 2.5% at a 6-month rate.
• CPI revisions on Feb
  9 did not change the picture of inflation improvement in 2023.
• It’s comforting to
  know the progress we made was real and not a mirage.
• Still see wage
  growth ‘somewhat elevated’ to achieve a 2% inflation goal.
• Watching to see if
  housing costs continue to run higher than expected.
• One question is
  whether elevated labour costs are impeding progress on service inflation
  ex-housing.
• Considering all
  inflation aspects, ‘I see predominantly upside risks’ to the expectation
  inflation will keep moving to the 2% goal.
• Need to see a couple
  more months of inflation data to be sure if January was a ‘fluke’ and we
  are still on track to price stability.
• There are no
  indications of an imminent recession.
• Stock market gains
  are largely being driven by seven firms.
• We’re not trying to
  kill the economy or crash the stock market.
• On CRE only worried
  if banks are going to get stuck with a lot of losses but it’s not a shock,
  we knew this was going to happen.
• CRE (commercial real
  estate) is predictable, manageable, should not cause major crisis.
• Not sure if
  productivity uptake will continue.
• Politics just does
  not enter how we set policy.

The German IFO
improved slightly in February:

• IFO 85.5 vs. 85.5
  expected and 85.2 prior.
• Current conditions
  86.9 vs. 86.7 expected and 86.9 prior (revised from 87.0).
• Expectations 84.1
  vs. 84.0 expected and 83.5 prior.

ECB’s Holzmann
(uber hawk – voter) continues to stress patience regarding rate cuts:

• The main risk to
  rate cuts is Red Sea tension.
• Some of the recent
  wage increases have been quite high.
• It is better to cut
  rates later than to do so too early.
• We are hoping for
  rate cuts but have been wrong before.

ECB’s Schnabel
(neutral – voter) sounded optimistic about achieving a soft landing although a
bit disappointed from weaker impact of monetary policy to the services sector:

• Monetary policy has
  had a weaker impact on dampening services demand.
• Confident that risks
  of de-anchoring of inflation expectations have come down.
• There is hope to
  achieve soft landing and taming inflation without causing a recession.

ECB’s Nagel (hawk
– voter) stressed about patience on the rate cuts front and suggested to think
about them only after Q2 data:

• It is too early to
  cut rates even if a move appears tempting to some.
• Will only get key
  price pressure data in Q2, then only we can “contemplate a cut in
  interest rates”.
• Price outlook is not
  yet clear enough.
• Some setbacks on
  inflation may be possible.

ECB’s Lagarde
(neutral – voter) welcomed the Q4 2023 wage data and hinted that if the Q1 2024
figures will be good, the central bank will likely have the confidence to
deliver the first rate cut:

• Q4 2023 wage numbers
  are encouraging.
• If Q1 2024 numbers
  continue to be encouraging, that will be important.
• Need to be more
  confident that disinflation is sustainable.
• ECB is independent
  of moves by other central banks.

The
highlights for next week will be:

• Tuesday: Japan CPI, US Durable Goods Orders, US Consumer
  Confidence.
• Wednesday: Australia Monthly CPI, RBNZ Policy Decision, US Q4
  GDP 2^nd Estimate.
• Thursday: Japan Industrial Production and Retail Sales,
  Switzerland Q4 GDP, Canada GDP, US PCE, US Jobless Claims.
• Friday: Japan Unemployment Rate, Chinese PMIs, Switzerland
  Retail Sales, Eurozone CPI and Unemployment Rate, US ISM Manufacturing PMI.

That’s all folks.
Have a nice weekend!