Today’s podcast

Overview: Pressure Down

• Notable turnaround in risk assets on Friday, squaring ahead of US holiday on Monday cited
• Fed speakers slightly less hawkish, Barkin firm supporter of moving in 25bp increments
• This week: RBNZ, FOMC Minutes, US PCE, Global PMIs, Earnings
• Coming up: Quiet, CH Loan Prime Rate, US Holiday (markets closed)

“Take the pressure down; Cause I can feel it, it’s rising like a storm; Take hold of the wheels and turn them around; Take the pressure down”, Pressure Down, John Farnham, 1986

It was mostly quiet on Friday and on the weekend, with an initial push higher in yields and sell-off in equities largely reversing later in the session. Squaring and covering shorts ahead of today’s US President’s Day Holiday was cited for the reversal, as was some less hawkish messaging from the Fed’s Barkin, which talked up the merits of moving by 25bp increments, running counter to Mester and Bullard’s discussion of wanting a 50bp hike in February. The US 10yr yield at one point hit 3.93%, before more than retracing to close at 3.81%. Over the week though the 10yr yield is up 8bps. A similar story was seen in shorter-end yields with the 2yr at one point hitting 4.71%, before reversing to close at 4.62%, still up some 9.8bps on the week. Equities told a similar story with the S&P500 at one point down -1%, before paring losses to end the session -0.3%, and is also down -0.3% on the week. The USD (DXY) broadly followed the moves in yields, ending -0.1% after having been up 0.6% at one point, and is up 0.2% on the week. A similar story was seen across most pairs: GBP +0.1%; USD/JPY +0.3%; EUR -0.1%. The AUD (-0.5%) and NZD (-0.7%) underperformed with the AUD currently trading at 0.6866.

Under the surface an interesting dynamic to note is the increase in implied inflation breakevens with the 2yr breakeven now back to 2.90%, after having dipped down close to 2.0% in January, and is now back to highest levels since November. That suggests markets are taking a real signal of inflation persistence from the macro data seen since the beginning of the year. If that plays out then the call will be higher for longer and a few US investment banks have recently raised their forecasts for the Fed up by 25bps to 5.25-5.50%. Markets are currently pricing a terminal rate of around 5.28%, with only 22bps worth of cut now priced in H2 2023. The equity market so far seems sanguine about the rates outlook, seemingly taking more signal from the better than expected macro data, then from what that then means for rates and getting inflation down.

Fed speak was slightly less hawkish on Friday with the Fed’s Barkin (non-voter) advocating for moving by 25bps following last week’s discussion on the merits of a 50bp hike by Mester and Bullard. Barkin said: “I like the 25-basis-point path because I believe it gives us the flexibility to respond to the economy” and “That means I’m comfortable raising rates potentially more often to a higher level if inflation were to come in hot, and I’m comfortable backing off if inflation were to not,”  “I think it’s what best balances the inherent uncertainty (in the economy) and one’s desire to do a sufficient amount to control inflation, but not to needlessly overshoot. ” The Fed’s Bowman (voter) was also speaking, noting that “I think we’ll have to continue to raise the federal funds rate until we start to see a lot more progress on that [inflation].” Former Treasury Secretary Summers (who has called this cycle) also noted “the Fed’s been trying to put the brakes on and it doesn’t look like the brakes are getting much traction’.

Across the pond, ECB speak was mixed with hawkish comments from Schnabel initially supporting a move higher in European yields, then more measured comments by Villeroy. Schnabel said: “We are still far away from claiming victory” and that “Markets are priced for perfection…They assume inflation is going to come down very quickly toward 2% and it is going to stay there, while the economy will do just fine. That would be a very good outcome, but there is a risk that inflation proves to be more persistent than is currently priced by financial markets.” In Schnabel’s view “A broad disinflation process has not even started.” In contrast Villeroy was more measured, noting “ It is likely we will reach the terminal rate by the summer, which technically ends in September” and that “there will be no automatic moves at each meeting, nor the impossibility to act afterwards if needed.”

Data was very sparse. In the UK retail sales surprised in January, with core sales up 0.4% m/m vs. -0.2% expected. The prior month though was revised down to -1.4% from -1.1%, and illustrates the widespread seasonal adjustment issues seen globally over the November, December and January period. We will have to wait for another month to have a cleaner read of the macro data globally. Meanwhile across the pond, conflicting anecdotes on the health of the consumer continues. The WSJ noted on the weekend that some 9.3% of auto loans extended to people with low credit scores were 30 or more days behind on payments at the end of last year, the highest share since 2010. With used car prices having fallen, some borrowers now owe more than their vehicles are worth. (see WSJ: More Auto Payments Are Late, Exposing Cracks in Consumer Credit).

Finally in Australia, on Friday RBA Governor Lowe gave testimony to the House Economics Committee. At the margin, Dr Lowe’s emphasis on getting inflation down being “the priority right now”, and focus on the risks of “not doing enough” may have come across as marginally more hawkish. Guidance to their being at least two more hikes was repeated in the Governor’s opening Statement – “based on the currently available information, the Board expects that further increases will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary ” (underline added). It was also pleasing to see the RBA also took our interpretation on last week’s labour market figures (see NAB note  AUS: RBA Lowe remains hawkish, perhaps marginally more hawkish given inflation “…has to be the priority right now” and for those wanting more information the official Hansard Transcript).

This week:

In Australia Q4 WPI wages on Wednesday is the key event in a week that also includes the RBA Minutes of the February meeting on Tuesday, and pre-GDP investment partials:

• For wages data on Wednesday, we expect a repeat of the 1.0% q/q Q3 result, taking the year-ended rate to 3.5%. That’s in line with the RBA’s updated February SoMP view and is also the consensus, though we assess the risks as being skewed to the upside to a 1.1% q/q print. Any upside surprise when see the RBA become more worried about inflation persistence; note the RBA latest forecasts see base wages growth of 3.5%, and then hitting 4.2% by end 2023 before easing back to 3.8% by mid-2025.
• Tuesday’s February RBA Minutes are unlikely to provide much new on top of recent communication; at the margin we might find out whether the RBA Board considered a 50bp increase. Also out in the week are the pre-GDP investment partials of Construction Work Done on Wednesday and Capex on Thursday, ahead of Q4 GDP on 1 March.

Offshore there are five events to watch, while it is also the one-year anniversary of Russia’s invasion of Ukraine on Friday (expectations are that Russia may launch an offensive):

• (1) RBNZ on Wednesday and our BNZ colleagues are holding to their view of a 50bp hike to 4.75%. As for the forecast track, the RBNZ is also likely to tone down its projected rate peak by 25bps, to 5.25%, on the grounds of lessening steam in the economy’s broader trajectory, compared to the November MPS. The case for 75bps has become a harder sell, especially given recent severe weather events.
• (2) US FOMC Minutes on Wednesday have been put back into the spotlight given Mester and Bullard’s revelations that they wanted a 50bp hike at the last meeting. Were there any others? And if so does that increase rate volatility which looks to be impacting risk assets. Markets now ascribe a 10% chance of a 50bp hike in March, while terminal fed pricing has also lifted to be above the Fed dot plot at 5.28% by July 2023;
• (3) US PCE figures on Friday are an update on both the Fed’s preferred inflation measure, and also on consumer spending; and
• (4) Global PMIs on Tuesday are a gauge on whether the more positive view of Europe avoiding a recession holds – consensus sees the Eurozone wide measure at 50.7, up from 50.3. The PMIs for the US are also worth watching for growth relativities, though the ISMs are given more weight.
• (5) Earnings, especially Walmart and Home Depot on Tuesday for further insight into the state of the consumer, after the very strong January figures. Nvidia also reports on Wednesday which could be important in terms of the rally in risk assets we have seen since the beginning of the year.

Coming up today (very quiet):

• CH: Loan Prime Rates: no change expected, though expect markets to remain focused on trying to assess how quickly activity is rebounding in China.
• US: Holiday (Presidents Day): markets are closed.

Market Prices

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