A slew of US macro data this week confirmed that the US economy stands strong, and as a response, market are pricing in high rates for longer. US curve inversion steepened, and in line with our call for a stronger USD, EUR/USD slid to below 1.07 level. The US January CPI details continued to illustrate persistent underlying price pressures. Headline CPI grew 0.5% m/m and core CPI 0.4%. Core Services ex. shelter inflation remained steady at 0.6% m/m, but excluding healthcare and shelter, a key measure of core services inflation picked up to 0.65% m/m (from 0.35%). Also, US January retail sales topped expectations with core sales (excl. motor vehicles & gas stations) rising by 2.6% m/m. The strong momentum appears to have continued in February as well, as NAHB housing market index and NY Fed’s Empire Manufacturing index also surprised to the upside.
While the recovering macro indicators point towards lower recession risks in the near-term, they also raise the risk of underlying price pressures being protracted. In our Global Inflation Watch – High services inflation remains a worry for central banks, 15 February, we highlight how core price pressures remain sticky on both sides of the Atlantic. For now, we stick to our forecast of two more 25bp Fed hikes, and first rate cuts only in early 2024, but we also highlight that both market and consumer survey based inflation expectations have ticked slightly up recently, supporting the case for keeping nominal rates higher for longer. We expect the ECB to hike rates by 50bp in March and by 25bp in May.
Over the weekend, senior policy makers will gather for the Munich Security Conference. On the sidelines, a meeting between US Secretary of State Anthony Blinken and China’s top foreign policy official Wang Yi is possible. Also, one week from now marks exactly one year since Russia started its invasion of Ukraine, and the war will undoubtedly be on the meeting’s agenda. Back in 2007, it was this same conference where Russian President Putin held his infamous speech where he criticised NATO’s eastern expansion. In our Research Russia-Ukraine: One year since Russia’s invasion – Europe faces three changes as it settles into new reality, 17 February, we explain how the war has changed the European security order, our energy model and decision makers’ priorities.
Next week’s focus will be on February flash PMI releases. In the euro area, we are interested to see whether the data brings more evidence of rebounding activity amid easing inflation pressures. In the US we expect PMIs to edge higher, although signals from NY Fed’s Empire and Philly Fed Manufacturing indices have been mixed. A clear upside surprise could push markets to price in further tightening in financial conditions We will also get the FOMC minutes on Wednesday, but given that the market narrative has changed a lot since the February meeting due to the strong data releases, the minutes are likely somewhat outdated. In the euro area, the final January HICP figures could show an upside revision on Thursday, given the impact from the delayed German figures.
It will be a rather quiet central bank week but we do have RBNZ meeting on Wednesday where a 50bp hike is the clear base case, while the Central Bank of Turkey, after the devastating earthquakes, is again expected to resort to a 100bp rate cut.
