Markets
In a session deprived of data, US yields yesterday easily reversed a big part of Friday’s decline post a weaker than expected US manufacturing ISM. The move started early in US dealings. Comments from Atlanta Fed president Bostic only confirmed recent guidance that the Fed will take a cautious stance on rate cuts as it wants to be sure that inflation is on a sustainable path to its 2% target. Bostic expects the first interest rate cut in the third quarter to be followed by a pause as he wants to asses the impact on the economy. Interestingly, with respect upside risks to inflation and economic activity, in an article on the Atlanta Fed website, he elaborates on ‘expectant optimism’ among businesses. From contacts with businesses, the Atlanta Fed learned they stand ready to deploy assets and hire again if the time is right e.g. when the Fed starts cutting rates. This threat of ‘pent-up exuberance’ holds the ‘potential to unleash a burst of new demand that could reverse the progress toward rebalancing supply and demand’ and would create upward pressure on prices. Interesting framework to assess the Fed’s reaction function not only with respect to inflation but also on (ongoing strong) activity and sentiment indicators. At the end of the day, US yields added between 7 bps (2-y) and 2.5 bps (30-y). Moves in German yields again were more moderate (2-y + 1.3 bps 10-y -2.2 bps). After setting new record levels on Friday, US equities finally showed some hesitancy (S&P -0.12%, Nasdaq -0.41%). Higher (ST) US yields again didn’t help the dollar. DXY closed marginally lower at 103.83. EUR/USD even drifted cautiously higher to close at 1.0856. We also are a bit puzzled by the sharp rally in gold on Friday and yesterday, bring it near record high levels ($ 2116 p/oz). Something to keep an eye on.
This morning Asian (equity) markets are trading mixed as investors are pondering the impact of China maintaining a 5% growth target for this year (cf infra). Mainland Chinese indices gain modestly, but Hong Kong shows a substantial loss (-2.5%). US yields maintain yesterday’s gain. The dollar gains marginally (DXY 103.9, EUR/USD 1.0845). The yen remains in the defensive with USD/JPY (150.5) holding with reach of the 150.89 YTD top. Later today, the US services ISM will take center stage. The headline index is expect to stay comfortably in positive growth territory (53.0). Price pressures are expected to persist (prices paid 62.0). After Friday’s disappointing manufacturing measure, markets might have become a bit more sensitive to a negative surprise. However, we don’t expect the Fed to leave its cautious approach on interest rates by one set of less buoyant sentiment indicators (cf Bostic).
News & Views
China at the annual National People’s Congress set this year’s growth goal at ”around 5%”. The country had set and successfully met the same target last year. But 2024 growth unlike 2023 won’t enjoy the tailwind of favourable base effects, effectively making the 5% a more ambitious target. The other 2023 goalposts haven’t been moved either: a jobless rate of 5.5%, CPI around 3% and a fiscal deficit of 3% of GDP. The latter was raised from 3% to 3.8% late last year though. By sticking to the same targets at a time when the economy is even more clearly in a downturn than what was already the case last year, Beijing tries to convey a message of confidence in the recovery. The report also no longer states that “housing is for living in, not speculation” amid a massive real estate slump. The phrase became common usage since 2016 and was implemented in the official report from 2019 on. Markets are not impressed with targets that are deemed unrealistic without a strong dose of fiscal stimulus. The Chinese yuan stabilizes near recent lows at around USD/CNY 7.20. Equity markets in the region trade mixed.
Inflation in Tokyo largely matched expectations. Price growth rebounded from 1.8% in January to 2.6% in February. The core gauge excluding fresh food (looked at by the Bank of Japan) bounced from 1.8% to 2.5% with the figure that omits energy as well holding sticking above 3.0% (3.1% from 3.3%). The M/M jump mostly reflects the fading impact of government subsidies rolled out last year to contain utility costs. It nevertheless reveals how these grants have masked inflation’s true momentum. Tokyo CPI is a good guide for the national reading which will be published on March 22. If confirmed, it will keep those figures comfortably above the 2% BoJ target across all gauges (core and headline), further fueling speculation for an imminent exit from the ultra-easy monetary policy. The BoJ meets March 19. Japanese bond yields erased early kneejerk gains to trade slightly lower on the day.
