Powell Looks Past Inflation Uptick

For the week ending 8 March 2024

As of midday Friday, global equities gained additional ground as investors anticipated easier monetary policy toward the middle of the year. From a week ago, the yield on the benchmark US 10-year note fell 15 basis points to 4.08% while the price of a barrel of West Texas Intermediate crude oil declined $1.30 to $78.50. Volatility, as measured by the Cboe Volatility Index (VIX), edged up to 14 from 13.3. 

MACRO NEWS

Powell sticks to his story on Capitol Hill

Recent upticks in inflation readings did not cause US Federal Reserve Chair Jerome Powell to alter his view that it will likely be appropriate to cut interest rates later this year. He said that while inflation has eased notably, it remains elevated. The economy, Powell said in his semiannual testimony to lawmakers, is on a good path and the Fed is not far from having enough confidence that inflation is falling toward its 2% goal to begin rate cuts. Markets breathed a sigh of relief after the testimony as Powell, rather than adopting a more hawkish approach, reiterated much of what he said after the January FOMC meeting which took place before hotter-than-expected US inflation data were released in February rather than adopt a more hawkish approach. Regarding banking regulations, Powell indicated, that after heavy lobbying efforts, the Fed is prepared to redo its plan to force big banks to hold more capital. The US banking system, the Fed chair said, can withstand threats posed by commercial real estate. 

US employment report offer both upside and downside surprises

Nonfarm payrolls in the United States rose by 275,000 jobs in February, significantly exceeding expectations for a 200,000-job gain. However, the readings for the prior two months, including January’s upside blowout, w revised lower by 167,000. The unemployment rate rose to 3.9% from 3.7% while average hourly earnings rose a less-than-expected 0.1%. Economists continued to see a perplexing divergence between the surveys the government conducts to compile the data. In recent months, the household survey has suggested that the labor market is weakening but the establishment survey has pointed to continued robust demand for labor. All in all, the data should not dissuade the Fed from beginning to cut rates by midyear so long as next Tuesday’s consumer price data are well behaved.

European services index rises; US index dips

The European services sector purchasing managers’ index rose to 50.2 in February, the sector’s first expansion since July. The index stood at 48.4 in January. In the United States, the ISM nonmanufacturing index remains in expansion, though it ticked down to 52.6 from 53.4. After a number of recent upside inflation surprises, markets welcomed a sharp decline in the prices paid index, which fell to 58.6 in February from January’s reading of 64.

ECB holds rates steady, hints at June rate cut

European Central Bank President Christine Lagarde suggested that the ECB is more likely to cut rates in June than in April, saying policymakers will have much more information in hand by then. Futures markets are pricing in a 93% chance of a June cut. The ECB will act independently of the Fed, she said. The US central bank is expected to cut rates in June too, about a week after the ECB. ECB Vice President Luis de Guindos addressed the commercial real estate exposure of European banks, calling it “quite limited” and saying there are no widespread signs of contagion from CRE, though the issue needs to be closely monitored. 

QUICK HITS

With 99% of S&P 500 Index constituents having reported their Q4 results, stronger earnings growth and improved margins were apparent as many companies reduced expenses, primarily through shedding jobs. Big tech and financials were the main beneficiaries of the efficiency trend. 

Foreign-born workers made up 18.6% of the US civilian labor force in 2023, up from 15.3% in 2006, according to Bureau of Labor Statistics data. Increased immigration is seen as an important factor in supporting consumer spending.

Spot gold closed Thursday at a record high $2,158 an ounce amid steady purchases from Asian central banks.

According to Nikkei News, key Chinese economic policymakers on Wednesday vowed to meet 2024 growth targets and insisted they still have room to maneuver. Some economists consider recent Chinese actions insufficient to boost business confidence. Policymakers set China’s 2024 economic growth target at “around 5%” after reporting 2023 growth of 5.2%.

On Wednesday, as expected, the Bank of Canada left its policy rate unchanged at 5%. Governor Tiff Macklem said inflation progress remains “gradual but uneven” and that it is too early to consider rate cuts.

The Business Roundtable CEO Economic Outlook Index increased 11 points to 85, its highest level since mid-2022. Readings above 50 indicate expectations for economic expansion in the next six months. 

By a vote of three to two, the US Securities and Exchange Commission on Wednesday approved a new climate-disclosure rule that left out a proposed requirement that companies report emissions from their supply chains and customers use of their products. The agency dropped reporting requirements for these so called Scope 3 emissions after many businesses complained about the cost and difficulty of compiling those data.

Strong Japanese wage data increased the odds that the Bank of Japan will abandon its negative interest rate policy in coming rate-setting meetings, perhaps as soon as 19 March. Government officials are said to be warming to the idea of ending the negative rate regime as it could signal that the domestic economy is returning to normal after decades of deflation.

Former US Ambassador to the United Nations Nikki Haley dropped out of the race for the Republican presidential nomination after an underwhelming Super Tuesday performance. Also, Democrat Dean Phillips effectively ended his campaign against President Joe Biden, setting up a rematch between Biden and former President Donald Trump in November.

UK Chancellor of the Exchequer Jeremy Hunt unveiled his 2024 budget on Wednesday. The package includes an overhaul to Individual Savings Accounts, including incentives for investing in British assets, and will cut payroll taxes by 2% and increase investments in nuclear energy. It assumes an economic growth rate of 0.8% in 2024.

US consumer credit expanded by $19.5 billion in January, almost twice as much as expected.

The Wall Street Journal reported on Thursday that a congressional investigation into China-built ship-to-shore cranes uncovered cellular modems that could be accessed remotely. Investigators said the equipment does not appear to support normal port operations, raising suspicions. About 80% of the cranes in use at US ports were built in China by ZPMC. Last month, the Biden administration announced it would invest more than $20 billion over the next five years to replace foreign-built cranes with US-manufactured ones. 

Canada added a more-than-expected 40,700 jobs in February, though the unemployment rate rose to 5.8%, up from 5.7% the month before. Hourly wages grew more slowly, rising 4.9% year over year in February, down from 5.3% in January.