US data over the past week still points to Fed on track to cut rates by mid-year

US inflation indicators other than CPI point to stable or softer outcomes

• USD: The University of Michigan Consumer Sentiment index delivers a preliminary reading of 76.5 in March, lower than consensus estimates for 77.4 and a downtick from February’s 76.9. Sentiment in March is nearly 25% above November 2023 lows and roughly halfway between the historic low during peak inflation in June 2022 and pre-pandemic levels. Consumer views remain stable as there are few signals showing the US economy improving or deteriorating. Both short- and longer-term inflation expectations are also unchanged with 1Yr still at 3% and 5-10Yrs at 2.9%. Consumer inflation expectations as measured by the different consumer surveys declined in 2023 with sharp declines in the 1Yr UMich inflation expectations median towards the end of last year. Most of these various inflation expectations measures have returned within or close to the pre-pandemic range which has played a role in making the Fed more confident that inflation can return to the 2% target sustainably. More importantly, UMich inflation expectations have staying unchanged in March despite some stronger inflation data and gasoline prices in recent months. This should make the Fed even more comfortable with the idea that they can begin normalizing monetary policy this year.

• USD: However stronger PPI continues in February – in data released a day earlier on Thursday, US PPI final demand rises a strong 0.6%MoM with a solid 0.4% increase in core PPI that excludes food, energy, and trade services prices. Core goods prices in PPI are also up 0.3%MoM for the second month in a row while core services rise a solid 0.5%MoM. The gains in PPI final demand in February are for very similar reasons to the increase to January as services remain strong. Rising goods prices in PPI also suggest that goods prices disinflation may be largely coming to an end. But similar to February CPI, details of PPI should imply somewhat softer core PCE inflation in February compared to a very strong 0.4% increase in January. Citi Research expect a 0.26%MoM increase in core PCE in January which would imply 2.8%YoY core PCE and the 6-month pace climbing to 2.9%.

US manufacturing rebounds but trend remains weak; Soft US real retail sales point to slowing consumption

• USD: US industrial production is up 0.1% M/M, slightly above expectations for a flat reading and better than the January -0.5% contraction with a 0.8% increase in the largest subset of manufacturing production that is much stronger than  consensus for 0.3%. Overshadowing the  beat however are downward revisions to January industrial production from -0.1% to -0.5% and  manufacturing revised down from -0.5% to -1.1%. Meanwhile, capacity utilization is unchanged at 78.3%. Utilization has fallen since 2022 highs amid an inventory glut, but markets expect a rebound this year from a cyclical recovery. However, a renewed decline in ISM manufacturing in February implies a less clear picture of rebounding activity.

• USD: In data released Thursday, US retail sales increase by 0.6%MoM in February, less than the 1.0%MoM increase expected and are revised lower to -1.1% from -0.8% in January. Total sales excluding autos and gasoline increase by 0.3%MoM and are also revised lower in January declining by 0.8%MoM vs 0.5%MoM initially. Meanwhile, control group sales are flat on the month. Softer-than-expected February retail sales as well as downward revisions to already weak January retail sales continue to point to slowing consumption growth especially as the US labor market weakens in coming months. The slowing in consumption growth is already consistent with some indicators showing a weakening backdrop for the consumer. Transitions into serious delinquencies for credit card loans have picked up very rapidly. With softer activity data and core PCE inflation declining on a year-over-year basis, the Fed should start lowering policy rates in June.

Week Ahead:

US -  Fed FOMC meeting in focus this week

• USD: Fed March FOMC meeting and new SEP projections - while markets are increasingly pricing a more-hawkish Fed following stronger-than-expected inflation, Chair Powell is likely to emphasize slowing YoY core PCE inflation and restate that the Fed is “not far” from achieving the level of confidence necessary to begin lowering rates. Citi Research expect a largely unchanged summary of economic projections (SEP). Core PCE at the end of 2024 could be nudged higher to 2.5% from 2.4%. Most importantly, median dots are likely to remain unchanged. The FOMC will also discuss balance sheet reduction in depth which might result in some principles being published on how the Fed plans to taper and then eventually end balance sheet reduction.

• USD: S&P US Manufacturing PMI – Citi: 52.0, median: 51.8, prior: 52.2; S&P US Services PMI – Citi: 52.0, median: 52.0, prior: 52.3 - S&P Manufacturing PMI has been in expansionary territory during the last two months with new orders and output increasing. ISM Manufacturing on the other hand has stayed below 50 and declined in February which on balance has made a potential manufacturing rebound less clear. Some of the upside in S&P Manufacturing PMI in February could have been related to better weather compared to January. In general, any rebound in manufacturing is likely to be limited in the coming months with the S&P Manufacturing PMI likely to decline to 52.0 from 52.2 in the March preliminary report with downside risks. Meanwhile, Services diffusion indices have generally stayed in expansionary territory continuing to point to services activity growing. But S&P Services PMI may also decline modestly to 52.0 from 52.3 with most attention paid to the employment index as one of the early indicators of the labor market for March.

Euro area and UK – Euro area and UK flash PMIs, German ifo and ZEW surveys,  BoE, SNB and Norges Bank central meetings in focus this week

• EUR: Euro Area recovery watch: critical PMI release – with only five weeks between the March and April ECB meetings, it would take a major downside surprise on March growth or inflation data to hasten ECB action. Citi Research expect the PMIs to continue edging higher, including a rebound in Germany after the February setback. A PMI composite output above 50 could raise risks for the June rate cut, however. German ZEW Expectations, March – Citi Forecast 15.0, Consensus 20.4, Prior 19.9; ZEW Current Assessment, March – Citi Forecast -83.0, Consensus -82.4, Prior -81.7; Euro Area: ZEW Expectations, March – Citi Forecast 28.0, Prior 25.0; Euro Area: Consumer Confidence, March – Citi Forecast -14.8, Consensus -15.0, Prior -15.5; Euro Area PMI Manufacturing, March – Citi Forecast 47.0, Consensus 47.0, Prior 46.5; Euro area PMI Services, March – Citi Forecast 50.7, Consensus 50.5, Prior 50.2; Euro area PMI Composite Output, March – Citi Forecast 49.7, Consensus 49.7, Prior 49.2; German Ifo Business Climate, March – Citi Forecast 85.5, Consensus 86.0, Prior 85.5; Ifo Expectations, March – Citi Forecast 84.5, Consensus 84.7, Prior 84.1; Ifo Current Assessment, March – Citi Forecast 86.5, Consensus 86.8, Prior 86.9.
   
• GBP: UK: BoE MPC on hold, inflation and retail sales in focus – Citi Research expect the MPC to hold rates steady this week, with the main move likely to be on the vote split – where hawkish dissent is likely to thin further. The meeting will be immediately preceded by the February CPI data, that will likely marginally disappoint expectations. Retail sales and consumer confidence will be worth watching closely. Here Citi Research expect the data to remain relatively soft overall – if marginally improving. CPI Inflation, February – Citi Forecast 3.4% YY, Consensus 3.5% YY, Prior 4.0% YY (BoE: 3.5% YY - Feb MPR); CPI Core, February – Citi Forecast 4.4% YY, Consensus 4.6% YY, Prior 5.1% YY (goods prices still subdued); UK PMI Manufacturing, March flash – Citi Forecast 47.8, Consensus 47.8, Prior 47.5 (continued normalization); PMI Services, March flash – Citi Forecast 53.6, Consensus 53.8, Prior 53.8; UK GfK Consumer Confidence, March – Citi Forecast -20% bal, Consensus -20%, Prior -21% (progress stalling, YouGov measure still ticking up); BoE Bank Rate – Citi Forecast 5.25%, Consensus 5.25%, Prior 5.25% (guidance unchanged, but June on course).
   
• SEK: Norges Bank dovish pivot – Citi Research expect the Norges Bank to deliver a dovish pivot at this week’s meeting, guiding for a first rate cut in the summer. The costs of monetary tightening are becoming more tangible and Citi Research change their own base case to now see the first 25bp cut in June rather than in September. Norges Bank Policy Rate – Citi Forecast 4.50%, Consensus 4.50%, Prior 4.50%.
   
• SEK: SNB first to cut? – Citi Research expect the SNB to be the first Western European central bank to deliver a 25bp rate cut on Thursday. Inflation is likely firmly in the target corridor across the forecast horizon after recent downside surprises, freeing up room to address downside risks to growth and inflation from the strong Franc. SNB Policy Rate – Citi Forecast 1.5%, Consensus 1.75%, Prior 1.75% (SNB President Jordan’s press conference).
   
• EUR: ECB and its watchers – Key ECB rate setters will speak at the Frankfurt conference on 20 March and around it. Following the March meeting, a June rate cut is the central scenario for most, but the bar to stop it may lie differently high. The focus shifts on central bankers’ current views on the further pace and terminal rate.

Japan – BoJ board meeting and nationwide CPI data in focus this week

• JPY: BoJ Board meeting – Citi Research shift their baseline scenario to NIRP termination at the April 2024 MPM and therefore expect BoJ to signal termination at the March 18-19 MPM. From a macroeconomic standpoint it makes little difference whether termination is in March or April. The more important point is the size of the wage hikes agreed upon in spring negotiations. Larger-than-expected wage hikes could boost the outlook for consumer spending, inflation, and the speed of rate hikes. If there are really hefty hikes, Governor Ueda’s press conference is likely to call for changes in the perception of the inflation risk balance. Citi Research also expect the BoJ to halt Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and drop the guidance of expansion of the monetary base. Jiji Press reported on the subsequent JGB purchasing framework on March 8. In risk asset buying, it seems the BoJ may put a formal stop to ETF and J-REIT purchases.
   
• JPY: Japan Nationwide core CPI to pick up to +2.9% YoY in February – Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.9% YoY in February, picking up from a 2.0% YoY rise in January. The expected acceleration reflects a substantial narrowing of energy’s negative contribution from -1.12ppt in January to -0.13ppt in February as the downward pressure of government subsidies drops off. Meanwhile, CPI excluding fresh food and energy likely increased 3.3% YoY in February, moderating from a 3.5% YoY advance in January. As February Tokyo CPI data suggested, goods inflation, including food, likely continued moderating.

Commodity Bloc – RBA meeting, Australia jobs and NZ’s Q4 GDP reports, Canada CPI and BoC’s Summary of Deliberations in focus this week

• AUD: RBA Board Meeting - Citi cash rate forecast; 4.35% (no change); Previous; no change - six weeks have passed since the last RBA Board meeting instead of the long-established 1 month break between meetings. The Board will therefore have more information than it is used to for its monetary policy deliberation including Q4 National Accounts, February Business Confidence and January monthly CPI and housing finance data. But none of these releases should have altered the RBA’s guidance that it is too early to announce a dovish pivot to its rate guidance. Instead Citi Research expect a continuation of the sentence “it will be some time yet before inflation is sustainably in the target range” followed by “a further increase in rates cannot be ruled out”. In making the likely decision to keep the cash rate at 4.35% and guidance mildly hawkish, the RBA Board will also be mindful that services inflation remains sticky, the labor market remains tight and productivity growth below the assumption required for wages growth to be consistent with the inflation target, which is now at 2.5%, requiring more precision than the previous range of between 2% and 3%.
   
• NZD: NZ Q4 GDP - Citi QoQ forecast; 0.2%, Previous; -0.3%; Citi YoY forecast; 0.2%, Previous; -0.6% - following the surprise -0.3% GDP growth result for Q3 (consensus was +0.2%, Citi was +0.1%) from higher interest rates reducing activity in the services sector and inflation that eroded household purchasing power, Citi Research expect a small improvement to finish the end of 2023. Citi’s forecast for Q4 is 0.2% QoQ, which is up on our previous working estimate of a flat result. This forecast would take YoY growth from -0.6% to +0.2%, the second slowest YoY expansion since Q3’21. The risk to the Q4 GDP forecast is arguably to downside to +0.1%. A weak GDP growth result is unlikely to be a surprise to the RBNZ. The Bank’s official forecast is flat in Q4. NZ growth is set to slow from 2.4% in 2022 to around 0.8% in 2023. For comparison, Australia’s year-average GDP growth rate in 2023 was a stronger 2.1%. So the moderation in New Zealand is substantial.
   
• AUD: Australia’s February Labor Force - Citi unemployment rate forecast; 4.0%, Previous; 4.1%; Citi employment growth forecast; 48k, Previous; 0.5k; Citi participation rate forecast; 66.8%, Previous; 66.8% - the February LFS is likely the most important since the RBA began its hiking cycle, after two consecutive weaker than expected employment prints prior. The December and January LFS were particularly weak given that seasonally-adjusted employment was down over 60k across the two months. However, this was down to changing seasonal patterns of hiring, where businesses were hiring even less during the holiday period, along with lower labor force participation as people were taking longer holidays. But if correct, it means that February should see a strong rebound in both original—Citi Research pencil 345k increase in jobs—and seasonally adjusted terms.
   
• CAD: Canada CPI NSA MoM (Feb) – Citi: 0.6%, median: 0.6%, prior: 0.0%; CPI YoY – Citi: 3.1%, median: 3.1%, prior: 2.9% - after a surprisingly soft reading of a flat headline CPI in January, Citi Research expect a solid bounce-back of 0.6%MoM in February. Part of this strength would reflect usual seasonal patterns where prices rise in the early months of the year. The most important element of monthly CPI reports will continue to be the core inflation measures, CPI-trim and CPI-median, and specifically the average annualized 3-month pace of the core measures. Given somewhat stronger February data and a strong increase in December that will still be included in the 3-month calculation, 3-month core inflation will likely remain close to 3% in February. With February CPI the last release before the BoC’s April meeting, a cut at that meeting remains very unlikely.
   
• CAD: BoC Summary of Deliberations – the Bank of Canada will release the summary of deliberations from their March 6 policy decision on Wednesday. The meeting itself was somewhat more hawkish than expected, as officials failed to give any more concrete guidance on the conditions necessary to consider rate cuts. There is some chance that officials may tie the Bank’s current forecasts for inflation to slow below 3% by the second half of the year with the possibility for lower rates, but even guidance in the summary may be limited. But this remains Citi Research’s current base-case for timing of cuts, with 3-month core inflation likely to slow more consistently below 3% ahead of the July meeting.
   
• CAD: Canada Retail Sales MoM (Jan) – Citi: -0.6%, median: -0.4%, prior: 0.9%; Retail Sales ex Auto MoM – Citi: -0.3%, median: -0.5%, prior: 0.6% - Citi Research expect a 0.6%MoM decline in retail sales in January, slightly softer that Statistics Canada’s preliminary estimate for a 0.4% decline. After solid goods spending in Q4, consumption is likely to remain subdued over the coming months.

Asia EM – China’s retail sales, FAI and IP in focus this week

• CNH: China Retail Sales (YTD, %YoY) February – Citi Forecast 6.0, Consensus 5.0, Prior 7.4 - retail Sales may pick up to 6.0%YoY. Auto sales likely remained resilient, and the CPCA (22 Feb 2024) estimated that passenger car sales increased 18.7%YoY in the first two months. The Chinese New Year holiday saw a solid return of the holiday rush, and revenue of key retailers and restaurants rose 8.5%YoY during the holiday.
   
• CNH: China Fixed Assets Ex Rural (YTD, %YoY) – Citi Forecast 4.0, Consensus 3.2, Prior 3.0 - for Fixed Asset Investment, policy push on infrastructure could be the most important factor. Carryover funds from 2023 should help. The property sector could continue to be a drag, and Citi Research expect FAI growth at 4.0%YoY for this January-February.
   
• CNH: China Industrial Production (YTD, %YoY) – Citi Forecast 8.0, Consensus 5.0, Prior 6.8 - industrial Production could benefit from two more working days in the first two months, and it would not surprise to see a reading of 8.0%YoY. 2024 seems to have started smoothly, with daily average output of crude steel rising 3.0%YoY so far.
   
• CNH: China 1-Year Loan Prime Rate (%) – Citi Forecast 3.45, Consensus 3.45, Prior 3.45; 5-Year Loan Prime Rate (%) – Citi Forecast 3.95, Consensus 3.95, Prior 3.95 - consecutive rate cuts are not very likely after the 25bps 5yr LPR cut in February. With the NPC behind, focus could shift to economic fundamentals and policy delivery. Key to watch include fiscal policy deployment, property financing and details on demand-side initiatives such as equipment upgrade and trade-in program for durables.