Focus shifts to the ECB meeting this week – updated staff projections likely to rule out an April rate cut

Euro area inflation pressures soften again, albeit at a slower pace

• EUR: The Eurostat flash estimate of euro area (EA) headline inflation falls from 2.8% YY in January to 2.6% YY in February, but slightly exceeding the 2.5% YY consensus forecast. However, in 1Q-24 to date, inflation is averaging 2.7% YY, 0.2 percentage points (pp) below the 2.9% YY forecast contained in the ECB’s December 2023 macroeconomic projections. Looking ahead to 2Q-24, the ECB anticipates inflation to ease back to 2.7% YY and foresees inflation dropping to 2.6% YY in 4Q-24. Meanwhile, euro area core inflation falls from 3.3% YY in January to a preliminary estimate of 3.1% YY in February, a 23-month low but eases less than expected (consensus 2.9%) and core HICP SA is up by a solid 0.4% MM (based on past ECB seasonals), which is stronger than consensus for 0.3% and the strongest MM pace in a year.
   
• EUR: On a seasonally-adjusted and annualized basis, the euro area three-month average gain for headline inflation rises to a four-month high of 2.3%, while the equivalent measure for core inflation also climbs to a four-month high of 2.5%. With both measures slightly above the ECB’s 2% medium-term price stability definition, more hawkish members of the ECB Governing Council (GC) will likely argue that there is no need to rush moving away from the highly restrictive monetary policy stance, even if the next interest rate move, likely to be in June, will probably be a cut. However, with many countries in the euro area already experiencing economic stagnation and in some cases recession, more dovish members of the ECB’s GC will likely step up their rhetoric at this week’s ECB board meeting to argue in favor of a cut in rates as early as April, in case the long-term inflation forecast were to show a return to the 2% target before 3Q-25 as projected in December.
   
• EUR: The OCIS team expects the ECB to start cutting rates at the 6 June ECB meeting and by up to 125bp in cuts by 2024-end, implying a deposit facility rate of 2.75% by year-end, compared to its current level of 4%.

Week Ahead:

US - February nonfarm payrolls, ISM services and January JOLTS in focus this week

• USD: US February Nonfarm Payrolls – Citi: 145k, median: 155k, prior: 353k; Private Payrolls – Citi: 130k, median: 145k, prior: 317k; Manufacturing Payrolls – Citi: 0k, median: NA, prior: 23k; Average Hourly Earnings MoM – Citi: 0.4%, median: 0.3%, prior: 0.6%; Average Hourly Earnings YoY – Citi: 4.6%, median: NA, prior: 4.5%; Unemployment Rate – Citi: 3.8%, median: 3.7%, prior: 3.7% - employment growth should slow substantially in February after two months of exceptionally strong over-300k job growth in December and January. Citi Research expect a 145k increase in nonfarm payrolls. December and January figures were likely boosted by stale seasonal adjustment factors, which positively offset non-seasonally adjusted declines in each of these months. Seasonal factors from February through June however will likely imply a downward adjustment to payroll growth. This should make for a still-declining trend of employment over coming months during the period in which hiring should typically pick up. Citi Research expect average hourly earnings to rise 0.4%MoM in February following a very strong 0.6% increase in January. This would still be a strong increase in wage growth, with average hourly earnings up 4.6% from a year ago. However, even with some rebound in aggregate hours worked in February, and thus softer average hourly earnings, markets will be particularly interested in the trend of average hours worked. Average hours worked dropped to a very low 34.1 hours/week in January, although this low level likely does reflect some weather and seasonal adjustment issues. The unemployment rate should rebound to 3.8% in February from 3.7% in January, although with risks that it remains at 3.7% if the participation rate remains subdued.
   
• USD: US January JOLTS Job Openings – Citi: 8670k, median: NA, prior: 9026k – Citi Research expect job openings to decline to 8.67 million in January after a somewhat stronger 9.03 million openings in December. This would be consistent with high frequency data on job postings from Indeed.com, which have fallen somewhat faster in recent weeks. The Indeed data now imply a level of openings around 8.5-9 million through February as well. Markets will also be closely watching the hiring, quits, and layoff rates in the JOLTS survey. Hiring and quit rates have fallen below pre-pandemic levels, suggesting more labor market unease among workers as hiring has slowed. Still, layoff rates remain low, consistent with a lack of large widespread layoffs and low levels of initial jobless claims. If this dynamic changes, this would be the clearest signal of a much weaker economic backdrop.
   
• USD: US February ISM Services – Citi: 52.4, median: 53.0, prior: 53.4 - unlike Manufacturing PMIs that have generally remained in contractionary territory (apart from the last couple S&P Manufacturing PMI prints) services diffusion indices have remained at or above-50 levels. Services consumption has also continued to generally grow. The increase in ISM Services in January was driven by the employment and new orders indices which should both moderate in the February print and should push the overall index modestly lower to 52.4 from 53.4. Markets will also be watching the prices index that jumped higher in January. A sustained increase in the prices index would imply upside risk to inflation, in particular goods inflation which has been a key contributor to the disinflation over the last 12 months. The percent of industries that report employment growth will also be important to watch after falling to very low levels in January despite the overall employment index rebounding.

Euro area and UK – ECB board meeting in focus this week

• EUR: ECB Board meeting: ECB deposit facility – Citi Forecast 4.0%, Consensus 4.0%, Prior 4% - an April rate cut is likely off the table after the euro area February HICP data, even if the ECB does not explicitly rule it out this week. The market has become more uncertain over the ECB’s reaction function in recent weeks, as indicated by the de-coupling between policy vs inflation pricing but the new HICP staff projections are likely implicitly to rule out April.

Japan – Tokyo CPI and current account data in focus this week

• JPY: Tokyo core CPI to increase 2.5% YoY in February — Citi Research expect core CPI in Tokyo (CPI excluding fresh food) to increase 2.5% YoY in February, picking up from a 1.8% YoY advance in January. The negative contribution of energy looks likely to decrease sharply from -1.31ppt in January to -0.45ppt in February, as government measures to curb energy prices introduced a year ago drop off. Meanwhile, CPI excluding fresh food and energy (i.e., core-core CPI) will probably moderate from +3.3% YoY in January to +3.1% YoY in February. The base effect from sharp markups a year ago will probably push down YoY inflation.
   
• JPY: Current account surplus likely expanded in January — Citi Research expect Japan’s current account balance to generate a ¥618.9bn deficit before seasonal adjustment and a ¥2.0262trn surplus after adjustment in January (+¥744.3bn and +¥1.8100trn, respectively in December). A plunge in goods imports likely pushed up the surplus after seasonal adjustment in January. The trade balance likely turned positive for the first time since July 2021, driven by a plunge in goods imports. Citi Research expect the primary income surplus to decrease modestly as portfolio investment income likely dropped off somewhat.

Commodity Bloc - Australia Q4 GDP, BoC board meeting and Canadian February jobs report in focus this week

• AUD: Australia Q4 GDP – Citi Forecast, 0.3% QoQ, Consensus 0.3% QoQ, Prior 0.2% QoQ; Citi Forecast 1.5% YoY, Consensus 1.4% YoY, Prior 2.1% YoY- this week’s release of Q423 GDP data should show another small increase in activity. With the Q4 building construction and capex data released and a likely 0.3% increase in household consumption, no contribution from net-exports, 0.1pp detraction from inventories and 1.0% growth in public consumption would produce GDP growth of 0.3% in Q4 for 1.5% YoY (0.2% and 2.1% respectively in Q3). The risk is for a print closer to 0.2%, which would lower the YoY growth rate to 1.3%.
   
• CAD: Bank of Canada Rate Decision – Citi: 5.0%, median: 5.0%, prior: 5.0% - the BoC is widely expected to keep policy rates unchanged at 5.0% at the March 6 meeting. After the policy statement in January removed the explicit hiking bias, Citi Research do not expect many changes to the policy statement in March. But this does not necessarily mean that guidance will be quite as vague as in recent communications. While Fed officials have been open about wanting to see a few more months of softer inflation data before starting to cut rates likely around the middle of the year, BoC officials have been much less explicit about either the timing of cuts or what officials would need to see to feel comfortable lowering rates. Markets are unlikely to learn some more about the likely path to rate cuts at this meeting. This could be dovish relative to recent communications, but Citi Research do not expect that the likely conditions necessary for cuts would be met until the middle of the year.
   
• CAD: Canada February Net Change in Employment (Feb) – Citi: 45k, median: 31.0k, prior: 37.3k; Unemployment Rate – Citi: 5.8%, median: 5.8%, prior: 5.7%; Hourly Wage Rate Permanent Employees – Citi: 5.1%, median: NA, prior: 5.3% - after a solid 37.3k increase in employment in January, Citi Research expect another strong increase of 45k jobs added in February. Seasonal issues could have possibly boosted employment in January, with an even clearer impact on hours worked last month, which rose at the strongest pace since January 2023. Seasonal issues should not repeat in February and, if anything, suggest downside risks to employment. But in February, substantial population growth may help to boost aggregate employment figures leading to greater entry into the labor force in February will likely result in both solid employment and a rebound in the unemployment rate to 5.8%. Wage growth should moderate only slightly to 5.1%YoY in February, continuing to move sideways around 4-5% as it has for over a year.

Asia EM – China’s trade and inflation data in focus this week

• CNH: China Exports (YTD, %YoY) Jan – Feb – Citi Forecast 3.0, Prior 2.3; Imports (YTD, %YoY) – Citi Forecast 1.5, Prior 0.2; Trade Balance (YTD, USD $bn) – Citi Forecast 112.8, Prior 75.3; Foreign Reserves (USD $bn) Feb- Citi Forecast 3230, Prior 3219.3 – flash manufacturing PMI in the US returned to expansion, while EU and Japan remained in contraction. The Baltic Dry Index bottomed out and has risen more than 40% since mid-January. China’s composite shipping cost index fell slightly but remined high. The deadweight tonnage of ships in 20 major ports (including both arrival and departure) increased by 4.4%YoY until February 26, (vs. 9.5%YoY in December). Korea’s first 20D export growth declined to -4.4%YoY on average in January-February.
   
• CNH: China CPI (%YoY) Feb – Citi Forecast 0.1, Prior -0.8; PPI (%YoY) – Citi Forecast -2.5, Prior -2.5– Citi Research expect +0.1%YoY CPI inflation with sequential reading at +0.4%MoM on late CNY this year. Much of the volatility could come from food prices. Concerns on prices could stay though with eyes on durable goods and services. Meanwhile, services activities have stayed resilient over the holiday, yet whether the underlying price momentum is as strong is unclear. There could be limited new information from the PPI inflation. Production activities were rather muted over the holiday, and domestic oil prices were held unchanged.