RBA remains poised to cut rates much later and by a lot less than its peers

A solid Australian jobs beat may dampen hopes for multiple RBA rate cuts in 2024   

• AUD: In data released late last week, Australia’s labor market tightens more than expected with in February with employment growth up 116.5k, the largest monthly increase since the COVID lockdown/reopen period in 2021. The full-time unemployment rate is even lower at 3.5%, lowest since Oct’23 while the employment to population ratio increases to 64.2%, just 0.2pp shy of its record high last year.

• AUD: The data challenges the narrative that Australia’s labor market has loosened. While one month does not make a trend, the February LFS is more consistent with other forward looking indicators of the labor market such as employment conditions in the NAB business survey which continue to point to ongoing employment growth over the year ahead. Citi Research still expect Australia’s unemployment rate to rise due to increased labor force participation but now see risks squarely that the unemployment rate does not rise to 4.5% by year-end, which has been Citi Research’s baseline forecast.

• AUD: RBA change of view – as a consequence of the February jobs report, the RBA now has more than achieved their wish of hanging onto labor market gains despite having the highest cash rate target in 12 years. While employment may still slow from here, the baseline is reset such that the labor market is likely to be in better shape than forecast by the RBA and Federal Treasury. A healthier labor market implies stickier wages growth and possibly extends the period of sticky services price inflation that currently concerns the RBA. Hence, Citi Research jettison their August -25bp cash rate forecast and pencil in the earliest cut to November. The risk is that the RBA does not cut at all this year, but for now, Citi Research have -25bp cuts occurring across November 24, February 25 and May 25 for a terminal cash rate of 3.60%.

New Zealand back in recession

• NZD: In data released late last week, New Zealand Q4 GDP unexpectedly contracts -0.1%, against consensus expectations for a +0.1% increase. Overall, the decline in activity means that New Zealand is back in recession with 4 of the past 5 quarters producing negative quarterly GDP growth. In that time through the year, NZ growth has eased from 2.2% to -0.3%. In year-average terms, growth has decelerated from a respectable and arguably trend rate of 2.4% in 2022 to a post-pandemic low of 0.6% for 2023. For comparison, note Australia’s year-average growth rate in 2023 was a much stronger 2.1%.

• NZD: Implications for the RBNZ - a disappointing GDP report with growth coming from a narrow set of private sector industries that shows the NZ economy continuing to under-perform official expectations. With the recently elected conservative coalition government more likely to trim government spending in 2024 compared to the previous administration and high interest rates likely to keep private spending growth restrained, Citi Research expect inflation to continue moderating and retain their previously out of consensus view of OCR cuts beginning in August finishing the year at 4.25% (125bps of cuts this year).

Norges Bank hints on rate cut only in fall

• NOK: Late last week, the Norges Bank leaves interest rate unchanged at 4.5% in its March policy meeting, a decision largely in line with market expectations. The central bank’s rate path shows — most likely — a cut in September. Governor Ida Wolden Bache tells reporters at the close of her news conference that cuts would begin most likely in the autumn. The Bank’s rate path still signals marginal potential for a higher rate in the second quarter, that, as well as a slight increase in rate projections for 2025 and 2026. This comes as a slightly hawkish surprise despite markets already reckoning Norges Bank is likely the last one in G10 to cut.
   
• NOK: Meanwhile, Norway’s inflation data shows headline and underlying CPI slowing to 4.5% and 4.9% in February respectively. Still, with the labor market staying tight and a new round of collective bargaining threatening to stoke wages, there’s little pressure for the central bank to pivot toward easing. “We’re less worried that inflation will become entrenched at the previous high levels,” Wolden Bache says in the interview but “at the same time, inflation at 4.5% is still markedly above our target and high wage costs and the effects of the past depreciation of the krone will continue to keep inflation elevated going forward.” Officials cut their forecast for core consumer prices, but they also raise their forecast for economic growth for 2024.

Week Ahead:

US -  core PCE and consumer confidence in focus this week

• USD: US February PCE Deflator MoM – Citi: 0.3%, median: 0.4%, prior: 0.3%; PCE Deflator YoY – Citi: 2.4%, median: 2.4%, prior: 2.4%; Core PCE MoM – Citi: 0.3%, median: 0.3%, prior: 0.4%; Core PCE YoY – Citi: 2.8%, median: 2.8%, prior: 2.8% - core PCE inflation should rise 0.26%MoM, rounding to 0.3% but with a chance of a somewhat softer print that rounds to 0.2%. Likely upward revisions to last month’s data should mean year-on-year core PCE is revised higher to 2.9% in January and moderates only to 2.8%YoY in February. Details of February core PCE, however, should be less concerning for Fed officials following substantial strength in services inflation in January. Core goods prices, which rose 0.1%MoM in February CPI, should rise 0.26% in February but core services prices excluding housing should rise a more modest 0.21%.
   
• USD: US January S&P CoreLogic 20-City MoM SA – Citi: 0.24%, median: 0.20%, prior: 0.21%; S&P CoreLogic 20-City YoY NSA – Citi: 6.82%, median: NA, prior: 5.53%; S&P CoreLogic US HPI YoY NSA – Citi: 6.19%, median: NA, prior: 6.13% - the Case Shiller index should see another more modest 0.24%MoM increase in home prices in the 20-City measure in January, but with upside risks as the median price of existing homes sold rose a strong 1% in January. The Case Shiller index tracks sales over a three month rolling window, implying sales from November and December are still included in the January calculations. These sales followed a period after mortgage rates were very elevated and thus weighed on demand and median sale prices. Stronger demand and increased supply of homes for sale led to a more modest 0.5%MoM increase in median sale prices in February.
   
• USD: US February Durable Goods Orders – Citi: 0.9%, median: 1.4%, prior: -6.2%; Durable Goods Orders ex Transport – Citi: 0.3%, median: 0.3%, prior: -0.4%; Capital Goods Orders Non-defense ex Air – Citi: 0.1%, median: 0.1%, prior: 0.0% - after falling more than expected in January, durable goods orders should rise 0.9%MoM, with core durables rising 0.3%MoM and non-defense capital goods (excluding aircraft) rising 0.1%MoM. Much of the rebound should be coming from an increase in aircraft orders in February, according to industry data. Survey data on the manufacturing has been mixed, with the S&P manufacturing PMI picking up while manufacturing ISM remains contractionary territory. A higher rate environment should continue to be a headwind to durable goods demand.
   
• USD: US March Conference Board Consumer Confidence – Citi: 109.6, median: 107.0, prior: 106.7 - consumer confidence measures were improving in the last quarter of 2023 as inflation expectations were declining sharply after lower gasoline prices and softer inflation data and financial conditions were broadly loosening. However, the rebound was limited, and the indices have pulled back somewhat in recent months with consumers still being worried about inflation which has been stronger at the start of the year. There has also been less optimism about business conditions in the future. Citi Research expect some modest rebound in the Conference Board consumer confidence index in March to 109.6 from 106.7 and will also be paying close attention to the percent of respondents saying jobs are hard to get which had been trending higher throughout 2023, moved lower at the start of the year and rebounded again in February. Further increases in this metric would point to downside riskd to the labor market in coming quarters.

Euro area and UK – March euro area inflation (flash) partials, Riskbank meeting and BoE speak in focus this week

• EUR: Eurozone March inflation data (flash) — first national inflation data out this week (France, Italy, Spain, Belgium, about 50% of the Eurozone aggregate). Energy base effects should push headline YY rates higher in some countries (Italy, Spain), but not in others (France). Core inflation YY should continue to ease, but an early Easter may prevent larger declines. Euro Area: Economic Sentiment Index, March – Citi Forecast 96.4, Consensus 96.1, Prior 95.4 (watch for seasonality).
   
• SEK: Riksbank meeting — data points to risks of an earlier rate cut than June (currently Citi and markets’ base case). While rates are likely to stay unchanged at 4% this week, a significant down-revision to the rate path is likely and may see the Riksbank opening the door to a cut already at the 8-May meeting. Riksbank Rate Decision – Citi Forecast 4.0%, Consensus 4.0%, Prior 4.0%.
   
• GBP: UK: After last week’s marginally softer PMI data, this week will focus on the Q4 national accounts. Citi Research expect the more detailed data to show the household savings rate falling and real incomes continuing to growth – although in this case only modestly. The risks to headline GDP feel if anything skewed to the downside with the current pattern of UK statistical discrepancies suggesting upside risks to growth revisions in H1-22, but downside risks thereafter. Quarterly National Accounts, GDP, Q4 – Citi Forecast -0.3% QQ, Consensus -0.3% QQ, Prior -0.3% QQ (BoE: 0.0%, possible downward revision).
   
• GBP: BoE: May in the balance — after last week’s MPC meeting, the focus will be the MPC speak from the core internals over the coming weeks. Mann will give comments this week but more important will be Pill and Broadbent. Having given themselves the option of May last week, and lowered the bar to a cut, the key question is to what degree they feel able to move on the basis of weaker forecasts alone, or to what extent they still wish to see the ‘whites in the eyes’ of some of the preliminary Q2 data.

Japan – Tokyo March CPI in focus this week

• JPY: Tokyo CPI to increase 2.4% YoY in March — Citi Research expect core CPI in Tokyo (CPI excluding fresh food) to increase 2.4% YoY in March to moderate slightly from a 2.5% YoY rise in February. The negative contribution of energy looks likely to decrease while CPI excluding fresh food and energy, i.e., core-core CPI, will probably moderate from +3.1% YoY in February to +2.9% YoY in March. The base effect from sharp markups a year ago will probably push down YoY inflation centering on goods.

Commodity Bloc – Australia February CPI and Canada’s CFIB business barometer in focus this week

• AUD: Australia February CPI Indicator - Citi YoY forecast; 3.4%; Previous; 3.4% - the second month of the quarter of the monthly inflation gauge has a larger weighting towards services items. Overall, inflation has come down more sharply than anticipated by the RBA in Q1, and Citi Research see downside risks to their Q1 inflation print of 3.5%.
   
• AUD: Australia February Retail Trade - Citi MoM forecast; 0.6%, Previous; 1.1% - Citi Research  expect a continuation of some of the volatility in recent monthly retail trade prints. On balance, retail trade is likely to increase by 0.6% in February, which would lift the yearly growth rate from 1.1% to 1.7%. More generally, the retail trade survey is becoming less relevant as a gauge of household consumption, now covering just 33% of household spending. The ABS aims will cease publication in June 2025 and introduce a monthly household spending indicator that will cover a larger 68% of household consumption.
   
• CAD: Canada CFIB Business Barometer (March) - CFIB price plans continue to be a remarkably reliable leading indicator for the trend of Canada’s annual core inflation measures over the following 6 months. While survey data and hard inflation data could diverge in any given month, markets continue to take signals for the trend in core inflation from CFIB price plans. Currently, CFIB implies annual core inflation remaining close to 3% through June, before falling slightly below 3% in H2. This is similar to the BoC’s own forecast that “inflation will be close to 3% through the middle of the year before easing in the second half”. While the BoC’s expectation for any rate cuts alongside this inflation outlook is unknown, this may suggest BoC officials are operating with a current base case for cuts to start only in H2.

Asia EM – Singapore CPI and China manufacturing PMI in focus this week

• SGD: Singapore CPI (%YoY) February – Citi Forecast 3.1, Consensus 2.6, Prior 2.9; Core CPI (%YoY) – Citi Forecast 3.3, Prior 3.1
   
• CNH: China Manufacturing PMI March – Citi Forecast 50.2, Prior 49.1 – Citi Research expect manufacturing PMI to return above 50, partly on post-Chinese New Year seasonality. For high frequency data, operation rates of heavy sectors such as asphalt and cement both rebound from February. Overall manufacturing production should see a sequential improvement. With the NPC now behind, the policy push to stabilize the economy could be coming through steadily.