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Still healthy February nonfarm payrolls is unlikely to shift Fed narrative towards further easing

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Jobs upside surprise offset by downward revision, higher unemployment rate

  • USD: According to the Bureau of Labor Statistics, the month of February sees 275k new jobs created that is well above consensus expectations for 200k. However, that upside surprise is more than offset by a 167k downward revision to the prior two months with the January blockbuster employment report alone revised down from 353k to 229K. The household report is also weaker than expected with employment down 184k while the unemployment rate rises from 3.7% in January to 3.9% in February with an unchanged participation rate of 62.5% from the previous month.
  • USD: The rise in unemployment rate is also higher than consensus looking for an unchanged unemployment rate of 3.7% and with hours worked rising to 34.3 after dropping to 34.1 the previous month, the rise in average hourly earnings is lower than expected, up just 0.1% month-on-month versus 0.6% (revised) in January and 0.2% expected by consensus, leading to a 4.3% rise year-to-year which is lower than the prior month’s revised 4.4%.
  • USD: Friday’s jobs report is mixed overall but the key take way for markets is the acceleration in employment reported for January is revised to show a deceleration and the path of employment and wage gains continues to slow since 2022. The unemployment rate also rises by more than expected, which is likely a sign that a more significant weakening of the US labor market lies ahead. Bottom Line - February’s US jobs data remains consistent with expectations for the Fed to begin easing by mid-year 2024.


Canada’s jobs report solid but still leaves BoC on track to cut by July

  • CAD: Canada’s employment rises by a solid 40.7k jobs in February, above consensus for 20k with full time employment up by 70.6k jobs while part time employment falls by 29.9k jobs. However, the unemployment rate rises modestly to 5.8% even as the participation rate falls to 78.7% from an upwardly revised 78.8%. Hourly wages of permanent employees also slows from 5.3%YoY to 4.9%YoY.
  • CAD: The rise in the unemployment rate still points to an overall softening Canada’s labor market and a solid 40k increase in employment in February will likely have little impact on the BoC’s assessment of appropriate policy rates with Citi Research still expecting the first BoC cut in July. The strong employment gains in February are partly a result of a very strong increase in population in January that is also likely to lead to a gradually higher unemployment rate over the coming months. However, BoC officials would only likely be concerned with a rising unemployment rate when it reaches closer to 6.5%.
  • CAD: BoC Governor Macklem has been highlighting the inflationary pressures still evident in elevated wage growth. While 4.9% wage growth in February is unlikely to be low enough for the BoC, it is another sign that wage growth is moving in the right direction (lower), as communications from the BoC last week noted. Still, easing inflationary pressures will need to be confirmed in the actual inflation data before officials feel comfortable cutting rates.


Week Ahead:

US - inflation measures in focus this week with CPI topping the list

  • USD: US February CPI MoM – Citi: 0.5%, median: 0.4%, prior: 0.3%; CPI YoY – Citi: 3.1%, median: 3.1%, prior: 3.1%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.4%; CPI ex Food, Energy YoY – Citi: 3.7%, median: 3.7%, prior: 3.9% - following a surprisingly strong 0.39%MoM increase in core CPI in January, Citi Research expect another solid 0.33% increase in February although with slightly different details - a more modest 0.1% decline in core goods prices in February but with strong services prices overall, although with a more modest 0.45% increase in core non-shelter services after a very strong 0.85% increase last month. Shelter inflation should also remain strong, although Citi Research expect a more modest 0.50% increase in owners’ equivalent rent in February and a 0.38% increase in primary rents. Headline CPI should rise 0.5%MoM (0.46% unrounded) and remain at 3.1%YoY with strength in energy prices.
  • USD: US February PPI Final Demand MoM – Citi: 0.4%, median: 0.3%, prior: 0.3%; PPI Final Demand YoY – Citi: 1.3%, median: 1.2%, prior: 0.9%; PPI ex Food, Energy MoM – Citi: 0.3%, median: 0.2%, prior: 0.5%; PPI ex Food, Energy YoY – Citi: 2.0%, median: 1.9%, prior: 2.0%; PPI ex Food, Energy, Trade MoM – Citi: 0.3%, median: 0.3%, prior: 0.6%; PPI ex Food, Energy, Trade YoY – Citi: 2.5%, median: NA, prior: 2.6% - after a very strong 0.6%MoM increase in core PPI (excluding food, energy, and trade services) in January, Citi Research expect a more moderate but still solid 0.3% increase in February. Aside from the components of PPI that matter directly for PCE inflation, markets will also be paying close attention to goods prices in PPI given the rise in global shipping prices.
  • USD: US February Industrial Production – Citi: 0.0%, median: 0.0%%, prior: -0.1%; Manufacturing Production – Citi: 0.6%, median: 0.3%, prior: -0.5%; Capacity Utilization – Citi: 78.5%, median: 78.5%, prior: 78.5% - industrial production should remain flat on the month in February, with a drag on overall IP due to weaker utilities production. But manufacturing production should rise a solid 0.6%MoM, though some of this strength would also reflect the effects of warmer weather. There had been some signs of strengthening manufacturing activity again with rising PMI indicators, but softer ISM manufacturing in February suggests any rebound is less clear.
  • USD: US February Retail Sales ex Auto – Citi: 0.6%, median: 0.5%, prior: -0.6%; Retail Sales ex Auto, Gas – Citi: 0.5%, median: 0.3%, prior: -0.5%; Retail Sales Control Group – Citi: 0.4%, median: 0.4%, prior: -0.4% - after a weaker retail sales report in January partly driven by seasonal adjustment issues, Citi Research expect a rebound in February retail sales by a strong 1.0%MoM with the main drivers being auto sales. Meanwhile, retail sales excluding autos and gasoline are expected to rise by 0.5%MoM and for control group sales to also increase at a similar pace by 0.4%MoM. For the quarter, overall consumption is still on track to continue growing but at a somewhat slower pace than during Q4 2023. Consumption should still be supported in the near term as long as the US labor market holds up well, but Citi Research see risks for a more significant weakening in the labor market and activity this year.
  • USD: University of Michigan Sentiment – Citi: 76.4, median: 77.0, prior: 76.9; 1Yr Inflation Expectations – Citi: 3.2%, median: NA, prior: 3.0%; 5-10Yr Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.9% - consumer sentiment was improving towards the later months of 2023 as inflation expectations were dropping sharply, but the most recent reports show that the upward momentum might not be continuing. Citi Research expect some further pullback in the March preliminary report with the University of Michigan Sentiment Index falling to 76.4 from 76.9. Gasoline prices have been rising in recent weeks and inflation rose at a stronger pace at the beginning of the year which should push the 1Yr inflation expectations higher to 3.2% from 3.0%. This would not be a concerning level for the Fed as it is still close to the pre-pandemic range. Citi Research also expect 5-10Yr inflation expectations median to stay unchanged at 2.9%


Euro area and UK – UK jobs and GDP in focus this week

  • GBP: UK January ILO unemployment rate (3mths) – Consensus 3.8%, Prior 3.8%; January employment change (3m/ 3m) – Consensus 5k, Prior 72k; Claimant count rate February – Prior 4.0%; Jobless claims change February – Prior 14.1k; Payrolled employees monthly change February – Consensus 25k, prior 48k; Average Weekly Earnings January (3m/ YoY) – Consensus 5.7%, Prior 5.8%; Weekly earnings ex-bonus January (3m/ YoY) – Consensus 6.2%, Prior 6.2%.
  • GBP: UK monthly GDP (January) – Consensus +0.2% MoM, Prior -0.1% MoM; Monthly GDP January (3m/3m) – Consensus -0.1% QoQ, Prior -0.3% QoQ.


Japan – Real Q4 GDP (2nd estimate) in focus this week expected to show Japan was not in a technical recession in H2’2023

  • JPY: Real GDP 2nd Preliminary Estimate (4Q) – Citi Forecast: 0.4% SA QoQ; 1.4% SAAR, Previous: -0.1% SA QoQ; -0.4% SAAR – Citi Research estimate the 2nd print will show real GDP growth of +0.4% QoQ and +1.4% QoQ annualized in Q4’23, revised upward from -0.1% QoQ and -0.4% QoQ annualized in the first estimate. Based on fourth quarter corporate statistics, business investment looks likely to be revised up sharply from -0.1% QoQ in the first print to +2.8% QoQ in the second estimate.


Asia EM – China’s money supply and new Yuan loans in focus this week

  • CNH: China Money Supply (M1, %YoY) February – Citi Forecast 0.8, Consensus 2.3, Prior 5.9; Money Supply (M2, %YoY) – Citi Forecast 8.6, Consensus 8.8, Prior 8.7 - due to the CNY effect, M1 growth could drop from the high point of 5.9% this January, and markets wouldn’t be surprised to see a reading lower than 1.0%. Put the two months together, M1 growth could still show a mild rebound from 1.3% at end-2023. March numbers could be more important to conclude whether the trough is behind us or not.
  • CNH: China New Yuan Loans (CNY bn) – Citi Forecast 1500, Consensus 1500, Prior 4920; Total Social Financing (CNY bn) – Citi Forecast 2200, Consensus 2250, Prior 6501.7 – the long CNY in holiday during February could be an additional drag for the low season. Despite the leap year, there are only 18 working days this February compared with 20 in February 2023. Citi Research expect new loans at RMB1.5trn. Thanks to government bond financing of RMB603bn, new Total Social Financing (TSF) could hit RMB2.2trn this February.

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