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Assessing US health


US Headline NFP print surprises to the upside, but some areas show weakness

  • USD: Non-farm payrolls topped estimates again in February rising at a blistering 311K pace from a slightly downwardly revised January (still 504K). Private services were the clear stand out, with manufacturing actively contracting in the month (-4K). But even within services there were clearly distinctions between the booming leisure and hospitality industry (+104K) and items like information (-25K), finance (-1K), trucking (-8K). It is clear that in terms of total employment the reopening from covid remains the driving factor, notably leisure and hospitality is still down 410K jobs from the pre-covid peak. In other segments of the economy, the news from today’s report was much more grim. Taken together finance, information, utilities, trucking and manufacturing jobs contracted by 49K jobs. Average hourly earnings continue to ease at just +0.2% in the month, although are still running at a pace higher than consistent with 2% inflation even on a 3m3m basis. In the separate household survey, unemployment rate rose higher to 3.6% which was driven almost entirely by an increase in the labor force, as the participation rate increased. The employment to population ratio remains nearly a full percentage point below the pre-pandemic high, and it seems unlikely that it will regain that height in this business cycle.

BoJ left policy unchanged at Kuroda’s last policy meeting

  • JPY: BoJ left policy rates and YCC unchanged at Governor Kuroda’s last policy meeting. March 10 saw the formal approval of Kazuo Ueda as the next governor, along with Shinichi Uchida and Ryozo Himono as deputy governors. Citi Research continues to expect YCC to be adjusted comparatively quickly under the new regime, with base case of policy change in July, when the Outlook Report will be published. If there is no BoJ move ahead of the June MPM, expectations for July adjustments could increase based on the timing of the Outlook Report and wage settlement releases. In addition, the bar seems too high for an abrupt exit from YCC. The QQE-YCC combination is intended to stay in place for as long as is necessary to reach the goal of stable 2% inflation, and the wording of forward guidance suggests that YCC will stay in place until inflation is very close to the 2% target, which means June and July are unlikely to fit the bill. The BoJ will likely need to see the outcome of the spring 2023 wage negotiations before it can judge the situation. Also, as an early advocate of the lower-for-longer effect in monetary policy, Mr. Ueda presumably sets store by central bank commitments. If the commitments break down, there is a danger that future “lower for longer” forward guidance in an economic downturn will not be trusted and the benefits from accommodation will diminish.
Canadian jobs report beat consensus
  • CAD: Employment increased by a solid 21.8k in February, beating the consensus even after a very strong 150k increase in January. All of the increase was due to full-time employment which was up 31.1k while part-time employment declined by 9.3k. Employment numbers were up in 8 of 16 industries, with healthcare and public administration recording the largest increases. The unemployment rate is unchanged at the very low level of 5.0%, contrary to the consensus of a slight increase, as the number of unemployed people increased as well with new entrants to the labor force. Average hourly wages of permanent employees jumped to 5.4% YoY from 4.5% YoY, in line with the peak in wages during 2022. Stronger-than-expected job growth combined with the unemployment rate staying at a very low level and average hourly wages of permanent employees jumping back up to the most recent peak will likely make the BoC concerned that the labor market remains too strong and could continue to put upward pressure on inflation. Hours worked continued to increase in February as well, up by a strong 0.6%MoM, adding to the evidence that Q1 activity is tracking stronger than activity during Q4 last year.

Week Ahead – US CPI, PPI, retail sales, Japan trade balance, ECB rate decision, UK labor market report, NZ GDP, AU labor market survey, China retail sales

  • USD: US February CPI – CPI MoM – Citi: 0.4%, median: 0.4%, prior: 0.5%, CPI YoY – Citi: 6.1%, median: 5.9%, prior: 6.4%, CPI ex Food and Energy MoM – Citi: 0.5%, median: 0.3%, prior: 0.4%, CPI ex Food and Energy YoY – Citi: 5.6%, median: 5.4%, prior: 5.6%, CPI Index NSA – Citi: 301.004, median: 301.000, prior: 299.170; Citi Research expect a softer 0.4%MoM increase in headline CPI due to a retracement of utility gas prices in line with falling natural gas prices. Details should reveal continued strength in key services prices, although starting with February data could be the start of an expected slowing in shelter prices which comprise close to 40% of core CPI. Other non-shelter services should be strong overall, although with a continued drag from the medical insurance component in CPI which notably will not be included in PCE inflation. Prices for medical services themselves however should remain strong, as should prices for recreation services and transportation services, including a 1.5%MoM bounce back in airfares. Rather than services which should remain consistently strong, the pick-up in core CPI relative to the previous two months should come from goods prices. Most notably, Citi Research expect recently rising wholesale measures of used car prices to start to feed through to stronger car prices in CPI.
  • USD: US February PPI, PPI Final Demand MoM – Citi: 0.3%, median: 0.3%, prior: 0.7%, PPI Final Demand YoY – Citi: 5.4%, median: 5.4%, prior: 6.0%, PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.4%, prior: 0.5%, PPI ex Food, Energy YoY – Citi: 5.0%, median: 5.2%, prior: 5.4%,PPI ex Food, Energy, Trade Services MoM – Citi: 0.4%, median: 0.4%, prior: 0.6%, PPI ex Food, Energy, Trade Services YoY – Citi: 4.7%, median: NA, prior: 4.5%; Citi Research expect a solid 0.4% increase in core PPI (excluding food, energy, and trade services) in February. Some details of PPI could be somewhat softer, such as a possible decline in airfares which will be an input into PCE inflation. There also remain upside risks to key financial services prices over the coming months as risk asset prices have remained somewhat elevated despite substantial repricing of Fed rate expectations. The most important components of PPI will continue to be various medical services prices, where Citi Research still see upside risks as a few years of higher labor costs are passed on to higher services prices. Even if wage growth has slowed somewhat from a year ago, a still-tight labor market suggests wages and thus prices are likely still running stronger than consistent with 2% inflation.
  • USD: US February retail sales: Retail Sales – Citi: -0.7%, median: -0.3%, prior: 3.0%, Retail Sales ex Auto – Citi: -0.5%, median: -0.4%, prior: 2.3%, Retail Sales ex Auto, Gas – Citi: -0.5%, median: -0.3%, prior: 2.6%, Retail Sales Control Group – Citi: -0.1%, median: -0.2%, prior: 1.7%; Citi Research expect a 0.7%MoM decline in total retail sales in February, after a very strong 3.0%MoM increase in January. Part of the strength in January was due to seasonal factors not capturing shifts in consumption patterns around end/beginning of year well. While this should not be as relevant in the February data, only a 0.7% decline this month does not offset the majority of the strength from last month and suggests that underlying strength in goods consumption while not as strong as January is somewhat stronger than what Citi Research would have thought six months ago. However, Citi Research would still expect goods consumption in the coming months to be somewhat weaker as the rotation to services consumption continues.
  • USD: U of Michigan Sentiment – Citi: 65.2, median: 67.0, prior: 67.0, U of Mich 1y Inflation Expectations – Citi: 4.1%, median: NA, prior: 4.1%, U of Mich 5-10y Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.9%; Citi Research expect a decline in the University of Michigan Consumer Sentiment Index in March to 65.2 from 67.0, after three months of increases. This would be in line with the recent weakness in the Conference Board Consumer Confidence measure. As inflation started to soften on a month over month basis at the end of last year consumers started to feel marginally better about inflation which in part led to increases in sentiment. However, with retail gasoline prices picking up again this poses some downside risk for sentiment. While Citi Research expect inflation expectations to stay unchanged, the recent uptick in month over month inflation as well as gasoline prices poses considerable upside risk.
  • JPY: Japan trade balance (Feb): Citi Forecast: -¥1172.7bn NSA; -¥1624.6bn SA, Previous: -¥3498.6bn NSA; -¥1821.3bn SA; The customs-clearance trade balance likely came to a ¥1.1727trn deficit before seasonal adjustment and a 1.6246trn deficit after it in February (-¥3.4986trn and -¥1.8213trn, respectively in January). The trade deficit after adjustment probably narrowed in February. Citi Research expect real exports to grow MoM, in reaction to a January drop, which was due partly to the Chinese New Year. The focus will be on the extent of the likely rebound, given a recent reopening of the Chinese economy and early signs of stabilization for the global manufacturing cycle. Citi Research pencil in a MoM fall for real imports, reflecting the distortion caused by the Chinese New Year (a drop in exports from the Greater China area in January will lead to weaker February imports in Japan).
  • GBP: UK labor market report: Payrolls Jan MoM change, Citi 75K, prior 105K – In focus for the UK will be the labour market release for the three months to January, and the spring budget. In the former case Citi Research expect headline pay growth to moderate further, with public sector pay growth increasingly taking over from its private sector counterparts. Private sector regular pay, Cit Research think, will likely fall further.
  • EUR: ECB rate decision: Citi +50bp to 3.5%; Citi Research expect the council to avoid another explicit commitment (or public intention) to any given pace of rate hikes, not least as April is due to see a number of important data releases. However, Citi Research do expect a fairly clear guidance that in order to slow and stop rate hikes, the council needs (1) several consecutive decreases in core inflation (2) buttressed by a deceleration in wage growth or a rise in unemployment.
  • EUR: Euro Area: key fiscal EU decisions – The Eurogroup and Ecofin meetings will be key on the path to a potential deal on the fiscal rules reform. The clock is ticking given that fiscal rules will be reinstated next year. The European Commission’s guidance on 2024 budgets this week followed quite closely its own recommendations for revamped fiscal rules – including country-specific debt reduction pathways – signalling confidence that a deal with member states can be reached. However, given still strong German opposition to key elements of the proposal, Citi Research think a substantive agreement is more likely to have to wait until heads of states meet later this month.
  • NZD: NZ Q4 GDP, Citi forecast; -0.3%, Previous; 2.0%; The New Zealand economy has probably turned ahead of RBNZ expectations for a decline in output from Q2 this year. This result would mean monetary policy is having a stronger impact on activity more quickly than expected by the RBNZ and lower YoY GDP growth from 6.6% to 3.2%. It would also reduce year average growth from 5.6% in 2021 to 2.8% in 2022. This is closer to potential growth with the likelihood that growth slows further in 2023.
  • AUD: AU Feb. Labour Force Survey (LFS), Citi employment change forecast; 56k, Previous; -11.5k, Citi unemployment rate forecast; 3.5%, Previous; 3.7%, Citi participation rate forecast; 66.6%, Previous; 66.5%; The February labour force survey will be crucial to determine whether the RBA hikes or pauses in April. Strong employment gains are a necessary condition for the RBA to hike in the April Policy Board meeting. If the unemployment rate remains unchanged at 3.7% because of softer job growth—rather than strong labour force participation—then the odds of an RBA pause in April will increase.
  • CNH: China retail sales (%YoY, Feb) – Citi: 5.2, median: 3.5, prior: -1.8; In February, Citi Research expect retail growth rate YTD will be shifted to positive at 5.2%YoY, as the first “normal” Chinese New Year (CNY) has shown the beginning of consumption recovery.
  • CNH: China retail sales (%YoY, Feb) – Citi: 5.2, median: 3.5, prior: -1.8; In February, Citi Research expect retail growth rate YTD will be shifted to positive at 5.2%YoY, as the first “normal” Chinese New Year (CNY) has shown the beginning of consumption recovery.
  • CNH: China Industrial Production (%YoY, Feb) - Citi: 4.0, median: 2.8, prior: 1.3; Citi Research estimate February IP growth rate YTD at 4.0%YoY, as the earlier released manufacturing PMIs had a further rebound in February.
  • CNH: China Fixed Assets Investment ex Rural (%YoY, Feb) - Citi: 5.0, median: 4.5, prior: 5.1; Citi Research also expect fixed assets investment YTD (excluding rural) at 5.0%. The government is not shying away from its economic support post reopening. Issuance of local government special bonds reached RMB825bn in the first two months, flat compared with last year. Potential improvement in the housing sector could also bring upside risks to FAI.