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

• 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.