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US ISM data shows a still resilient US economy for now

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  • USD: US ISM Manufacturing stabilizes sub-50, prices rise - in data released earlier last week, the US ISM Manufacturing Index increases modestly to 47.7 from 47.4 in February, a bit softer than consensus expectations though the first gain since August. Strength is driven by a significant improvement in the new orders index that rises to 47.0 from 42.5 but the production index declines modestly to 47.3 from 48.0 and the employment index dips below 50, down to 49.1 after being above-50 for two months in a row (though the employment sub-component has not correlated well with manufacturing payroll data). The prices paid index increases from 44.5 to 51.3, the highest level seen since September 2022.  While still in contractionary territory (manufacturing PMI has been in 47-48 range since December), the modest increase is consistent with ISM potentially stabilizing around levels that are close to those during late 2019, that indicate US manufacturing activity is contracting but at a more modest pace. The ISM also notes that US companies are preparing for a slow 1H23 and a stronger 2H23. However, the recent repricing higher in Fed rates remains a key headwind for US growth, potentially dragging the US economy into recession in the next 2-4 quarters. That may see US manufacturing PMIs resuming their downward trend again in coming months.
  • USD: US ISM services strength holds in February   - in data released Friday, the US ISM services index for February essentially comes in unchanged at 55.1 compared to 55.2 in January and above consensus expectations for a modest decline to 54.5. The new orders component rises on the month from 60.4 to 62.6 to the highest level in over a year but business activity declines to 56.3. Employment on the other hand, rises from 50.0 to 54.0, the highest since December 2021 but prices paid moderate though to a still inflationary level of 65.6. Indicators of services demand in February remain strong, with both the new orders and employment indices higher than at any point in 2022. Many respondents indicate that demand remains strong, although with costs still high and more focus on cost-cutting. While the US labor market remains tight, the report indicates that the “employment picture has improved for some industries, despite the tight labor market.” The stably strong level of the ISM services index in February and the rebound in the S&P Services PMI index back above 50 in February suggests that there is still underlying strength in the US services sector. The ISM services prices paid index, while off the recent highs, also remains elevated from pre-pandemic levels and higher than ISM manufacturing prices paid, consistent with services inflation staying elevated despite softening in goods prices. That said, unlike ISM services, hard data like US payrolls and retail sales are unlikely to be quite as strong in February as in January.

Week Ahead – Fed Chair Powell’s semi-annual testimony to Congress, BoJ, RBA and BoC meetings this week as well as US jobs, Swiss CPI and Chinese NPC and trade data

  • USD: Chair Powell set to appear before the Senate Banking Panel and the House Financial Services Committee starting March 7
  • USD: US February Nonfarm Payrolls – Citi: 255k, median: 200k, prior: 517k; Private Payrolls – Citi: 225k, median: 200k, prior: 443k; Manufacturing Payrolls – Citi: 10k, median: 10k, prior: 19k; Average Hourly Earnings MoM – Citi: 0.4%, median: 0.3%, prior: 0.3%; Average Hourly Earnings YoY – Citi: 4.8%, median: 4.7%, prior: 4.4%; Unemployment Rate – Citi: 3.4%, median: 3.4%, prior: 3.4% - last month’s seasonal adjustment that resulted in a large boost to employment should reverse in February as some workers return to payrolls. Meanwhile, Citi analysts expect the unemployment rate to remain at 3.4% as the household survey could be somewhat softer than the 255k payrolls after strong gains over the last few months.
  • JPY: BoJ monetary policy to be left unchanged this week — BoJ will hold a policy meeting on March 9-10, the last one for Governor Kuroda. Citi analysts expect to see the policy status quo maintained.
  • CHF: Switzerland: another inflation uptick? – the big inflation upside surprise in January changed the picture for the SNB outlook substantially, alongside rapidly improving forward-looking activity data. Citi analysts expect food prices to boost headline inflation again, which could switch their call from a 25bp to a 50bp policy rate hike at the mid-March meeting. Switzerland: CPI Inflation, February: Citi Forecast 3.4% YY, Consensus 3.0% YY, Prior 3.3% YY (watch food inflation); CPI Core 1, February: Citi Forecast 2.3% YY, Prior 2.2% YY.
  • AUD: RBA Board Meeting: Citi forecast: +25bps to 3.60%, Previous; +25bps to 3.35% - Citi analysts expect RBA to increase the cash rate by 25bps to 3.60% at the March meeting. This would be the highest since May 2012 and take monetary policy further into restrictive territory. Citi’s mid-point estimate of neutral is ~ 2.85%.
  • CAD: Bank of Canada Rate Decision: Citi: 4.50%, median: 4.50%, prior: 4.50% - the BoC’s March 8 policy decision is very likely to see the cash target unchanged at 4.50% given that economic developments in Canada have evolved “broadly in line with the MPR outlook”. The most important adjustments in the policy statement will be to the guidance, where Citi analysts’ base case is for very little change.
  • CAD: Canada Employment – Citi: 40k, median: 2.5k, prior: 150k; Unemployment Rate – Citi: 4.9%, median: 5.1%, prior: 5.0%; Average Hourly Wages Permanent Employees – Citi: 5.4%, median: NA, prior: 4.5% - February employment should rise a strong 40k, partly on stronger immigration in 2022 continues into 2023. Citi analysts also expect a pick-up in wage growth and a decline in the unemployment rate to 4.9%.
  • CNY: China’s NPC (March 5) and CPPCC (March 4) will highlight new economic targets and policy initiatives - important for CNH amid reopening optimism. Focus will be on measures to support China’s property markets.
  • CNY: China Exports YTD (%YoY) February: Citi Forecast -10.0, Consensus -10, Prior -9.9; Imports YTD (%YoY) Citi Forecast -5.0, Consensus -4.0, Prior -7.5; Trade Balance YTD: Citi Forecast 76.9, Consensus 95.85, prior 78.0 – China’s exports growth could stay low at -10.0%YoY Ytd, while contraction in imports could narrow to -5.0%YoY.

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