UPCOMING EVENTS:
- Tuesday: US CPI.
- Wednesday: US Retail Sales.
- Thursday: US Jobless Claims .
Last week was basically a continuation of the repricing we started to see out of the incredibly strong NFP report and the jump back into expansion of the ISM Services PMI. The major event of the previous week was Fed Chair Powell speech where he acknowledged that “the disinflationary process has begun” but it will take “not just this year but also next year to get down to 2%”. The two key lines though in my opinion were:
· “If we continue to get, for example, strong labour market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more.”
· “Balance sheet reduction process will take a couple of years.”
From the first line Powell is saying that the Fed is targeting a softer labour market. If the labour market remains tight, the Fed will have to go higher than their projected terminal rate seen in December 2022. Before the next FOMC meeting, we will get another labour market and CPI report in March.
From the second line we can see that the Fed has set the balance sheet reduction on autopilot and it’s not yet clear what consequences it will have on the markets although it’s another tightening tool.
Powell’s speech didn’t trigger any notable market moves other than some choppy price action. The market is currently focused on economic data to decide where to go next.
After a big jump out of the NFP report, the US Dollar consolidated near the previous resistance and the trendline. This week’s inflation report will be key for the next move. A beat will easily send the DXY up to the 105 level, while a miss should reverse the gains we’ve seen out of the NFP data. Technically, a break above the trendline will give more conviction for a rally to the 108 level.
Tuesday: The headline Y/Y rate is expected to fall to 6.2% from the prior 6.5%, while the M/M figure is expected to rise 0.5% compared to the prior 0.1%. The Core measures are expected to show a decrease in the Y/Y number to 5.5% from the prior 5.7% and to match the prior December M/M reading at 0.4%. Given that inflation fears were awakened by the NFP and ISM Services PMI reports, the market will most likely react with notable moves out of the report. A miss across the board will be good for risk sentiment, while a beat will be bad.
Wednesday: Headline retail sales is expected to rise 0.9% M/M compared to the 1.1% decline in the previous report. The control group figure is expected at 0.3% compared to the previous -0.7%. Many January data reversed or improved notably in February, which may be a consequence of the easing in financial conditions we saw in the previous months.
Thursday: Initial jobless claims are expected to show a 200K increase and continuing claims are expected to climb to 1695K compared to 1688K in the previous report. Since the market is focused on the labour market data, it’s worth to keep an eye on jobless claims, although only a significant beat/miss would be market moving.
This article was written by Giuseppe Dellamotta.
