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Breakfast Bites - ECB Expected to hold

Breakfast Bites - ECB Expected to hold

Fed Chair Powell's testimony; Bank of Japan ready for change?; NYCB receives funding of $1B

Ayesha Tariq
March 07, 2024

Rise and shine everyone.

It felt as though Fed Chair Powell was channeling Greenspan yesterday, putting out a subtle statement on inflation and rate cuts.

We have a lot going on around the world today and we cover these in detail below:

Fed Chair Powell delivers part 2 of his testimony today at 10 am ET before the Senate Committee on Banking, Housing, and Urban Affairs. This should be interesting given that yesterday Chair Powell signaled scaling back plans on higher bank capital requirements.
ECB Meeting and Staff Projections - No change expected. Messaging to be hawkish
Bank of Japan in focus as traders bet on the end of negative interest rate policy

US Equity Futures are higher this morning, with yields lower at the long end and a lower US Dollar Index. Crude Oil is pulling back, while Bitcoin and Gold climb higher.

Costco and Broadcom report after the close today.

Big Stories

ECB Meeting

There shouldn’t be any big surprises at today’s ECB meeting. The staff projections will be released today as well, although they have been far from reliable in the last few months. For today we expect rates to be on hold. The first rate cut will likely come in June not, even in April because inflation still remains sticky, particularly at the core level.

What we see for today:

Wage growth and Corporate pricing power will dominate discussions [the latest negotiated wage data for Q4, which has been released since the January meeting, showed 4.46% y/y growth, down slightly from 4.7% in Q3]. Wages are not coming down fast enough.
Headline inflation came in lower at 2.6% from 2.8%. Core inflation however, came in at 3.1% vs. 2.9%e. 3month annualized rose to 2.4% from 1.52%. Inflation continues to remain sticky.
PMIs came in weaker on the manufacturing side but services PMI continue to remain high and this includes wage growth.
GDP Growth Projections for 2024 will likely be lowered to 0.5% from 0.8% (Q4 GDP Growth came in at 0%).
We also may see inflation projections lowered to 2% in 2025, meeting the target [from 2.1%]. The inflation target for 2024 will still be above 2%.

Fed’s Path

There weren’t any major surprises from the Fed Chair’s testimony yesterday.

The message was very balanced and not hawkish at all. But, the message wasn’t very clear either and I would think that it tells us exactly where we are right now with regard to the macro picture - neither here nor there.

Things can certainly change quickly and various Fed members are now giving us their two cents on reducing rate cuts for the year.

Fed's Kashkari (non-voter) noted that had expected two rate cuts in 2024. Cautioned that if inflation flared again that could justify a rate hike
Fed's Daly (voter) stated that was focused on getting inflation down, committed to finishing the job on price stability. Recognized high rates also raise housing costs

Interestingly though was a discussion on “high prices” are here to stay. It’s great to see that the rate of change in inflation is slowing down but, as long as it still remains positive, prices will not go back to pre-pandemic levels. The cumulative effects of inflation continue to hurt, not just in the US, but also globally. Perhaps a little deflation may not be such a bad thing after all.

Yen stronger; Nikkei weaker on BoJ speculation

Quite a lot going in Japan over the last two days. The yen has risen from 150.6 to 148.4 over the past 36 hours and the Nikkei is pulling back today. All of this is because of speculation around the BoJ ending negative interest rate policy in March (19 March).

A few things are in play today:

Major worker unions Zensen noted wage demands are currently seen at 6.70% The Rengo Union, which is the largest trade union in Japan, is seeing wage demands at 5.85% v 4.49%y/y. - This is good news for the BoJ and in line with what they want to see. SME Wage rates are yet to be known but, BoJ’s Nakagawa mentioned that they may not wait for all outcomes.
Cash Earnings came in significantly higher at 2%, up from 1% last month. It should be noted though that Real Wages and Real Consumption are still negative. Again, Governor Ueda’s has said that they may not wait until real wages are negative.

We still think that March is too soon for a change to policy and while discussions may start during this meeting, it’s likely that an actual decision will come in April with the Bank’s Outlook.

While the Government is pushing for higher rates to jump start consumption and help with inflation, the BoJ wants to be careful that the country doesn’t slip back into deflation. And that’s a slippery slope given that GDP has come in negative for Q4, 2023 and is expected to be negative in Q1, 2024. Hiking also means a stronger currency and that may move the needle on inflation lower that what the BoJ wants. The last reading on inflation came in lower as it is.

Bottom line: Change is coming and we’ve been talking about taking profits in equities and positioning for a stronger Yen in March ahead of the meeting.

Chart of the Day

US Job openings decreased 26k. JOLTS job openings 8,863k for January vs. median forecast 8,850k, prior revised 8,889k. The level is still far too high and keeps the labor market tight.

The Quits Rate has now dropped to 2.1%, lower than pre-pandemic levels. We had a lot of people quit during the pandemic because of the wealth effect, fear and home-care. But, now we’re seeing the rate drop which signifies that the labor market is gradually easing as more people want to keep their jobs.