The week ahead: China growth, the fate of the FTSE, Powell testifies and NFPs

This is set to be another mega week for financial markets. A combination of the National People’s Congress in China, Federal Reserve Chairman Jerome Powell’s semi-annual testimony to Congress, and a jobs report leaves the potential for volatility. It’s worth remembering that January’s job report shifted the dial on the prospects for future Fed policy, putting to bed the notion of a pivot, and causing stocks and bonds to sell off. The result is that the 2-year Treasury yield is now at its highest level since 2007, and the debate rages on about where the terminal rate will settle for the US, and how long it will stay there. If we get another upside surprise in payrolls for February, then will the markets be spooked, or will more strong jobs data suggest that the economy can cope with an uplift in the Fed’s terminal rate?

China’s modest growth outlook – is the bar too low?

At the start of the new week, the news that China has set a 5% growth target for 2023 has had a mixed impact on financial markets. On the one hand, stocks in China are lower across the board, on the other hand stocks in Europe are broadly higher, while futures markets are predicting a slightly positive open in the US. Domestic markets in China are struggling on the back of the lower-than-expected growth forecast, however, the rest of the world could benefit from “moderate” rates of growth in China in the coming years as it reduces the chance that it will export inflation and boost already high price growth. However, the Chinese government has set the bar low when it comes to growth. February’s business activity levels blew past pre-covid levels, and China’s composite PMI survey was at the highest level for 3 years. Thus, this target could easily be exceeded, especially if the post-covid bounce lasts for the next few months. Obviously, challenges lie ahead for China, one of the most pressing is the strategic rivalry with the US and its economic implications. A bill that would allow the US to systemically ban Chinese technology, including services like TikTok, will be introduced this week, which may also be weighing on Chinese shares. We will also be looking out for other announcements from the National People’s Congress, particularly any sign that the Chinese government will exert more control over the tech and science sectors. Most damaging would be any sign that there will be increased party involvement in non-public enterprises. If this happens, then we could see Chinese stocks comes under pressure, and the Nasdaq’s Golden Dragon index of US-listed Chinese tech firms tumble and erode recent gains.

Why Fed Chair Powell won’t let the cat out of the bag on the future of rates

Elsewhere, Federal Reserve Chair, Jerome Powell, will testify before the US Senate Committee on Banking, Housing and Urban affairs on the Fed’s monetary policy, and he will head to the Capitol again on Wednesday to testify before the US House Financial Services Committee. The market will obviously scrutinise anything he says, right now the market is pricing in a terminal rate of 5.4% by August this year, with only 25 bps of cuts priced in by January 2024. We don’t think that the Fed chair will say anything that will move the dial on market-based expectations for US interest rates during his testimony. This is mostly because: 1, politicians like the sound of their own voices, giving Powell little time to respond meaningfully to their often-rambling questions and 2, we are approaching a key election year in the US, so politicians may press Powell not to choke off economic growth with too many rates rises.

What to expect from payrolls

Overall, we think that this week’s payrolls report will be more important to the Fed Funds Futures market and risk sentiment more broadly. Expectations are for an increase of 215k jobs last month, which would be a moderation from the 517k added in January. Monthly jobs growth around 200k may be better tolerated by financial markets than another super-size jobs report, and if that happens then we could see some unwinding of the post January NFP trade: lower terminal rate, more rate cuts priced in by year end and a better tone to risk appetite.  The unemployment rate is expected to remain steady at 3.4%. Wage growth is also worth watching. So much hinges on this payrolls report, and we expect Jerome Powell to stick closely to the view that the Fed remains data dependant during his testimony this week.

Eurozone inflation expectations surge

Elsewhere, we are also going to watch inflation expectations closely this week, especially as Eurozone expectations for future price growth is rising even though commodity prices are falling. This is a key sign that inflation is becoming embedded into the currency bloc and could drive the ECB to keep hiking rates. Right now, interest rate differentials are in the euro’s favour, and we think that EUR/USD could break out of its recent range and target $1.08 highs from early Feb, particularly if the US jobs report disappoints expectations.

The problem with the FTSE 100

In the UK, the FTSE 100 is struggling as GBP/USD falls below $1.2030. The UK index is bucking the trend in Europe, where stocks are rising, on the back of news that another major company could ditch their UK listing in favour of the US. CRH, the building materials company, has announced it will leave the FTSE 100 in favour of a US index, Flutter is looking at a dual listing in the US, ARM will only list in the US, and cloud-computing company Wandisco, is preparing to list its shares in the US and is targeting a $1bn valuation. This is adding to scrutiny of the city’s attractiveness. Some are arguing that problems in London including the high cost of listing, the regulatory burden and the liquidity issues need to be addressed to keep firms located in the UK. Pension funds in the UK can’t invest in UK stocks, which is a large pot of liquidity that companies listed here cannot tap into. This is not a problem in the US, so there are not only more investors in the US willing to invest in new firms, but companies tend to get higher valuations, which is attractive for executives. Thus, unless these structural issues are addressed in the UK, it is hard to see how the City will boost the attractiveness of a listing on the FTSE 100. Of course, the grass is not always greener, US stocks underperformed the UK last year, however, over 5 years, the UK is lagging the US. Thus, for some c-suite level execs, the US is a no brainer.