The week ahead: economic data comes back into focus

Last week, macro and interest rate concerns were not the key drivers of markets, instead markets moved on the back of earnings results, notably Nvidia’s results. That rally fizzled, and momentum in Nvidia had cooled by the end of the week. There was some understandable profit taking in tech stocks on Friday, and that may continue as we move into month end. The S&P 500 rose by 1.17% last week, and the Nasdaq eked out a 0.57% gain. US indices were outperformed by their European counterparts, as European stocks get a boost from the ‘granolas’ and some notable record highs for European company share prices. The Eurotoxx index rose by 2.65%, and the Dax defied Germany’s economic malaise to rise by 2.17%. At the start of this week, the Nikkei managed to extend gains, but Chinese stocks dipped once again, after a flurry of downgrades of Chinese corporates.

This week is all about macro, with some key economic data releases from around the world. As the focus shifts from stocks to economic data, FX may come into focus. There are two themes that could develop this week: 1, can non-tech stocks play catch up with tech and help to rebalance the US indices? and 2, will the economic data releases lead to more divergence between the economic outlooks for the US and Europe? If yes, then we could see some decoupling of rate expectations, with expectations for ECB and BOE rate cuts to come before the Fed. The euro and the pound rose against the dollar last week, but they may come under pressure vs the US dollar, especially if Fed rate cut expectations are pushed back further in the coming days.

Macro highlights

The key data released this week will be the Fed’s preferred inflation measure, the core PCE deflator, which is released on Thursday. Economists expect the monthly core PCE reading to rise by 0.4% in January, which would be the fastest reading for a year. The annual rate is expected to fall a notch to 2.8% from 2.9%. The headline PCE deflator is expected to rise by 0.3% MoM, and fall slightly to 2.4% YoY, which would be the lowest level since 2021. Service inflation is once again expected to drive the PCE readings, with goods inflation expected to continue to be a small driver of US inflation. While the annual rates are encouraging, the Fed is likely to be concerned by the reacceleration in the monthly rates, and these are the figures to watch. Currently, the market is expecting the Fed to start cutting rates in June, this could get pushed back into the second half of the year if inflation is thought to be running hot.

US economic data may be moderating, but it is expected to remain strong

New home sales, regional manufacturing orders and durable goods are also worth watching, along with the second reading of US GDP for Q4. No change to GDP is expected, with the annualized quarterly rate expected to remain at 3.3%. Personal consumption is expected to be revised a notch lower for last quarter, to 2.7% from 2.8%, but this is unlikely to have a major impact on the outlook for the consumer or the US economy, as Atlanta Fed’s GDPNow tracker is predicting that the US economy will grow by 2.9% in Q1, which suggests that US economic growth is moderating, but it remains at a high level compared to elsewhere. The ISM manufacturing survey for February, and the University of Michigan consumer sentiment and long and short-term consumer inflation expectations will round the week off.

European CPI to give steer on when the ECB could cut rates

In the Eurozone, all eyes will be on the February CPI estimate that is due for release on Friday. The market is expecting a strong monthly rate, with the headline MoM rate expected to rise to 0.6% from -0.4% in January. If this estimate is accurate, then it would be the fastest rate of increase since April 2023. The headline rate of CPI is expected to be 2.5%, marginally higher than the ECB’s 2% target, the core rate is expected to rise by 2.9% YoY. In the UK, house price data, CBI reported sales for February, mortgage approvals and money supply are all worth watching. The CBI reported sales data is due later on Monday and this is expected to show an improvement in reported sales.

Japan gets a boost from Warren Buffet

Watch out for volatility in the yen this week. Japan will release CPI data late on Monday night UK time, and expectations are for a decline in inflation to 1.9% for the headline national rate in January, from 2.6% in December. The super core rate is also expected to decline to 3.3% from 3.7%. If this is stronger than expected, then it could increase the chances of the BOJ hiking interest rates and taking the next step in normalizing its interest rate policy. The BOJ meets on 19th March, and this week’s data could give us a steer on what they do at this meeting. Retail sales, the jobless rate, industrial production and a raft of confidence indicators and Q4 corporate indicators are also released this week. The market currently expects a 10bp rate increase at the March meeting, with further 10bp hikes in June and October. If the inflation rate is weaker than expected, the market may start to doubt the prospect of a March hike, which could weigh further on the yen, and USD/JPY is already back above the psychologically important level of 150.00. If the yen moves lower from here, then the risk of BOJ intervention will rise, so approach the yen with care this week. The Nikkei remains above its record high and extended gains slightly at the start of the week. This comes after Warren Buffet spoke favorably about Japanese stocks in his annual shareholder’s letter.

Another week, another hope of more Chinese stimulus

Elsewhere, Chinese stocks have weakened at the start of the week, after bouncing back last week. China will release more PMI surveys this week, and all eyes will, as usual, be on whether the government provides more stimulus after President Xi called for a boost in spending on big ticket items like cars and home appliances. We shall have to see if this materializes into more stimulus, if it does then stocks may continue to move higher in China and Hong Kong. However, it highlights how the US and China are moving in two different directions when it comes to the economy, as the Fed is trying to dampen down spending, as China is trying to fuel it.

Central bank speakers and Debt auctions

There is a full roster of global central bank speeches to watch out for including Huw Pill, Dave Ramsden and noted hawk Catherine Mann from the BOE. There are 13 Fed speakers due to talk this week, and ECB President Lagarde will speak to the EU Parliament later on Monday afternoon. There is a plethora of short-term US Treasury auctions coming up. This week will also see robust corporate issuance, with $35bn of US blue chip bonds being issued, which suggests that the credit cycle is re-accelerating, just as the market ponders when interest rates will fall.