Money markets are finally making big changes to their expectations for the Fed tightening cycle due to US data – both activity and prices – printing stronger than forecast. The peak terminal Fed funds rate is now above 5.25% which means there may be more defensive trading in stocks and risk currencies going forward this week. This more aggressive repricing of policy tightening should support the dollar. But it is interesting that quite a few majors printed “doji” candles last week which could be a sign of indecision. Treasury yields also moved lower on Friday after printing at levels last seen in November.

We note that dollar positioning, which has run against the USD in recent weeks is not extreme but may be one-sided enough to support a short squeeze. Seasonal pressures do generally help greenback bulls in the first quarter.

It is a quieter calendar with Friday’s January PCE deflator data the highlight in the US. This is the Fed’s preferred inflation gauge, and some economists say its lower weight on shelter might make for a more substantial move down than CPI. The minutes of the FOMC meeting could grab some headlines as they may reveal what conditions need to be met for the Fed to pause its tightening.

The series of PMIs for most global regions will inform on the latest state of manufacturing and services activity. The global PMI data broadly improved for the first time in many months in January. Will we see more improvement this month?  

In Asia, the Japanese inflation release for January is worth keeping an eye on. A further acceleration in prices is forecast, which will see CPI accelerating to 4.5% y/y, up from 4.0% y/y in December. The pace of rises in core prices, outside fresh food and energy, remains high. Australia’s wage price index released on Wednesday should provide direction for the RBA as they tied its interest rate target to wage growth rising to a level consistent with target inflation of 3.5% – 4%. The last quarter saw the index grow by 3.1%, which means there is still room to edge higher.

Finally, the RBNZ is expected to hike by 50bps on the same day. The labour market remains tight with price pressures still elevated. Despite softer growth indicators, weak sentiment and rapidly falling house prices, the bank is likely to be more focused on inflation than growth. The kiwi is threatening to make fresh year-to-date lows.

Major risk events of the week

21 February 2023, Tuesday:

-Eurozone PMIs: The market median sees the manufacturing PMI printing at 49.3 from 48.8 in January. The Services PMI is forecast to tick a tenth lower to 50.7. Better winter weather is helping growth in activity as confidence rebounds, albeit from low levels. 

22 February 2023, Wednesday:

-RBNZ Meeting: Consensus expects the bank to lift the OCR by 50bps to 4.75%. That’s down from the 75bp rise that the market was widely predicting and which the RBNZ seemed set on delivering after the November statement. Inflation data since then hasn’t accelerated as forecast but the bank is seen retaining a hawkish stance with more hikes projected.

-IFO Business Climate Survey: Analysts predict a reading of 90.7, a further improvement after the 90.2 print in January. The new year has started with modestly easing price pressures, an improved outlook and more confidence. The German economy is expected to narrowly avoid recession this year. EUR/USD is focusing on the Fed repricing at the moment. Last week’s low around strong support above 1.06 is key.

-FOMC Meeting Minutes: The Fed hiked rates by 25bps at this month’s meeting with the debate moving away from the size of hikes to how many remain in this cycle. Powell said the disinflationary process had begun but the FOMC will remain data dependent with policy still not sufficiently restrictive. Discussion and debate around what that level is should be important and potentially market moving. Gold fell for a third week and is down over 7% from this year’s high. A higher rate path is hurting so any talk of how long to keep policy at the peak will be a focus.

24 February 2023, Friday:

-US Core PCE, Personal Income, Spending: This data should get some attention after the recent strong retail sales and signs that core inflation could be higher than the FOMC’s expectations.  The core PCE deflator is seen rising one-tenth to 0.4% from 0.3% in December. Economists say this is more than twice the 0.17% m/m required over time to produce year-on-year inflation of 2%. The Fed will be closely monitoring services inflation.