Strong economic data releases, which includes improving PMI gauges, have continued with Friday’s PCE numbers being the pick of the bunch and proving much hotter than expected. This is the Fed’s favoured inflation gauge as it is a broader measure of price pressures. The renewed spike has prompted more policy tightening by the Fed to be priced in by money markets.

Traders are now seeing the Fed funds rate rise to 5.45% in July. The US two-year Treasury yield, which matches changes in the Fed funds rate closely, hit its highest level since July 2007, if we exclude the brief spike on November 4 last year. These sizeable moves in fixed income markets are primarily being driven by better US data and it will be interesting to see if this slew of consensus-beating data continues this week.

The main data, amid a fairly light calendar, will be the ISM figures for manufacturing and services. These have a slightly different methodology to the PMI activity figures but are a timely gauge of business activity. The key question is whether the releases will mirror the strong prints from the PMIs.

Anything adding to the current outlook that the US economy continues to motor along at a decent pace will add fuel to the dollar rally. The DXY index has bounced over 4% since the February lows and is closing in on the 200-day simple moving average at 106.46. The greenback has enjoyed four weeks of consecutive gains, which was last seen in May last year. The 50-week simple moving average at 105.39 may be initial resistance, while we will also be watching to see if the 10-year US Treasury yield can hit the key psychological level of 4%. Also of importance could be support from the 200-day moving average in the S&P 500 which currently sits at 3,940.

We get fresh inflation numbers out of the eurozone on Thursday with the headline reading expected to reveal a modest slowdown. The core print, which strips out volatile food and energy costs, was recently revised one-tenth higher to an all-time peak and is the key figure for policymakers. The minutes for the February ECB meeting are released the following day with recent ECB speakers generally hawkish. The euro has lost support above 1.06 on the surging dollar with the next strong line of support around 1.0481.

Major risk events of the week

27 February 2023, Monday:

-US Durable Goods: This monthly report is used to measure industrial activity. Consensus predicts a print of -3.8%, a big fall from the December reading of 5.6%. Economists say this is entirely due to volatility in Boeing aircraft orders. The company received 55 orders for aircraft down from 250 in the previous month. Outside of transportation, orders are likely to be flat. Rising interest rates are expected to impact going forward as higher borrowing costs discourage activity.

01 March 2023, Wednesday:

-US ISM Manufacturing: This gauge of business activity is forecast to have risen to 47.9 from 47.4. Economists want to know if the resilience in recent data is due to underlying strength in the US economy or the unseasonal warm weather. The China re-opening story is likely to be supportive.

02 March 2023, Thursday:

-Eurozone CPI: Headline inflation is forecast to reveal a modest slowdown to 6.9% y/y from 7.1% in January. This figure appears to have peaked at 10.6% in October. The most recent core inflation data was revised one-tenth higher to an all-time top at 5.3%. The terminal ECB rate has recently risen to 3.75%.

-ECB Meeting Minutes: This meeting saw a slowdown in the hiking pace to 50bp. Investec says President Lagarde largely reiterated the ECB’s expectation of another half-point move in March. Hikes beyond this date would depend on the data and the new staff projections next month. The focus will be on any debate around the path for rates beyond March.

03 March 2023, Friday:

-US ISM Services: This indicator is expected to decline to 54.2 from 55.2. Weather was closer to the seasonal average, so a small pullback is likely. But the print should still be well above 50 which denotes the line between contraction and expansion. The services index accounts for more than 75% of US GDP.