Markets are leaning more and more to the Fed’s projection of three 25bp rate cuts this year. There are now just under 100bps of rate reductions priced in, which has been some adjustment from “peak policy easing” at the start of 2024 when more than seven cuts were predicted. Strong data including inflation and labour market figures have been at the heart of this move. And this week’s PCE inflation report is likely to further cement this theme, with the monthly print of the Fed’s favoured price measure remaining too high for rate cut chatter.

We should get a timely reminder of the strength of the US economy coming into 2024 with the fourth quarter GDP revision set to confirm the expansion of 3.3%. This blowout final three months of last year was above every single forecast in the Bloomberg survey ahead of the initial release. This growth may help underpin support for the greenback, which suffered its first losing week after five straight weeks of gains. But the dollar index is still trading above its 200-day simple moving average, and we will probably need to get concrete signs of slower, more benign, inflation to change this.

Interestingly, the widely followed US 10-year Treasury yield again failed to break above long-term resistance around 4.33% last week. This bond is seen a as global proxy for borrowing costs and turned lower on Friday, helping boost gold prices. After dipping below $2,000 a few weeks ago amid Fed policy uncertainty, gold bugs are hoping yields continue to drift down. The precious metal tends to be more attractive to investors when interest rates are lower, as it doesn’t offer any yield. But central bank buying remains strong and comes as countries like China shift reserves away from US dollars. Strong retail demand in India and other emerging markets could also help prices push higher over the medium-term.

Other important data to watch out for this week includes Eurozone inflation. It is expected to be relatively well behaved on a monthly basis in the core, which the ECB is monitoring closely. Markets also get the region’s unemployment, which remains at record low levels at 6.4% despite economic stagnation. This is feeding into wage growth which is the real concern for policymakers. An upside surprise here would help the doves and potentially hurt the euro as it tries to steady above 1.08.  

China PMI manufacturing is expected to come in below the critical 50 threshold for the fifth month in a row. But a solid recovery in travel over the Lunar New Year should keep the service sector print above 50. Can Chinese stocks build on their strong week after a very volatile start to the year? This was exacerbated by the “quant quake” when quant models at funds failed and caused forced selling and a sharp decline. Fresh record highs in the US and European stock markets give some encouragement, and perhaps prove that the risk rally may not just be about seven stocks in the US.

In Brief: major data releases of the week

26 February 2024, Monday

– Japan CPI: Consensus expects the headline to cool to 1.9% from 2.3% in December. This would be the first sub-2% print since April 2022. This is primarily due to a high base from last year as service prices ease.

28 February 2024, Wednesday

-RBNZ Meeting: The OCR is likely to be kept unchanged at 5.50%. Headline inflation has slowed more than expected but the core remains elevated with labour market pressures still apparent. Focus will be on the profile for rates in 2024 and further out.

-Australia CPI: The monthly figure is forecast to tick up one-tenth to 3.5% due to base effects. But quarterly inflation does point to the disinflation trend continuing, with domestic and China data posing downside risks.

29 February 2024, Thursday

–US Core PCE: The Fed’s favoured inflation gauge is expected to fall one-tenth to 2.8%, though the monthly print may tick up to 0.4%. This would be in line with the CPI and PPI data which surprised to the upside. Markets currently price in around four rate cuts for this year, from seven at the start of 2024.  

01 March 2024, Friday

–China PMIs: Data is likely to remain broadly stable with the familiar picture of struggling manufacturing and non-manufacturing painting a more favourable picture. That should leave the composite above 50 and still in expansion territory.

–Eurozone CPI: Expectations are for the headline to fall three-tenths to 2.5% and the core by a similar margin to 3.0%. The ECB appears content with the pace of disinflation but in no rush to begin easing policy. There are now less than 100bp of rate cuts priced in for this year.

–US ISM Manufacturing: The February print is predicted to rise modestly to 49.2 form 49.1 in January. Better weather conditions are seen underpinning activity. But the index will have been stuck in contraction for 16 straight months.