Home ForexForecasts US CPI to top a boring week and may ruin the calm

US CPI to top a boring week and may ruin the calm

by SuperiorInvest
  • US retail sales and inflation data to take center stage as dollar falls
  • UK employment and GDP figures also rising amid recession woes
  • Will the markets remain calm in the face of the imminent central bank storm?

Will the CPI report cause a complicated problem for the Federal Reserve?

The US Federal Reserve does not meet until March 20 to make its next policy decision and, with the jobs report behind us, all eyes are now on the February CPI figures to be published on Tuesday . There has been good and bad news lately on the inflation front in the United States. The headline CPI rate has remained stubbornly stuck above 3.0%, while the core CPI has remained close to the 4.0% level. There was some comfort with core PCE inflation, which fell to 2.8% year-on-year in January, although the six-month annualized measure of the same indicator rose from 1.9% to 2.5% year-on-year.

According to forecasts, February consumer price index readings will likely be another mixed bag. The 12-month CPI rate is expected to have remained unchanged at 3.1% thanks to a slight rebound in the month-on-month rate to 0.4%. However, there may be some relief with the basic measure that excludes food and energy prices. It is expected to have decreased from 3.9% to 3.7% year-on-year.

The services component of the CPI that excludes housing costs will also be observed, as it rose to 3.6% in January, in a setback for the Federal Reserve, which wants this figure to drop. Thursday's producer price index will also be vital ahead of the March meeting.

Retail sales expected to rebound

Federal Reserve Chair Powell remained cautious about the inflation outlook when testifying before lawmakers on Capitol Hill this week. While he noted that rates will likely be cut later this year, his reluctance to be less vague about the possible timing suggests the Fed has some reservations about how quickly inflation is falling.

However, that didn't stop investors from cheering the prospect of an early rate cut. The soft landing narrative, according to which the US economy is slowing enough for the Federal Reserve to ease policy but can still avoid a recession, continues to underpin risk sentiment in markets.

Growth saw some weakness in January, so some sort of rebound in February is essential to sustain this goldilocks scenario. And the latest retail sales figures are expected to do just that on Thursday. After falling 0.8% month-on-month in January, retail sales are expected to have recovered 0.3% in February.

Dollar bulls expect good CPI data

Other indicators on next week's calendar include the Empire State Manufacturing Index, industrial production and the University of Michigan's preliminary estimate of consumer confidence in March, all scheduled for Friday.

For the US dollar, the main risk is upside surprises in the CPI numbers, which have the potential to cast doubt on a June rate hike that investors have pinned their hopes on. A positive CPI report would be detrimental for risk assets, but positive for the dollar, which badly needs a boost after being on the defensive since mid-February. Data aside, a series of bond auctions by the Treasury Department could also inject some volatility into bond, currency and stock markets.

Will UK GDP point to a recovery?

The pound will also be in the spotlight over the next week as labor market statistics and the monthly GDP reading are on the agenda in the UK. Employment in the UK plummeted last summer as the economy contracted, but has been rising since October, with the unemployment rate falling again to 3.8%. If Tuesday's report points to further improvement in the labor market in January, it would ease concerns about a sharp recession.

However, investors probably won't pay too much attention to the employment figures due to some reliability issues with ONS surveys lately and the focus will mainly be on the wage growth figures. The Bank of England is unlikely to start cutting rates before seeing clear signs that wage pressures are cooling and while there has been good progress (profit growth, excluding bonuses, has slowed from 7.9 % to 6.2% year-on-year), there is still a long way to go. .

Stiff wage growth would make it difficult for policymakers to consider lowering rates even if the economy is struggling. The British economy is officially in a technical recession after GDP fell for two consecutive quarters in the second half of 2023. January output data is due out on Wednesday and is expected to show marginal GDP growth of 0. 2% monthly, which could signal the end. of the recession. Industrial and manufacturing production figures will also be published.

The pound, which has been benefiting from the dollar's decline, could extend its recent gains if a better-than-expected data set lifts the market-implied path for the Bank of England's policy rate.

Drivers for the start of the week.

Elsewhere, it will be an extremely quiet week ahead of crucial decisions from central banks from the Federal Reserve, the Bank of Japan and the Bank of England at the end of the month.

Speculation is growing that the Bank of Japan could raise interest rates as soon as it meets in March, so an upward revision to Japan's fourth-quarter GDP estimate on Monday could further boost the yen against the dollar, which has already risen almost 2% over the past week.

Meanwhile, Chinese price indicators released over the weekend could also boost sentiment at the start of the week. Consumer prices in China are expected to have increased 0.4% year-on-year in February after falling 0.8% in January. However, producer prices are expected to have remained in deflationary territory, amid a slow economic recovery.

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