Weekly Outlook: Mar 01 — Mar 05: RBA Decision, US NFPs, OPEC+ Meeting

Given the latest surge in government bond yields around the globe, investors may pay extra attention to the US employment report for February, due out on Friday. A good report may add to expectations over an overheating economy, which could result higher inflation, and thereby equities may slide further. The RBA decision on Tuesday and the OPEC+ meeting on Thursday may also come into the limelight.

On Monday, we get the final manufacturing PMIs for February from the Eurozone, the UK and the US, and as it is the case most of the times, they are expected to confirm their preliminary estimates. From the US, we also have the ISM manufacturing PMI for the month, which is expected to have ticked up to 58.8 from 58.7.

Apart from the PMIs, we also have Germany’s preliminary inflation data for February. The CPI rate is forecast to have risen to +1.2% yoy from +1.0%, while the HICP one is expected to have held steady at +1.6% yoy. This could raise speculation that Eurozone’s headline inflation, due out on Tuesday, may accelerate as well.

On Tuesday, during the Asian morning, the RBA decides on monetary policy. At their previous meeting, policymakers of this Bank decided to expand their QE program to buy additional AUD 100bn of bonds. Since that meeting, the only top-tier economic release we got was Australia’s employment report for January, which revealed that the unemployment rate fell to 6.4% from 6.6% and that the economy has gained 29.1k jobs during the month, a slowdown from the 50.0k in December. Following the stellar employment gains in October and November, slowing job growth in December and January appears more than normal to us. With that in mind, we don’t expect the Bank to proceed with more easing at this meeting. However, with government bond yields surging lately, and the Aussie reaching the 0.8000 mark against the US dollar last week, despite correcting lower on Thursday and Friday, officials may sound more dovish than previously. That said, we don’t expect the Aussie to tumble much as the Australian economy shows signs that it may stage one of the quickest comebacks compared to other developed countries.

During the European session, the most important release may be Eurozone’s preliminary inflation data for February. The headline CPI rate is forecast to have ticked up to +1.0% yoy from +0.9% yoy, but the HICP excluding energy and food rate is anticipated to have declined to +1.1% yoy from +1.4% yoy. Despite the lockdown measures around the Eurozone, at the press conference following the latest ECB meeting, President Lagarde said that the downside risks to the economic outlook are now “less pronounced”, making investors skeptical over further easing. The minutes of that meeting revealed that other members shared Lagarde’s view, and thus, we don’t expect a slowdown in core inflation to spark speculation over more stimulus by the ECB, especially after the preliminary PMIs for February came in better than the January prints.

Later in the day, Canada’s GDP for December and for Q4 as a whole is coming out. December’s mom rate is expected to have declined to +0.3% from +0.7%, while no forecast is currently available for the qoq rate. At its prior meeting, the BoC decided to keep interest rates and the pace of its QE purchases unchanged, disappointing those expecting a small cut or even a re-increase in QE. Officials also noted that “As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required”, which suggests that the next policy step for BoC may be tapering QE.

However, the employment report for January disappointed, with the unemployment rate rising to 9.4% from 8.9%, and the net change in employment showing that the economy has lost 212.8k jobs. What’s more, although the CPIs for January came in better than expected, they still stayed below the BoC’s inflation aim of 2%. Thus, with that in mind, we don’t believe that tapering may be on the cards in the months to come, especially if the GDP has slowed as the forecast suggests in December.

On Wednesday, during the Asian session, Australia’s GDP for Q4 is due to be released. The qoq rate is expected to have declined to +2.5% from +3.3%, but the yoy one is anticipated to have increased to -1.8% from -3.8%. China’s Caixin services PMI for February is also coming out, but no forecast is available.

Later in the day, we have the final services and composite PMIs for February from the Eurozone, the UK and the US, as well as the US’s ISM non-manufacturing index for the month, which is anticipated to have held steady at 58.7. The ADP employment report for February is also coming out and it is expected to show that the private sector has gained 168k jobs, less than the 174k jobs added in January. This is likely to raise speculation that the NFPs, due out on Friday, may come near their own forecast of 165k.

On the political front, in the UK, finance minister Rishi Sunak will present the nation’s budget and he is expected to pledge on more spending. However, this may be the last pandemic-related aid he offers. In any case, a generous package may allow the pound to continue trending north.

On Thursday, OPEC and major non-OPEC oil producers meet to decide on oil output with expectations suggesting a modest easing of supply curbs, starting in April. OPEC and its allies, known as the OPEC+ group, cut output by 9.7mn bpd last year due to the pandemic hitting demand hart, and as of February, it is still withholding 7.125mn bpd. Sources suggest that the group may increase output by a 500k bpd, but some voices within the group argue against any increase, citing possible setbacks in the battle against the coronavirus pandemic. With that in mind, no action may allow oil prices to continue trending north, while any increase beyond 500k may raise concerns over an inventory build up and thereby be the reason for oil prices to correct lower.

As for Thursday’s data, Australia’s retail sales for January are expected to have grown 0.6% mom, the same pace as in December, while the UK construction PMI for February is anticipated to have risen to 51.5 from 49.2. Eurozone’s retail sales for January are also coming out and they are forecast to have slid 1.1% mom after rising 2.0% in December.

Finally, on Friday, the main item on the agenda may be the US employment report for February. Nonfarm payrolls are expected to have increased 165k from 49k in January, and the unemployment rate is forecast to have held steady at 6.3%. Average hourly earnings are expected to have risen 0.2% mom, the same pace as in January, something that will take the yoy rate down to +5.3% from +5.4%.

Lately, government bond yields have surged in anticipation of higher inflation that could lead major central banks to tighten their policy soon. Although Fed Chair Powell reassured market participants that he and his colleagues are not planning to start normalizing policy anytime soon, investors remained unconvinced. with yields keep rallying and equities correcting lower. Thus, a decent report, although it would mean that the US economy is performing better than expected, may also intensify fears over rising inflation and thereby push yields even higher. As a result, equities may slide further and the US dollar may strengthen.

Having said all that though, we stick to our guns that the decline in equities may be a corrective phase. The reason is that the Fed has noted that they will not tighten policy even if inflation overshoots 2% in the months to come. They clearly said that they expect such a spike to be temporary and that inflation will rise and stay above 2% for some time — the goal for the beginning of normalization — in the years after 2023. As a result, we expect fears over high inflation to ease in the foreseeable future, which may allow equities and other risk-linked assets to rebound. As for the dollar, it may come under selling interest on more signs that the Fed is likely to stay accommodative for longer than previously assumed.

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