Macroeconomics: The Day Ahead for 14 March

By rights, today should have been all about the US CPI data, but with the ‘fear’ factor following the SVB fall-out sweeping markets, it will have to spring something of a surprise. It will be a busier day for data, with the UK labour data and Australia’s Business and Consumer Confidence surveys to digest, and Italian Industrial Production, US NFIB Small Business Optimism and Canada’s Manufacturing Sales ahead. The events schedule sees all members of the Riksbank’s board testifying on its annual report on monetary policy, while Fed’s Bowman’s speech to community bankers in Hawaii may grab rather more attention than would normally be the case in the wake of the shuttering of SVB and Signature Bank, with OPEC publishing its monthly Oil Market report. Market reaction to the SVB collapse continues to be driven by fear, rather than any rational analysis of the potential impact, as well as by the underlying lack of market depth, with the overnight gyrations in the US 2-yr, carving out a whopping 37 bps trading range underlining this. The globally broad-based slide in bank stocks also demonstrates panic-like behaviour, failing to appreciate that European banks have much higher capital requirements across the board than the US, where Basel rules are only applied to G-SIB banks; ironically Japan’s banks are arguably a greater point of concern, above all due to the fact that they are the largest providers of USD liquidity and credit outside of the US. One final point should be also borne in mind in Japan, given the sharp fall in JGB yields, if the BoJ is no longer having to intervene to defend its 10-yr YCC cap, then its balance sheet swings from quite rapid expansion (as per November through early February) to modest contraction, per se no longer countering the QT of the ECB and Fed.

** U.K. – Jan/Feb labour data **

There were relatively few surprises in the latest report, with the sharper than expected 98K rise in HMRC Payrolls more than offset by a 60K downward revision to 42K. The Unemployment Rate was unchanged at 3.7% against forecasts of 3.8%, despite labour inactivity dropping 0.2 ppt, while Vacancies remained sky high at 1.124 Mln, per se suggesting that there continues to be no material easing in labour market conditions. Average Weekly Earnings fell slightly more than forecast to 5.7% y/y from 6.0%, and ex-Bonus to 6.5%, largely due to base effects turning benign, just as they were adverse in H2 2022, but more importantly remain well above the BoE’s comfort zone, though at least not accelerating further. Overall the report still makes the case for a further 25 bps rate hike at next week’s MPC meeting.

** U.S.A. – February CPI, NFIB Small Business Optimism **

CPI is expected to show both headline and core up 0.4% m/m, which would pull headline y/y down 0.4 ppt to 6.0% and core 0.2 ppt to a still very lofty 5.4%. Much looks likely to depend on the extent of the rebound in energy prices (both gasoline and utilities) and core goods, which are likely to see a sizable rebound in Used Car Prices, with OER/Shelter (i.e. housing) likely to ease slightly in m/m terms from January’s 0.7%, but remain high. The other wild card is how much medical care costs (elevated in January) are offset by the previously mentioned drag from medical insurance. With the SVB fall-out triggering a spike in volatility, and a spectacular repricing of Fed rate expectations (see charts), anything higher than expected may serve to prompt yet another sharp reversal in near term Fed rate expectations and US Treasury yields. Ahead of the CPI, the NFIB Small Business Optimism is seen barely changed at 90.2, with the already published employment sub-indices, showing Plans to Hire slipping back to their recent low of 17, but Positions Not Able to Fill rising to 47 (highest since August), in both cases still very high by any historical standards, as were compensation plans. If other surveys are anything to by, there should be a boost to Orders, and along with some further easing in supply chain issues, the risks look to be modestly to the upside, even if the headline index would still remain at a low level historically.