Markets Await Key Data Amidst Rate Cut Speculations

It was a quiet start to a busy week that includes key CPI and retail sales reports. The markets are increasingly confident the major central banks are making enough progress on their inflation goals that rate action is on the way. However, the timing and pace are still the big question marks.

This week's data releases will be necessary in clarifying global outlooks, but they will not be sufficient for policymakers who need several more months of data to boost their confidence in making rate changes. Market bets are for cuts from the FOMC, ECB, and BoC in June, with the BoE lagging.

Despite the various surprises in the February jobs release, the report overall added to evidence of a slowing economy, loosening in the labor market, and cooling wages that support expectations for a June rate cut.The robust job growth in February, surpassing predictions of 200,000 new jobs, underscored the resilience of the US services sector. Sectors such as healthcare, hospitality, and the public sector saw notable increases in payrolls, indicating continued strength in the services industry.

Yet, the upbeat mood was dampened by revisions to January and December's figures, revealing that 167,000 fewer jobs were created than previously reported. This revelation complicated the economic landscape, leading to fluctuating market sentiments and increased speculation about future interest rate cuts.

Wall Street traders found little encouragement to keep pushing the stock market higher at the start of a week that will bring the last key inflation figures before the Federal Reserve decision.

Following the release of the report, traders initially leaned towards anticipating faster and earlier interest rate cuts by the Federal Reserve. However, sentiment later reversed as uncertainties surrounding the timing and pace of rate adjustments lingered.

Market expectations, as reflected in futures pricing, suggest that the Fed may initiate its first interest rate cut as early as June, with the possibility of subsequent cuts later in the year. This speculation contrasts with the Fed's December projections, where officials hinted at three potential rate cuts in 2024.

Looking ahead however, this week, Fedspeak turns very light, with the blackout period heading into the March 19-20 FOMC meeting. Attention turns to upcoming economic indicators such as the Consumer Price Index (CPI) inflation figures for February, scheduled for release this week. Federal Reserve Chair Jay Powell indicated that the central bank is closely monitoring inflation trends before considering any adjustments to borrowing costs.

Inflation is a focal point of the FOMC, making February CPI key. We expect a 0.4% headline increase with a 0.3% rise in the core following respective January gains of 0.3% and 0.4%. Much of the strength should come from a 5% rebound in CPI gasoline prices after four consecutive monthly declines. The Fed will also be keen on services inflation results, and especially shelter and owners' equivalent rent which remained hot in January, underscoring the Fed's warning of a bumpy path.

Reuters Graphics

Nevertheless, February data in line with our forecasts would leave the headline rate steady at the 3.1% pace from January, and well off of the 4-decade high of 9.1% in June 2022. The core rate should ease to 3.7% y/y from 3.9% y/y in January and December, versus a 40-year high of 6.6% from September 2022. Both y/y gauges benefit from easier comparisons in Q1.

As investors await further clarity on economic conditions, this week's data releases, including CPI and retail sales reports, will play a crucial role in shaping market sentiments and informing policymakers' decisions. Despite the uncertainties, one thing remains certain: the US economy faces a complex balancing act as it navigates through changing economic dynamics and market expectations.

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Andria Pichidi

Market Analyst

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