Global Economic Outlook | Week #12

The previous week's data releases provided validation for the policies implemented by central banks in the US and EU, potentially signaling a shift in stance for the Bank of Japan towards an exit from negative interest rate policies. Notably, China initiated the week on a positive note with encouraging industrial production figures.

 

US Economic Outlook

While the Federal Reserve meeting will likely dominate market attention, the housing data releases will also play a crucial role in shaping perceptions of the US economic outlook and better estimates of Fed possible decisions.

On Tuesday, Housing Starts data will provide valuable insights into the US housing market, followed by Existing Home Sales figures on Thursday. January saw a notable decline of nearly 15% in housing starts, attributed in part to adverse weather conditions. However, Existing Home Sales kicked off the year on a positive note, registering a 3.1% increase and reaching a 4.0 million-unit annualized sales rate.

 

Various factors, such as price discounts and mortgage rate buy-downs, have contributed to the resilience of the housing market, which has performed relatively well compared to other sectors of the economy. Notably, the average 30-year fixed mortgage rate has improved to 6.7%, down from nearly 7.8% last October. This positive trend in mortgage rates over recent months may continue to support the market in February, potentially leading to an increase in housing starts and new home sales. However, existing home sales may experience a slower pace of improvement compared to the previous month.

 

Regarding the upcoming Federal Reserve Open Market Committee meeting, recent developments and statements from Fed Chair Powell and other Fed officials have instilled greater confidence in the decision to maintain the interest rate during this meeting and potentially even during the May meeting. Last week's inflation data provided further validation for the notion that inflationary pressures may persist for an extended period, as policymakers aim to assure the public that inflation remains under control. Notably, last Friday's producer and consumer price data exceeded expectations, indicating hotter inflationary trends than anticipated.

 

While the Fed is still expected to consider easing monetary policy around mid-year, likely in June or July, market sentiment will likely be influenced by Chair Powell's press conference and the release of dot plots. These will offer insights into the Fed's outlook on the US economy and potential actions in forthcoming meetings.

 

The timing of interest rate cut predictions will be a key determinant driving market dynamics. Delays in forecasts for interest rate cuts could strengthen the dollar and exert pressure on stock markets, while earlier-than-expected rate cut expectations may lead to the opposite effect. Thus, market participants will closely monitor Fed communications for clues regarding the timing and trajectory of future policy actions.

 

Europe Economic Outlook

Europe is poised for a dynamic week, marked by key central bank meetings such as the Bank of England (BoE) and the Central Bank of the Republic of Turkey (CBRT), alongside pivotal economic data releases across various economies.

 

Monday saw the release of Eurozone inflation numbers, with the Flash Consumer Price Index (CPI) for February confirming expectations with a 3.1% headline CPI and a 2.6% Core CPI. Attention turns to Tuesday, with eagerly anticipated German and Eurozone ZEW Economic Sentiment indicators, expected to reflect a slight improvement in economic activities.

 

Wednesday will be notable for speeches from European Central Bank (ECB) President Lagarde, as well as ECB members Lane and Schnabel. Market participants will scrutinize their remarks for insights into the ECB's policy stance and economic outlook. Additionally, Thursday will bring the release of manufacturing Purchasing Managers' Index (PMI) numbers, offering further insights into the health of the Eurozone economy.

 

Overall, expectations for Eurozone data indicate moderate progress across most economic indicators. 

 

In the UK, key economic events are on the horizon, with inflation data scheduled for release on Wednesday and retail sales figures set for Friday. Expectations point towards a deceleration in sales alongside easing inflationary pressures for both producers and consumers. However, the highlight of the week will undoubtedly be Thursday's Bank of England (BoE) meeting.

 

Market forecasts anticipate the BoE to maintain its current policy stance and hold interest rates steady, as it awaits further clarity on wage growth and other indicators of stable inflation. Notably, the UK's inflation rate stood at 4% in January, significantly higher than its major economic counterparts, particularly the EU and US. This elevated inflation level forms the basis for expectations of the BoE commencing a series of interest rate cuts starting in August, following similar moves by the Federal Reserve and the European Central Bank.

 

Given that the consensus is for rates to remain unchanged, the focus will shift to the balance of votes among BoE policymakers and the tone of the accompanying statement. These factors will serve as primary market drivers, influencing investor sentiment and asset prices.

 

The Central Bank of the Republic of Turkey (CBRT) is set to convene for its interest rate decision meeting, with Mr. Fatih Karahan presiding for the second time following the resignation of the previous chief, Hafiz Gaye Erkan. After maintaining the target interest rates at 45%, market expectations lean towards a continuation of this stance, with the One-Week Repo Rate anticipated to remain unchanged at 45.00%.

 

The upcoming local elections in Turkey, scheduled for March 31, 2024, hold significant importance, particularly for the ruling party, the AK Party. Consequently, policymakers are unlikely to risk implementing any rate cuts in this meeting, mindful of potential impacts on economic stability and political outcomes. However, given that these elevated rates may be impeding economic growth and affecting small businesses and households, a shift in policies could be on the horizon post-election.

 

Asian Economic Outlook!

The Asian economic outlook is heavily influenced by upcoming central bank meetings in two of the region's economic powerhouses. On Tuesday, the Bank of Japan (BoJ) is set to make a crucial decision regarding its monetary policy stance, specifically whether to end negative interest rates or extend the duration to allow the economy more time to benefit from accommodative monetary conditions.

 

Following the upward revision in Q4 2023 GDP data and significant wage increases during annual negotiations, there is growing speculation that the BoJ may opt to increase interest rates from -0.10% to 0.0%. Such a move could help rebalance financial conditions and support economic growth. However, it's worth noting that the market has already priced in the expectation of 0.0% interest rates.

 

Therefore, market participants will be closely attuned to any signals of further interest rate hikes during the BoJ's statement or Governor Kazuo Ueda's press conference. We do not expect any more hawkish tone in the statement or press conference, which can help the Japanese stock market and soften its effects on the Yen.

 

The following day, the People's Bank of China (PBoC) will convene for its interest rate decision. Market expectations lean towards the PBoC maintaining the Loan Prime Rate at its current level of 3.45% during its Wednesday meeting.

 

The recent conclusion of China's annual session of the national congress revealed a 5% GDP target for 2024, signaling continued efforts toward economic stimulus and holding lower interest rates. Monday's published data indicated an improvement in industrial production during February, following a period of slightly better economic activities in January. However, the uptick in the unemployment rate to 5.3% is concerning, particularly for the world's largest manufacturing hub.

 

Other Economies 

In addition to the major economies, there are notable developments in Canada and Latin America that warrant attention.

 

In Canada, recent data indicates a notable increase in the raw material price index, rising to 2.1% in February from 1.2% in January, surpassing estimates of 0.8%. Expectations for the Consumer Price Index (CPI) suggest a further increase, with February's CPI estimated at 0.6%, compared to stable prices in January. These inflationary pressures may prolong the maintenance of higher interest rates, although a potentially weaker outlook in retail sales data expected on Thursday could introduce uncertainty into policymakers' positions.

 

Turning to Latin America, the Central Bank of Mexico is anticipated to commence a rate-cutting cycle on Thursday. Rapidly receding inflation and tentative signs of an economic slowdown in recent months are likely influencing policymakers' decisions. It is expected that Banxico will implement a 25-basis point rate cut from the current level of 11.25%. While this decision may impact the value of the peso, it is unlikely to disrupt the currency's trend as one of the best-performing currencies globally in 2023 and 2024 thus far.