The global week ahead

The global week ahead

There is something for everyone on this busy week for economic and corporate data. Ahead of it, however, Japanese stocks have followed Wall Street higher, and posted a record high, the Nikkei breached the key 40,000 level. The Nikkei was one of the best performing global indices last week, rising 2.29% in the last 5 days, which suggests that structural factors remain at play for Japanese stocks, even if this index hits some resistance at this level.  The yen fell in early trading on Monday and Japan’s currency has sold off sharply vs. all G10 currencies apart from the Swissie in the past month. Chinese stocks had a more uncertain start to the week, ahead of some key economic data and the start of the Chinese National People’s Congress, while S&P 500 and FTSE 100 stock index futures point to a weaker open for both indices later today.

US: Inflation pressures, to keep Powell cool on rate cuts

In the US, the focus will be the second half of the week. Jerome Powell will deliver the semi-annual Humphrey Hawkins testimony on March 6^th and 7^th to the US Congress. He is likely to reiterate his message that the Fed can be patient when it comes to rate cuts, especially after a growing number of signs that inflation pressures could be growing. There has been a big increase in the 2-year breakeven inflation rate, as you can see below, which is at its highest level for a year, and the 1-year inflation expectations from the University of Michigan remain stuck around the 3% level, which supports a cautious approach from the Fed chair this week. Members of Congress are likely to press the Fed chair on cutting rates, but we expect him to remain firm in his message that the timing of the first Fed rate cut will be data dependent.

2-year Breakeven inflation rate:

Source: XTB and Bloomberg

The key economic release this week, will be the US Non-Farm Payrolls report that is scheduled for release on Friday. The market is expecting a rise of 200k, which is lower than the 353k for January, however, it is still well above the 100k monthly rate that the Fed believes is neutral for the US economy. It is worth noting that February jobs numbers can be strong, as the usual January round of layoffs gets reversed. However, after January’s supercharged jobs report, the same may not be true this year. The unemployment rate is expected to remain steady and low at 3.7%, while average hourly earnings are expected to rise by 0.2% MoM in February, down from the 0.6% increase in January, while the annual rate of wage growth is expected to moderate to 4.3% from 4.5% at the start of the year. Ahead of Friday’s jobs report, the Jolt job openings data for January is released on Wednesday. This is also a closely watched figure, and it is expected to show a moderation in the number of job openings to 8.89mn, down from 9.02mn in December. This is still a high level, but it would suggest some loosening in the US jobs market, although probably not enough to placate the Fed who remain laser focussed on inflation pressures.

Ahead of these key data releases, the market is expecting nearly 90 basis points of cuts from the Fed this year, with all of them backloaded to the second half of the year. The first rate cut is expected in June. Any change to US interest rate expectations, could lead to volatility for the USD and the S&P 500. The S&P 500 made a fresh record high at the end of last week, and the US blue-chip index rose by 0.95%, the 10-year Treasury yield drifted lower last week and fell more than 10 basis points. If the Fed is truly worried about inflation pressures, then Jerome Powell may use his Congressional testimony to try and tighten financial conditions.

We are in the dregs of earnings season, however, US corporate earnings to watch this week, include Target, Abercrombie and Fitch and Footlocker from the consumer side, Broadcom and Marvell Technologies, two strong performers on the S&P 500 this year, will also report earnings along with Oracle.

UK: Budget in focus

All eyes will be on the Chancellor when he delivers his Budget on 6^th March. The showpiece is expected to be a 2p cut to the national insurance rate, however, the chancellor gives with one hand, but he is likely to take away with another. Reports on Monday suggest that he has pencilled in plans to recoup £9bn through tax rises and spending cuts, in order to pay for the cut in NI. The fiscal headroom available to the Chancellor is expected to be £20bn, which is lower than the average of nearly £30bn available since 2010, and highlights the fiscal tight spot the UK finds itself in. After the NI cut, the chancellor may only have £10-15bn left to give away election sweeteners to try and boost votes for the Tories. This is the ultimate election budget, with a bit of fiscal prudence thrown in. However, because the Tories are on track to lose this election, there is also a sense that this Budget may not be worth the paper that it is written on, as any tax and spending changes could be reversed by the next government.

There are two other factors to consider alongside this Budget. The Chancellor is not going to want to do anything that could make an interest rate cut from the BOE less likely, as this could be more important for winning votes than future tax giveaways. This means that we don’t expect any major changes on Wednesday. Also, the OBR forecasts will be worth watching. Will they revise down growth forecasts to bring them more inline with the BOE? Could inflation be revised up? Either way, the OBR forecasts may paint the UK economy in an unflattering light.

The FTSE 100 is languishing as a wall flower of the global equity space and fell some 0.47% last week. The FTSE 350 fared slightly better, however, it is lower YTD. We do not expect this week’s Budget to move the dial for UK equities, which are struggling from their lack of exposure to tech and AI.

Corporate earnings to watch this week, including Ashtead, Greggs, Legal & General, Aviva and Admiral.

Europe: Lagarde to wait for wage growth clarity

The ECB meeting on Thursday is they key event to watch in Europe this week. The market expects no change, however, views on the timing of the first rate cut from the ECB vary enormously, suggesting that there is no consensus on when the ECB will cut. The market currently expects the first rate cut to come in June, the same month as the Fed is expected to cut rates. However, there could be a recalibration of expectations on the back of this week’s meeting. Comments from ECB President Lagarde will be parsed to see if they give a hint about the timing of a rate cut, but the focus may be on the ECB staff forecasts for GDP and inflation. Expectations are for a reduction in inflation expectations; however, all eyes will be on wage data, which remains elevated. Q4 wage growth moderated to 4.46% and was the first slowdown in pay growth since 2022, however, this is still well above the ECB’s 2% target rate for inflation. Added to this, there are signs that wage growth could rise, especially in Germany, in Q1 of this year, so the ECB is unlikely to cut rates until there are clear signs that wage growth is moderating.

The best wage data is released with the national accounts, so we may need to wait until well after Q1 to get a clear sense of where wage growth is going in the Eurozone, and what the ECB will do next. If this is Lagarde’s message on Thursday, then it could be perceived as slightly hawkish, as it raises the risk that rate cuts may be pushed back past June, even though there are signs of economic pain in the currency bloc.

The Dax hit a fresh record high on Friday, following in the footsteps of the S&P 500. The German stock index has defied the economic gloom and risen by more than 4% so far this year. There is a spate of corporate earnings releases from Germany this week, including Bayer, Continental and Deutsche Post. We will be watching for earnings forecasts, and also any announcements of buybacks and dividends, which have been warmly received by the market this year.

China: stimulus measures in focus at NPC

As mentioned above, the key event for China this week is the National People’s Congress, the focus will be on whether Beijing is willing to add more stimulus to the economy to boost growth in a significant and sustainable way. China’s growth target for this year, may also highlight how aggressively the country’s leadership want to pursue a recovery. If this is considered an ambitious growth target, then it will need to be accompanied by stimulus measures. This could trigger a broad-based rally in Chinese stocks and plenty of volatility later this week.

Elsewhere, watch for trade data and producer price data, to see whether China’s deflation problem has eased as we move through Q1.  

OPEC boosts the oil price

The price of Brent crude oil is backing away from $84 per barrel highs at the start of the week, even though Opec + announced that they would continue with production cuts until at least the middle of the year. These cuts amount to approx. 2mn barrels per day; however, the average price of oil YTD is just over $80 per barrel. If Saudi Arabia wants to manipulate the price of oil higher, then it may have to enforce the production cuts on all members, even though some have been producing more oil than their quotas have allowed, and hope that the US starts to cut oil production. The oil price is anchored around $80 per barrel because there is ample oil supply, even with Opec cuts, and demand growth is set to slow, which are factors that Opec can’t control.