Weekly focus – Will the SNB lead the way in the cutting cycle?

US inflation data was the centre of attention this week for financial markets, as price pressures remain elevated. Monthly core CPI inflation of 0.4% for the second consecutive month is too high for the Fed as strong wage growth pushes service prices higher at an annualised 7% pace. Markets zigzagged somewhat on the release but in the end the outcome was higher global yields. Producer prices and New York Fed inflation expectations added to the impression of a sustained inflation pressure in the US, with both increasing more than expected. It supported the move higher in yields and strengthened USD. On the dovish side, retail sales were weaker than expected, a challenging combination for the Fed.

With risk appetite improving through the week, prices for oil and industrial metals have also increased. Oil traded back above USD 85 per barrel in a week where an IEA report indicated an expected deficit in the oil market this year on the back of OPEC+ production cuts.

We have seen signs of global manufacturing bottoming out over the past couple of months. The data does not support any kind of boom, though, and we got some further weakening signs this week. Euro area industrial production was down 3.2% m/m in January, implying we will see no growth contribution from here until Q2 or Q3. At the same time, Asian export data, a leading indicator of global manufacturing, have been to the weak side.

In Japan, the biggest labour union federation released the first tally of this year’s pay deals. This largely reflects big businesses which got 5.28%, close to what they asked for. The big question, however, remains whether this will rub sufficiently off on SMEs, where wage increases have been very modest so far. Elsewhere in Asia, the Chinese housing market continues to struggle as prices declined 1.4% y/y in February, the biggest annual drop in 13 months. The Peoples Bank of China kept rates unchanged as it likely awaits clearer signals of Fed easing.

Next week has a very busy central bank schedule. We expect no changes at the FOMC meeting but will look for clues about the timing of rate cuts and the end game for QT. We could also be in for an unusual couple of days with a Bank of Japan rate hike followed by an SNB cut two days later. While we expect the BoJ to hold the horses until April, we do expect a cut from the SNB. Both are close calls, though.

On the data front, we will start next week with key Chinese data on home and retail sales covering the first two months of the year. It will give us important information on the state of the housing crisis and the Chinese consumer. Thursday is PMI-day and it will be particularly interesting to see if the upward trend in global manufacturing PMIs continues after the recent signs of setback. In Japan we will look closely at the second wage tally at the end of the week.

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