Ahead of the game: 1 March 2024

US equity markets nudged upwards this week, marking a fourth consecutive month of gains, undeterred by the Core PCE— the Fed's go-to inflation gauge—hitting a twelve-month peak. Throughout February, the seemingly invincible US stock market weathered a storm of challenges. Hot inflation figures, a sturdy non-farm payrolls report, sky-high earnings expectations for bellwethers like Nvidia, and a scaling back of hopes for bold Fed rate cuts were just a few of the hurdles. Yet, no challenge proved insurmountable.

On the home front, the ASX 200 celebrated a fourth month of upward momentum, buoyed by an earnings season that surpassed expectations and milder inflation and retail sales figures. These developments bolster our prediction that the RBA will proceed with a 25bp rate reduction in both August and November.

• In the US, core PCE inflation in January rose by 0.4% MoM for 2.8% YoY, the highest pace in 12 months
• Germany's inflation rate in February eased to 2.5% YoY from 2.9% prior, the lowest inflation rate since June 2021
• Japan's inflation rate dropped to 2.2% YoY in January from 2.6% prior, the lowest since March 2022
• In Australia, the Monthly CPI indicator for January rose by 3.4% YoY, less than the 3.6% expected
• The second estimate of US Q4 GDP was 3.2%, slightly below the 3.3% advanced estimate
• The Canadian economy expanded by 0.2% in Q4, recovering from a revised 0.1% contraction in Q3
• Crude oil locked in a second month of gains, to be trading near $78.30
• Gold gained 0.41% to $2043
• Wall Street's gauge of fear, the Volatility (VIX) index, eased to 13.39.

• AU: Building Permits and Q4 Company Profits (Monday, 4 March 4th at 11:30am AEDT)
• AU: Q4 GDP (Wednesday, 6 March at 11:30am AEDT)
• AU: Balance of Trade and Home Loans (Thursday, 7 March at 11:30am AEDT)

• CH: Caixin Service PMI (Tuesday, 5 March at 12:45pm AEDT)
• CH: Balance of Trade (Thursday, 7 March at 2:00pm AEDT)
• CH: CPI and PPI (Saturday, 9 March at 12:30pm AEDT)

• US: ISM Service PMI and Factory Orders (Wednesday, 6 March at 2:00am AEDT)
• US: ADP Employment (Thursday, 7 March at 12:15am AEDT)
• US: JOLTS Job Openings (Thursday, 7 March at 2:00am AEDT)
• US: Non-Farm Payrolls (Saturday, 9 March at 12:30am AEDT)

• GE: Factory Orders (Thursday, 7 March at 6:00pm AEDT)
• EA: ECB interest rate decision (Friday, 8 March at 12:15am AEDT)

• AU

GDP numbers for Q4

Date: Wednesday, 6 March at 11.30am AEDT

Australian GDP rose by 0.2% in the September quarter of 2023, and 2.1% YoY. While it was the eighth straight rise in quarterly GDP, it was considered a weak number as more normal GDP levels in Australia are closer to 3%.

Within the details

• Per capita GDP growth fell by 0.5% QoQ. It was the third consecutive quarterly fall in per capita GDP, also called a “per capita recession.”
• The household saving-to-income ratio fell to 1.1%, its lowest level since December 2007, as households use accumulated savings to offset cost of living pressures.
• Government spending and capital investment were the main drivers of growth.
• Household spending was flat as government benefits and rebates reduced household spending on essential services such as electricity.

This quarter, GDP is expected to increase by 0.2%, and the annual growth rate is expected to rise by 1.5%, providing further evidence that economic activity has slowed in response to higher interest rates.

We expect that softer inflation, cooling labour markets and slower growth, will see the RBA remove its tightening bias in June before cutting rates by 25bp in August and November 2024.

AU annual GDP rate chart

• EU

ECB interest rate decision

Date: Friday, 8 March at 12.15am AEDT

At its last meeting in January, the ECB kept its deposit rate on hold at 4.00% for the third time since the last hike in September. The statement reiterated its message from December that “future decisions will ensure its policy rates will be set at sufficiently restrictive levels for as long as necessary.” However, there was some encouragement for the doves as president Lagarde acknowledged the rise in inflation in December was less than expected, and noted the Governing Council is data-dependent, rather than date-dependent.

The minutes from the January ECB meeting, unveiled last week, underscored a widespread consensus that it was premature to broach the subject of rate cuts, emphasising the fragile nature of the disinflationary process. This sentiment was reinforced by hawkish remarks from ECB Governing Council members Stournaras and president Lagarde, who echoed, "We are not there yet" regarding inflation.

As such, the ECB is expected to keep rates on hold in March, with a first-rate cut expected in June. There is a total of 90bp of ECB rate cuts projected for 2024.

ECB deposit rate chart

• US

Non-Farm Payrolls

Date: Saturday, 9 March at 12.30am AEDT

In January, the US economy added 353k jobs, well above market expectations, looking for a gain of 180k. The stronger-than-expected number followed a 333k increase in December and, combined with the unemployment rate holding steady at 3.7% for a third month in January, provided confirmation the labour market remains tight.

The hotter-than-expected data during the opening weeks of 2024 has been central to the Fed's messaging that it will move considerably slower regarding rate cuts than the market was pricing. A combination that has resulted in rates markets now pricing in just three Fed rate cuts in 2024, from the almost seven priced in the first weeks of this year.

In February, the US economy is expected to add 195k jobs and for the unemployment rate to remain at 3.7%. The participation rate is expected to rise marginally to 62.6% from 62.5% prior.

US unemployment rate chart

• CH

CPI

Date: Saturday, 9 March at 12.30pm AEDT

In January, Chinese CPI fell shockingly by -0.8% YoY, the most in more than 14 years, and worse than the -0.5% expected. It was the fourth straight month of falls, and the longest drop since October 2009. The fall was partly due to lower pork prices, but core inflation also moderated further to 0.4% YoY from 0.6%YoY the previous month.

In February, the market expects CPI to fall by -0.2% YoY, as unfavourable base effects fade, and easing measures gain traction.

China inflation rate YoY chart