Opinions

Wednesday's FOMC meeting will take center stage this week amidst a moderate dose of US data releases that will be heavily scrutinized for signs of further weakness. We expect the Fed to hold rates steady for the second consecutive meeting and, given heightened uncertainty, provide limited guidance about the policy path ahead. The updated Summary of Economic Projections is likely to show a median expectation of two rate cuts this year, unchanged from December. Sentiment toward US economic prospects has already taken an abrupt turn for the worse over the past month. The S&P 500 selloff the fastest decline since 2020 has entered correction territory. With the Trump put vanishing, it could get still worse if there’s also no “Fed put” forthcoming. We see mounting downside risks to the economy that could require the Fed to reduce rates by total 75 bps in REMCY25. In US macro data, we see headline retail sales data at 0.6% (more of a rebound from Jan low nos) while the ex auto and control nos are likely to be weak at 0.2% each. We expect soft industrial production nos along with existing home sales. In UST supply, we have 13 BN USD supply of 20yr USTs & 18 BN USD supply of 10yr TIPS. In Germany we have Bundestag voting on 18th March on the new Chancellor Merz's fiscal bazooka of 500 BN USD for infra spending & a far larger defense spending. The Bundesrat vote is planned for Friday (21st March). Those plans need to be passed quickly, ahead of the new parliament sitting for the first time (25 March), during which time the electoral math remains favourable to make constitutional changes (which require a two-thirds majority in parliament). In central bank meeting, we expect SNB to cut rates by 25 bps in it's 20th March meeting. We expect BOE to remain on status quo in it's 20th March meeting though we continue to expect 25bp rate cuts at the Monetary Policy Report meetings until early 2026 (i.e. 25bp in May, August, November 2025 and February 2026) for a terminal rate of 3.50%. In the 19th March meeting of BOJ, we expect status quo too. But we still expect two more hikes of 25 bps each by BOJ in REMCY25.

Though this week’s economic calendar is relatively light, Wednesday's CPI and Thursday's PPI releases will be the major focus for market participants ahead of the March 19th FOMC meeting. We expect more moderate gains than last month for both headline CPI (+0.27% forecast vs. +0.47% previously), as well as core (+0.24% vs. +0.45%). While the Fed is widely expected to remain on hold at the March meeting, the inflation data will be an important input for official’s updated economic projections, and in turn, their expectations for monetary policy in the second half of the year. On other US data front, we expect job openings increased to 7900k in January from 7600k in December. We also expect the Dec JOLT nos to be revised upwards. In prelim survey of Univ of Michigan for Mar'25, we expect the consumer sentiment likedy ticked down to 63, lowest since Nov'23. In US budget negotiations, House Speaker Mike Johnson on Saturday released a proposal endorsed by President Trump that would keep the federal government funded through September. But in current form it looks unlikely to be passed in Senate. Hence we expect funding for federal agencies runs out by 14th March. With no new legislation, many federal employees would be furloughed, while others would continue to report to work with no pay. In ROW events, we expect BOC to cut by 25bps in it's Wednesday meeting to safeguard domestic economy from US tariffs. In Germany, after last week's ground breaking events, we expect the current defense spending & infra spending plans to be approved on Tuesday 18 March by the lower house (Bundestag), and on Friday 21 March by the upper house (Bundestag). In UK we expect lower output in January at -.2% for both total economy & service sector.

We expect more moderate gains than last month for both headline CPI (+0.27% forecast vs. +0.47% previously), as well as core (+0.24% vs. +0.45%). We believe that headline CPI YoY growth would fall a tenth to 2.9%, while that for core YoY growth would drop by two to 3.1%. We are looking at stable primary rents (0.31% vs. 0.35%) and OER (+0.32% vs +0.31%). In super core services (+0.24% vs. +0.75%), we are expecting much more muted gains than we saw in Jan data. Hospital and related services (+0.09% vs. +0.86%) are usually on the softer side after seeing strong January gains. After early-year price resets stalled disinflation in January, policymakers will be looking for real progress in February’s CPI which looks to us that it won’t be there. While the impact from seasonal price hikes in January appears to have partially reversed, the bi-monthly sampling by the BLS likely made some of the January strength persist into February. While the market is pricing in 70 bps of cut in CY25, we believe the push for these 3 rate cuts might be coming from the employment side mandate of the Fed & not the price mandate. Some softening of broad labor market conditions likely with the unemployment rate at or above the highs from last year combined with a noticeable slowdown in payrolls (sub 50k nos for 2 or more than 2 months) will be necessary to trigger rate cuts. A sharper tightening of financial conditions could also boost prospects for earlier easing. Given the decent February jobs report, it is hard to see these conditions emerging before the June FOMC meeting. However, recent weeks have made clear that narratives can shift quickly. We see 3 rate cuts in CY25 by Fed as base case.

We expect a significantly lower NFP for Feb'25 at 60k than market consensus of 160k. While the ISM services employment index has come stronger than estimates, we derive our nos from Challenger Job cuts, ISM manufacturing employment index which came lower than estimates & higher continuing claims. We also believe that weather related rebound in Feb of 45k (from Jan's poor weather conditions) might be offset by 100k drag due to weather disruptions in Feb, giving a net impulse of 50-60k for weather reason itself. Currently the NFP data is whispered to be lower (120k) than consensus expects. We believe markets will be more sensitive to weaker data (i.e. higher unemployment rate, lower non-farm payrolls) than to stronger prints. Risks are skewed towards a selectively softer USD, steeper curves, and lower equities. A higher unemployment rate (UR) and/or lower non-farm payrolls (NFP), if seen in February as per our assumptions, would underscore US stagflation risks at a time when Federal workforce, program-funding cuts are just beginning and the impact of implemented and potential tariffs remains unclear. It would suggest the labor market is already on weaker footing into these risks, likely to weaken even further as these risks feed into the real economy. 2 factors critically drove our assumptions. First being the Challenger job cuts nos released today for Feb'25. Job-cut announcements totaled 172,017 in February, a 103% increase from last year and the most since July 2020. It also marks the highest number reported in a February since 2009. The federal government was responsible for the largest share of cuts, at more than 62,000. The 2nd factor being the severe job cuts in education sector due to end of Biden era programs. February typically has been one of two peak months for hiring education workers, the other being September, when the school year begins. In a normal February, the education sector accounts for about 60%-70% of total hiring, so lower job gains in this sector risks a substantial undershoot of seasonal expectations. But the end of 2 programs ESSER III & SLFRF of Biden era produced a drag of 25k in the government sector and 21k in the private sector in the education sector. We believe US equities might see further sell off after a weak NFP data as well as USD falling against GBP/CHF/NZD more than other pairs. We expect a steeper UST curve if our assumptions play out and we get a soft NFP no.

Last week we see a series of weak US economic data such as falling consumer confidence, pending home sales, durable good orders ex transport & Atlanata's Fed reading of -1.8% GDP forecast for Q1CY25. This week's economic data is likely to show the same trend. We expect the ISM services to come lower than consensus, Feb NFP at 130k against consensus of 160k as well as an elevated IJC. We expect Mexico & Canada to escape Trump tariffs again as they have been showing their actions on drug cartel control as well as immigration control but China might continue to face the music. Fed speak is likely to remain patient but we believe that QT taper is on it's way though Logan downplayed in her last week comments. We also see a 25 bps cut in the 6th March ECB meeting with neutral commentary. In summary, the test of US exceptionalism shall continue and it is a matter of if and not when it crumbles down. We will be soon releasing a detailed note on the expected demise of US exceptionalism as well as the Feb NFP preview by Wednesday.

While recent Fed speak has been all about patience, last week's minutes were unique in the sense that they discussed pausing QT in light of debt ceiling drama as well as the relief on SLR for USTs. We believe that this week's Fed speak will put more light on these two topics. We believe that QT might be paused in the 19th March meeting itself. On economic data front in US, we expect core PCE at .27% MoM & 2.6% YoY which should be a relief to Fed. We expect 2nd estimates of Q4CY24 GDP to be reduced to 2% from 1st estimates of 2.3% in light of Jan's weak retail sales. We believe that high long end yields can’t be sustained by US economy for ever. The sentiment boost with a new administration might last for maximum 2-3 months more but then the fatigue of frequent policy changes as well as uncertainty on tariffs will set in. This might lead to sharply lower economic output which might then be better appreciated by long end UST yields. We believe that medium term 10yr UST peak 4.65 is difficult to breach and the new short-term range is 4.35-4.65. For the same reasons, we believe DXY has topped out and new short-term range is 105-108. In UST auction supply, we have a total of 183 BN USD of 2,5 & 7 year USTs. In rest of the world data, German election results on 23rd Feb are most significant as the results will drive the relaxation in debt austerity limits for Germany. We also have Feb flash inflation nos for Eurozone this week which are expected to remain elevated. Tokyo CPI on 28th Aug is also likely to remain elevated which strengthens our case for 2 more hikes of 25 bps each by BOJ in REMCY25. Our Short USDJPY call has been proven right and we expect to see 140 soon (CMP 149). We had initiated the call on 18th Jan'25 when USDJPY was at 156. Australian Jan'25 CPI data due on 26th Feb is likely to remain elevated but we believe the Feb'25 CPI reading due on 26th March might be more relevant. We believe April is a status quo for RBA followed by a 25 bps cut in it's May meeting.