US equities declined and the dollar lost ground this week. Just as markets had begun to ponder a scenario of no Fed rate cuts in 2024 (and potentially a hike), Fed Chair Powell told Congress that the FOMC is not far from having the confidence to lower rates, while back revisions to US employment data indicated the labour market is not as hot as previously thought. The Australian dollar and Sterling saw their strongest weekly gains against the USD this year, while the Japanese yen rose by its most since July amid signs that the BoJ is moving towards hiking rates. The euro also advanced despite the ECB giving strong indications that it will cut rates in June. Next week's highlight events include US CPI (Tue) and retail sales (Thu).
Fed Chair Powell's Congressional testimony reaffirmed that rate cuts remain on the cards despite an uptick in recent inflation readings and strength in the labour market. Assessments around the latter, however, have shifted somewhat following Friday's employment report. Nonfarm payrolls increased by 275k in February, stronger than the 200k consensus but sizeable downward revisions saw reductions to the employment gains in December (333k to 290k) and January (353k to 229k). The unemployment rate lifted from 3.7% to 3.9% and the broader underemployment rate rose from 7.2% to 7.3%, both touching highs since late 2021/early 2022, as labour force participation remained unchanged (62.5%). Further signs of softening in the labour market were seen in average hourly earnings growth easing from 4.5% to 4.3%yr.
The Australian economy posted subdued growth of just 0.2% in the December quarter and 1.5% through the year. This confirmed a notable slowing of momentum through the back half of the year (0.5%), as household consumption (0.1%q/q, 0.1%Y/Y) became increasingly constrained by cost-of-living pressures and higher interest rates. Alongside a moderation in business investment and renewed weakness in residential construction, the composition of growth rebalanced further away from private demand to public demand. In light of this, the RBA's assessment of excess demand in the economy is looking harder to sustain. For in-depth analysis of the Q4 National Accounts please see my In Review feature article here. Other key developments from the week are also covered, including a substantial widening in the current account surplus to $11.8bn (see here), with the monthly trade surplus coming in at $11bn in January (see here); while dwelling approvals (-1%) and housing finance (-3.9%) opened 2024 on the back foot.
The ECB is inching closer to cutting rates but is awaiting more data to confirm that inflation is on track to return to target. Markets are betting on the first rate cut coming in June. With the Governing Council leaving all monetary policy settings unchanged, the focus was on the ECB's messaging as a new set of economic forecasts was published. The new forecasts cut the growth outlook this year to 0.6% from 0.8% and lowered the inflation outlook across the projection horizon, anticipating headline and core inflation to slip below the 2% target in Q3 next year. Given this outlook, a case could have been made to cut rates at this meeting, but President Lagarde said this was not discussed. Instead, the main point coming out of the press conference was that the Governing Council wants to see more data - particularly on wages - to give it confidence that it can start to dial back restrictive monetary policy. President Lagarde said the Governing Council will know "a little more in April" and "a lot more by June", giving soft validation to market pricing.
In the UK, the Spring Budget capitalised on an outlook for lower inflation and interest rates, using the windfall to increase fiscal support to the economy. The OBR calculates that new measures announced in the budget will increase spending by around £40bn over the next 5 years, delivering stimulus of 0.3% of GDP on average per year. The major announcement was tax relief for households, a 2ppt cut to National Insurance Contributions coming at a cost of £10bn per year. However, this will be partly offset by new taxes, expected to raise £7bn through 2028/29. Following the budget, planned Gilt sales in 2024/25 have been announced at £265bn, this was above expectations (£258bn) but market reaction was limited.