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Weekly Focus: US jobs growth in focus




Markets remain caught between the soft-landing vs overheating narrative. On the one hand, the challenge comes from too high inflation. The US ISM manufacturing prices paid index took a notable jump higher in February, suggesting that producer prices are rising again. In the euro area, February HICP inflation figures came in red hot. While headline inflation eased further to 8.5% (from 8.6% in January), core inflation jumped by 0.3pp to a new record high of 5.6%. Markets reacted by sending yields higher and pricing in more rate hikes from the ECB and the Fed. The ECB peak rate is now priced at close to 4% and we have also changed our ECB call in light of the strong underlying inflation momentum. We now expect a peak policy rate of 4% (deposit rate), with hikes of 50bp in March, 50bp in May, 25bp in June and 25bp in July (see also ECB Preview – Higher for longer, 2 March).

Equities remained on a roller-coaster, caught between higher yields (hurting equity risk premia) and an improving macro outlook (benefitting earnings). Chinese PMIs rose across the board and brought more evidence that the reopening of the economy has boosted activity. New orders in both manufacturing and services rose strongly and stronger employment bodes well for consumers and the housing market. Overall, the figures support our view of a frontloaded Chinese recovery (see also China Macro Monitor – Strong growth burst in early 2023, 1 March). The anticipation of positive spill-over effects to the euro area economy and higher ECB terminal rate expectations boosted EUR/USD, which rose back above 1.06.

The UK and EU struck a deal on the Northern Ireland Protocol (NIP). The NIP tackles the post-Brexit issue of implementing an EU-border between the Republic of Ireland and Northern Ireland, which would violate the peace agreement from 1998, all the while still keeping the British inner market intact. While a date is not yet set for the UK Parliament to vote on the deal, it is at present expected to receive the necessary backing as Conservative MPs are faced with the alternative of another possible collapse of a Conservative government and a continued stalled political process in Northern Ireland. Markets took the deal as a positive sign and EUR/GBP moved lower as the tail risk of a EU-UK trade war has faded.

The macro highlight next week will be the February US jobs report on Friday. We expect nonfarm payrolls growth to moderate to 220k after effects of warm weather and heavy seasonal adjustments in January fade. Overall, leading indicators suggest that labour market conditions have remained tight amid a recovering growth outlook. Fed will also pay close attention to the JOLTs job openings on Wednesday, which have been a good leading indicator for wage growth. The FOMC blackout period will begin on Saturday 11th of March, so Fed still has the option to guide the markets after the Jobs Report. In the euro area, we also look out for comments from ECB members after the high core inflation figures, before the silent period starts on Thursday. On Friday the current Bank of Japan (BoJ) governor, Kuroda, has his last monetary policy meeting. We still think BoJ will tweak its yield curve control in the short-term. It is not likely to happen next week, but we also were surprised last time they did it in December. Either way, we think it is a matter of time and could happen during Q2.

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