Daily Market Outlook, March 7, 2024

Munnelly’s Macro Minute…

“BoJ Official Murmurings Boost JPY, ECB On Watch Next”

In the Asian region, major stock market indices showed a mixed performance after positive closures in the US and Europe. Japanese stocks declined while the JPY rose, amid speculation about potential near-term increases in policy interest rates. Despite stronger-than-expected trade data, Chinese stocks gave up earlier gains. Meanwhile, Germany reported a significant decline in January factory orders earlier today.

The main focus today is on the European Central Bank's policy decision at 13:15GMT, followed by the press conference at 13:45GMT. It is expected that interest rates will remain unchanged, including the deposit facility rate at 4%. The release of new March economic forecasts is expected to lower the 2024 inflation forecast from December's 2.7%. However, close attention will be paid to the medium-term outlook, particularly as inflation was previously forecasted to reach the 2% target only by 2026 (at 1.9%). Growth projections for 2024 are also expected to be revised downwards from 0.8%. Despite these adjustments, ratesetters are likely to proceed cautiously, preferring to await additional information, including Q1 wage data, before considering interest rate cuts. This suggests a diminished probability of an initial rate cut at the upcoming April meeting, with June being a more plausible timing. Market observers will closely monitor President Lagarde's stance on the lingering expectations for an April rate cut during the press conference.

In the UK, today sees the release of the Bank of England's Decision Maker Panel (DMP) survey, which is closely monitored by policymakers to assess businesses' price and wage expectations. The previous survey indicated a decline in one-year-ahead CPI expectations to 3.4%, while wage growth is expected to moderate to approximately 5%.

US Fed Chair Powell's semi-annual testimony to Congress continues today in the Senate. He is expected to echo yesterday's House comments, reiterating the Fed's cautious approach towards interest rate cuts and emphasizing the need for more evidence of sustained inflation decline to target levels. Reflecting resilient economic growth signals, financial markets have recently scaled back expectations of US monetary policy easing, now fully pricing in three rate cuts in 2024, consistent with Fed policymakers' December forecast update (the 'dot plot'). Overall, Powell seems content with the current positioning of financial markets. Additionally, the Fed's Mester is scheduled to deliver a speech on the economic outlook today at 16:30GMT and later appear on CNBC at 18:15GMT. Being considered on the hawkish side of the spectrum, she may advise against premature interest rate cuts.

Overnight Newswire Updates of Note

Reports Some Japan Govt Officials Back Near-Term BoJ Rate Hike
BoJ's Nakagawa Signals Conviction Over Price Goal Achievement
Japan Jan Real Wages Fall But At Slowest Pace In 13 Months
China’s Export Growth Jumps In Positive Sign For Demand
Fed's Kashkari Sees Two Rate Cuts At Most This Year
Fed's Daly Says Rising Housing Costs Drive Inflation Higher
US House Approves $460 Bln Bill Ahead Of Shutdown Deadline
Biden To Request 1% Increase In 2025 Defense Budget Under Cap
UK Taxes Head For Highest Level Since 1948 Despite Hunt’s NI Cut
UK Debt Chief Sees Less Value In Long-Dated Gilt Issuance
ExxonMobil Seeks Arbitration Over Guyana Oil Find In Chevron’s Sights
Intel Stands To Win $3.5 Bln To Produce Chips For Military
Bayer Chief Rules Out Capital Increase As Investors Slam Turnaround Plan

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0820 (EU988.3m), 1.0825 (EU659.7m), 1.0835 (EU632.7m)
USD/JPY: 149.50 ($1.08b), 151.00 ($984m), 146.00 ($969.1m)
USD/CNY: 7.1940 ($676.7m), 7.2150 ($418.6m). 7.1950 ($400m)
USD/MXN: 21.00 ($1b), 16.68 ($1b), 17.83 ($803.9m)
USD/CAD: 1.3635 ($799.2m), 1.3315 ($436m), 1.3550 ($356.3m)
AUD/USD: 0.6600 (AUD672.9m), 0.6525 (AUD631.6m), 0.6750 (AUD578.7m)
GBP/USD: 1.2485 (GBP1.63b), 1.2500 (GBP560m), 1.2650 (GBP537.7m)
USD/BRL: 4.9315 ($328.4m)
FX option implied volatility has found support at long term lows, with potential value hunting due to upcoming central bank announcements and data risks. EUR/USD implied volatility has increased for the overnight expiry, but the break-even is still low. One-week expiry FX options have elevated implied volatilities due to upcoming U.S. NFP and CPI data. JPY related implied volatility and its risk reversals have increased amid a mild JPY recovery, especially for the 2-week date with growing expectations of the BoJ announcing an end to its negative interest rate policy.

CFTC Data As Of 27/02/24

Euro net long position is 62,854 contracts
Japanese yen net short position is -132,705 contracts
Swiss franc posts net short position of -11,981 contracts
British pound net long position is 46,358 contracts
Bitcoin net short position is -1,967 contracts
Equity fund managers cut S&P 500 CME net long position by 5,157 contracts to 942,123
Equity fund speculators increase S&P 500 CME net short position by 14,679 contracts to 434,512