Crude Oil Maintains Position Close to Four-Month Peak Following IEA's Shift to Deficit Forecast

Yesterday’s mix of economic data – which pointed at higher-than-expected inflation and lower-than-expected spending in the US – finally broke the Federal Reserve (Fed) doves’ and the equity bulls’ back for at least a day. US producer price inflation jumped to 0.6% on a monthly basis in February, and to 1.6% on a yearly basis. Higher fuel and food prices were to blame. But even taking the volatile energy and food prices out, the core metric showed higher-than-expected price pressures last month, core PPI remained steady at the 2% y-o-y. Retail sales, on the other hand, improved less than expected. The data forced the market to reconsider the Fed expectations. The probability of a June rate cut fell to 60%. The 2-year yield jumped to 4.70%, the 10-year yield spiked to 4.30%, the dollar index sharply rose and equities fell – though losses reversed toward the end of the session. The S&P500 closed the session 0.29% down and Nasdaq fell 0.30%.

All eyes are on next week’s FOMC meeting. The Fed will update its dot plot having seen a two-month jump in inflation, robust jobs data, a relatively strong GDP print and healthy earnings. There is a chance that we see the median forecast show no more than two rate cuts penciled in by the Fed members for the year – instead of three plotted at December’s dot plot. We will walk into next week’s FOMC meeting with a hawkish tilt knowing that it’s always better for the Fed not to act too early than to be forced to make a U-turn on the way.

US crude advanced to $81pb level after Ukraine damaged 12% of Russia’s refining capacity with drone attacks. The IEA also gave support to the bulls yesterday by saying that they anticipate a supply deficit throughout this year if OPEC+ continues to cut output in the Q2. This is a significant change in their forecast as they were pointing at a surplus at their earlier prediction. Trend and momentum indicators support a further rise in oil prices. But oil bulls could hit a wall if we see a hawkish shift from the Fed at next week’s meeting.

The EURUSD tumbled to 1.0873 on the back of a broadly stronger dollar and rising speculation that the European Central Bank (ECB) will cut the rates even if it’s not fully sure that inflation is headed to 2% target according to the Belgian central bank head Pierre Wunsch. The Governor of the Bank of Greece goes a step further and says that the ECB should cut rates twice before its August break.

However, let’s return to reality. The ECB would find it challenging to act independently and implement numerous rate cuts if the Fed adopts a hawkish stance, leading to appreciation of the US dollar. The ECB could take the risk of cutting before the Fed (in June) and announce one additional cut compared to the Fed at best before seeing inflation risks return to the bloc.

Price-wise, the EURUSD outlook remains bearish. The pair will step into a medium term bearish consolidation zone if it slips below the 1.0867 level – the major 38.2% Fibonacci retracement on February – March rebound, and could extend gains all the way down to 1.06 in the continuation of an ABCD pattern.

Elsewhere, the USDJPY is trending higher despite news that the wages negotiations in Japan show that big corporations meet the wages demand. Today, Rengo – the country’s biggest union group – will announce its numbers. Strong wages growth is inflationary and should convince the Bank of Japan (BoJ) to act sooner rather than later. However, the BoJ is expected to hold off until it obtains a clearer understanding of the wage landscape following the second and third rounds of negotiations, scheduled between the end of March and the beginning of April. These negotiations will not only encompass major corporations but also extend to medium and small-sized companies. This being said, given the positive news from the early negotiations, it’s interesting to see that the Japanese yen bulls don’t hold a dominant position in the market this week. The USDJPY is back above the 148 level. A broadly stronger US dollar certainly explains why the USDJPY couldn’t gain a further downside momentum this week, but given how cheap the yen has become, I would expect the yen bulls to resist to the dollar’s upside pressure. They have not. Still, I think that going short the yen at the current levels doesn’t offer a potential worth taking the risk of a sizeable bullish run in the yen into next week’s BoJ decision.

And speaking of decisions, the PBoC left its MLF rate unchanged today, while home prices fell for a 13th month in China warning that all the efforts deployed so far couldn’t slow bleeding in the country’s problematic property sector.

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Japan's biggest companies agreed to hike wages by 5.28% for 2024, the highest in 33 years, the country's largest union group said on Friday, reinforcing views that the county's central bank will soon shift away from a decade-long stimulus programme.

The stronger-than-expected outcome comes as the Bank of Japan looks close to ending eight years of negative interest rate policy. BOJ officials have stressed the timing of a pivot would depend on the outcome of this year's annual wage negotiations.

Policymakers hope that hefty pay rises will boost household spending and produce more durable growth in the broader economy, which narrowly avoided slipping into recession late last year.

Workers at major firms had asked for annual increases of 5.85%, topping the 5% mark for the first time in 30 years, according to trade union group Rengo.

The union group, which represents about 7 million workers, many at large companies, had set its eyes on more than 3% of base pay hikes -- a key barometer of wage strength as they determine wage curves that provide the basis of bonuses, severance and pensions.

Analysts had expected a rise of more than 4%, after last year's 3.6%, itself a three-decade high.

Rengo chief Tomoko Yoshino told a press conference that rising income inequality, inflation and a labour crunch were among the factors behind the big increase, adding part-time workers would see pay hikes of 6% this fiscal year.

Yoshino said the country was at a critical stage in a shift towards economic revival.

The government is counting on such wage hikes to trickle down to smaller and medium-sized firms, which account for a whopping 99.7% of all enterprises and about 70% of the country's workforce, but many lack the pricing power to pass higher costs on to their customers.

Wage talks for most smaller companies are expected to concluded by the end of March, and any increments are likely to come in lower than those agreed by major firms.

Even though Japanese companies have been raising pay, the increases have largely failed to keep up with inflation. Real wages, which are adjusted for inflation, have now fallen for 22 straight months.

At the labour talks, one strong showing emerged after another, led by Toyota Motor, the bellwether of annual talks, which unveiled its biggest pay increase in 25 years.

The strong wage hikes are likely to boost expectations the central bank will end negative interest rates as early as its next policy setting meeting on March 18-19.

Japanese businesses are facing a chronic labour shortage due to an ageing and dwindling pool of workers.

Prime Minister Fumio Kishida is pushing companies to raise wages to help Japan shake off years of deflation and put an end to meagre wage growth that has kept well behind the average for the OECD grouping of rich countries.

The annual pay negotiations - called "shunto" or "spring labour offensive" - are one of the defining features of Japanese business, where relations between labour and management tend to be more collaborative than in some other countries.

Prospects of strong wage hikes this year have heightened the chances the Bank of Japan will phase out its massive monetary stimulus in what would be a landmark shift away from its decade-long stimulus programme.

Below are the key tools that make up the central bank's complex stimulus framework, and what will likely happen to them when the BOJ decides to exit from ultra-loose policy:

Since 2016, the BOJ has been applying a 0.1% charge on a small pool of excess reserves financial institutions park with the central bank. By doing so, it guided short-term borrowing costs slightly below zero. The move was also aimed at prodding banks to lend out money instead of hoarding it in accounts.

Upon an exit, the BOJ will instead pay 0.1% interest to the excess reserves financial institutions park with the central bank to mop up some cash from the economy. With the move, the BOJ will guide the overnight call rate, which will be its new policy target, in a range of zero to 0.1%.

The BOJ sets a 0% target and a loose ceiling of 1% for the 10-year government bond yield under yield curve control (YCC), a policy put in place in 2016 to prevent excessive falls that flatten the yield curve and crush investors' margin.

The central bank will dismantle YCC but offer some language reassuring markets that it will keep buying enough government bonds to avoid any abrupt spike in bond yields.

Several ideas are being discussed on the exact wording of the commitment. The most likely option is to commit to buying government bonds around the current pace for the time being, or promise to intervene with huge buying upon sharp yield rises.

It will eventually start slowing bond buying and hold off reinvesting proceeds from bonds that reach maturity, to scale back the size of its huge balance sheet.

The BOJ began buying risky assets such as exchange-traded funds (ETF) and real estate trust funds (REIT) in 2010 as part of a stimulus programme deployed under former governor Masaaki Shirakawa.

The central bank ramped up buying several times through to March 2021, when it decided to step in with purchases only in times of huge market turbulence.

While the BOJ's ETF buying underpinned stock prices, it has drawn criticism for distorting market pricing and crowding out private investors. Unlike government bonds, ETFs do not have maturity and therefore won't fall off the BOJ's balance sheet unless the central bank sells them in markets to a third party.

Given such side-effects, the BOJ will likely discontinue such risky asset purchases upon an exit from ultra-easy policy.

The BOJ pledges to maintain its massive stimulus programme "for as long as necessary to stably achieve" its 2% inflation target. It also promises to ramp up stimulus as needed, and keep expanding base money until inflation stably exceeds 2%.

All these commitments are likely to be removed. But the BOJ will offer guidance pledging to keep monetary conditions accommodative for the time being, to reassure markets that it will not shift to a steady rate-hike path of the kind seen in the United States and Europe.

The BOJ has said Japan's inflation expectations have yet to be anchored at 2%, and that there are uncertainties on whether the solid wage increases seen this year will continue. This means it will likely take a wait-and-see approach before raising rates again.

On Friday, Hong Kong's stock market witnessed a substantial decline, overshadowing the performance of other major Asian bourses. This drop was largely attributed to disappointing home price data from China and higher-than-expected inflation figures in the United States, further exacerbating the macroeconomic challenges faced by the city.

The benchmark Hang Seng index plummeted by 2 percent, reflecting a significant downturn in investor sentiment. Similarly, the Hang Seng Mainland Properties index, which tracks the performance of large Chinese developers listed in Hong Kong, experienced a notable decline of 2.5 percent. Additionally, the Hang Seng Tech index, primarily comprising Chinese tech companies, fell by 2.4 percent.

Meanwhile, mainland equities responded with relatively less negativity to the property data emanating from China. This data indicated a decline in prices for both new and second-hand homes in the country's major cities during the month of February.

The impact of these developments reverberated across various indices, with notable changes observed in the daily performance and year-to-date (YTD) figures:

- Hang Seng Index: Experienced a daily change of -1.9% and a YTD change of -2.4%.

- CSI 300: Witnessed a minor daily change of -0.1% but maintained a positive YTD change of 3.8%.

- Topix: Registered a modest daily change of 0.4% and a significant YTD change of 12.9%.

- Kospi: Recorded a daily change of -1.5% and a YTD change of 0.8%.

- Nifty 50: Exhibited a daily change of -0.8% and a YTD change of 1.1%.

The divergence in market reactions between Hong Kong and mainland China highlights the nuanced dynamics at play within the broader Asian financial landscape. While concerns over weakening home prices in China weighed heavily on Hong Kong's market sentiment, mainland indices demonstrated a relatively resilient response.

From a technical viewpoint, the pronounced decline in the Hang Seng index suggests heightened investor caution and a potential shift towards risk-off sentiment. The significant losses observed in sectors closely linked to Chinese property and technology further underscore the vulnerability of Hong Kong's equity market to external macroeconomic factors.

Looking ahead, investors will closely monitor developments in China's property market and the trajectory of US inflation, as these factors continue to influence market sentiment and drive volatility. Additionally, geopolitical tensions and regulatory uncertainties surrounding Chinese tech companies are expected to remain key areas of concern for investors in the region.

The recent downturn in Hong Kong's stock market underscores the interconnectedness of global economic factors and their impact on regional financial markets. As investors navigate through evolving market conditions, maintaining a diversified portfolio and a vigilant approach to risk management will be crucial in navigating the challenges and opportunities that lie ahead.

According to official data, Saudi Arabia experienced an inflation rate of 1.8 percent in February, showing a slight increase from the previous month’s rate of 1.6 percent.

The General Authority for Statistics (GASTAT) reported that the consumer price index for February was primarily influenced by the prices of housing, water, electricity, gas, and other fuels, which saw a 1.2 percent increase compared to the previous month. This upward trend was primarily driven by a 1.4 percent rise in actual rents for housing.

GASTAT noted that the inflation rate in February 2024 was mainly attributed to the high relative importance of housing rents in the Saudi consumer basket, accounting for 21 percent of the index.

In February, expenses for food and beverages decreased by 0.4 percent compared to the previous month, while transport prices dipped by 0.3 percent. Recreation and cultural prices saw a 0.2 percent increase, followed by a 0.1 percent increase in costs for personal goods and services.

On the other hand, prices for education, restaurants, hotels, and health services did not show any significant change in February compared to January.

Compared to February 2023, housing, water, electricity, gas, and other fuel prices increased by 8.5 percent last month, while rates for food and beverages rose by 1.3 percent. Similarly, restaurant and hotel prices surged by 2.5 percent, primarily driven by a 2.2 percent increase in expenses for catering services.

GASTAT revealed that costs for education went up by 1.2 percent in February, mainly due to a 4.3 percent increase in secondary education prices.

In contrast, household equipment and maintenance prices decreased by 3 percent in February compared to the same month of the previous year. Additionally, clothing and footwear prices declined by 4 percent in February compared to the year-ago period, while transport rates dipped by 0.9 percent.

In another report, GASTAT stated that Saudi Arabia’s Wholesale Price Index (WPI) increased by 3.1 percent in February compared to the same period in 2023. This rise in the WPI was driven by price increases in refined petroleum products (12 percent) and basic chemicals (10.8 percent).

Similarly, the Kingdom’s WPI decreased by 1.2 percent in February compared to the previous month, primarily due to a fall in the prices of other transportable goods, which declined by 3.2 percent.