March 28th Financial News

Daily News

Summary:

Bailey: Inflation control should be considered before banking worries; First Citizens Bank's acquisition of Silicon Valley Bank is settled; Swiss National Bank (SNB) has taken emergency liquidity...

【Quick Facts】

1. Bailey: Inflation control should be considered ahead of banking worries.

2. First Citizens Bank's acquisition of Silicon Valley Bank is settled.

3. The Hungarian parliament approved Finland's accession to NATO.

4. SNB has taken emergency liquidity.

5. Interest rate swaps show that the Fed is likely to raise interest rates in May by more than fifty percent.

【News Details】

1. Bailey: Inflation control should be considered ahead of banking worries.

As the successive "collapses" of banks such as SVB and Credit Suisse have sparked market concerns, some investors believe that central banks should not separate monetary policy from financial stability at a time when worries that banking woes could lead to a widespread financial crisis have intensified.

Bank of England Governor Andrew Bailey countered this view in a speech at the London School of Economics on Monday. He said rate-setters will focus on fighting inflation and should not be unduly influenced by concerns about the health of the global banking system. Britain's banks are resilient and able to support the economy.

2. First Citizens Bank's acquisition of Silicon Valley Bank is settled.

First Citizens Bank, a regional U.S. bank, said Monday it acquired the assets of the previously failed Silicon Valley Bank. The Federal Deposit Insurance Corporation (FDIC) has been given the right to increase the bank's equity worth up to $500 million, thereby acquiring all of Silicon Valley Bank's loans and deposits. Including $110 billion in assets, $56 billion in deposits and $72 billion in loans, with expansion in California. the FDIC retained about $90 billion in securities pending disposition.

The First Citizens deal boosted the shares of other smaller regional banks, including First Republic Bank, which has been the one that has kept investors most on their toes, whose shares jumped about 12 percent on Monday. And it eased fears of systemic stress in the banking sector.

3. The Hungarian parliament approved Finland's accession to NATO.

Hungary's parliament approved a bill on Monday to allow Finland to join NATO. Hungary's ruling party, the Federation of Young Democrats (Fidesz), has reportedly been dragging its feet on the issue for months. Sweden's bill to apply for NATO membership is still lingering in the Hungarian parliament. Finland and Sweden requested NATO membership last year in response to Russia's special military operation against Ukraine, but the process has been blocked by Turkey and Hungary.

4. SNB has taken emergency liquidity.

Data show that the SNB's demand deposits rose sharply last week, with commercial banks' demand deposits with the SNB jumping to 567 billion Swiss francs ($619 billion) from 515 billion a week earlier. 52 billion Swiss francs was the second highest increase on record, second only to the 52.4 billion Swiss francs in August 2011, when the SNB sold a large number of Swiss francs to ease the pressure on the safe-haven currency The Swiss franc was under pressure. This suggests that Credit Suisse and UBS may have taken on significant emergency liquidity to ensure the completion of the merger.

5. Interest rate swaps show that the Fed is likely to raise interest rates in May by more than fifty percent.

Interest rates on swap contracts rose to about 4.96% on Monday, about 13 bps higher than the current federal funds rate. This suggests that the Fed is more likely to raise rates by 25 bps at its May meeting than to leave them unchanged. The likelihood of a rate hike is more than 50%.

【Focus of the Day】

UTC+8 16:00 ECB Governing Council member Muller to speak

UTC+8 20:30 U.S. Monthly Wholesale Inventories Preliminary Rate (Feb)

UTC+8 22:00 U.S. Conference Board Consumer Confidence Index (Mar)

UTC+8 04:30 U.S. API Data

UTC+8 [TBD] U.S. Senate Banking Committee hearing on Silicon Valley Bank incident, Fed Governor Barr will attend

Risk Warnings and Disclaimers

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Justin

Bond

Historically, higher-rated short-duration high-yield bonds have provided strong returns with defensive characteristics. Now, with yield curves inverted across North America, Europe and parts of Asia, investors no longer need to increase interest-rate risk (duration) to earn extra income.

Shorter Bonds Make for Lower Risk

Short-dated high-yield bonds are intrinsically less risky than longer-dated counterparts, as their shorter maturities leave them less exposed to both default- and interest-rate risk. Further, as these bonds currently trade below par (Display), their prices will likely rise as they approach maturity, generating capital gains.

Short Duration High Yield at One of the Most Attractive Points in Last 20 Years

Bloomberg Global High Yield Corporate 1-5 Year Index: Starting Annual Price and Yield

From Anomaly to Opportunity: High Yields on Short Bonds_1

What’s more, by concentrating on the higher-quality segment of short-dated high yield, investors can create more defensive portfolios for a relatively small reduction in yield (Display).

High-Quality Short-Dated High-Yield Bonds Have Offered Attractive Yields

Average Yields in US Dollars Over Different Timescales (Percent)

From Anomaly to Opportunity: High Yields on Short Bonds_2

Over the 20 years ending September 30, 2022, BB- and B-rated high-yield bonds between one and five years to maturity captured more than 80% of the broader High-yield market return, while experiencing approximately 50% of the average monthly drawdown. Consequently, they have provided better risk-adjusted returns than their longer-dated (five- to ten-year) high-yield counterparts. But they have really come into their own during periods of extreme market stress. At these times, higher-quality, short-duration high yield has exhibited much lower downside capture than both the global and US high-yield markets (Display).

Higher-Quality Short-Duration High Yield Captured Less Downside When Spreads Widened

Cumulative Return When US High-Yield Spreads Widened 50 Basis Points or More (Percent)

From Anomaly to Opportunity: High Yields on Short Bonds_3

In our analysis, dynamically managed short-duration high-yield strategies that can allocate tactically to higher-rated assets, including investment-grade bonds, may achieve even more consistent performance. By varying the allocations to return-seeking and more defensive bonds as market conditions change, investors may have the opportunity both to capture higher returns in risk-on periods and to guard against downside risks in choppier markets.

Inverted Yield Curve Favors Shorter Bonds

Currently, owing to inverted yield curves, investors have a potentially highly attractive entry point for investing in short-duration high-yield bonds, as high-yield bonds with five or fewer years to maturity offer significantly higher yields than longer-dated counterparts (Display).

Shorter-Duration High-Yield Bonds Offer Higher Yields than Their Longer Counterparts

From Anomaly to Opportunity: High Yields on Short Bonds_4

In an uncertain world, we think shorter-dated, higher-rated, high-yield strategies could be particularly well-suited to delivering attractive risk-adjusted returns.

Source:Gershon M. Distenfeld

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Justin

Central Bank

Forex

The monthly bank lending data from the ECB continues to show the effects of monetary tightening on the economy as non-financial corporates saw small negative growth for borrowing for the fourth consecutive month. Month-on-month growth was just below 0%. For households, monthly growth rates continue to be positive but have also been on a downward trend for some time now. The monthly rate slowed from 0.15 to 0.1%.

We expect this trend of moderation to continue as the ECB's bank lending survey suggests that demand for borrowing is set to weaken further and credit conditions could become tighter. The latter could also be influenced by the recent global banking turmoil, as we argued in this recent piece.

The monetary data released today also show a further contraction in money in the euro system. M1, the narrow definition of money and a solid leading indicator for economic activity ahead, fell again and is now down by 2.2% on the year. Broad money (M3) is still positive but showed a sharper decline than expected to 2.9% year-on-year growth. The reversal of monetary policy plays a key role here, especially through the decline in asset purchases.

It is becoming more apparent that the hike cycle will have a significant dampening effect on the economy over the course of this year. The full effect of recent hikes on the economy still has to come through, and recent turmoil – while very uncertain at this point – will likely hamper economic activity. For an economy already quite weak at the start of the year, this means that the risks of a contraction remain significant.

Source:ING

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Thomas

Political

Nepal is at the centre of a delicate geopolitical balancing act, as the world's superpowers vie for its attention through major investments in areas such as energy and infrastructure.

The Biden Administration released its Indo-Pacific strategy about a year ago, and continues to deepen security ties with allies like Japan and South Korea, while pursuing closer relations with others, including Nepal.

However, Nepal's new Prime Minister Pushpa Kamal Dahal, who took office at the end of December last year, is seen by some as being friendly towards Beijing.

With tensions between the US and China showing no signs of abating, and a looming India as its neighbour, the new Nepalese government has to balance its relations with all the countries, each with their own competing interests.

A Balancing Act

Prime Minister Dahal is viewed by some in both Washington and Delhi as a pro-China politician.

In the last two months, the US under secretary of state for political affairs Victoria Nuland and United States Agency for International Development administrator Samantha Power, have visited Nepal to step up Washington's influence there.

They announced new investments, including more than a billion dollars in clean energy and a grant of nearly US$60 million to strengthen civil society in Nepal.

Meanwhile, Beijing had increased its foreign direct investments in Nepal by US$115 million last year.

The complex geopolitical situation is made even more challenging with the involvement of its neighbour India.

Mr Sujeev Shakya, chair of the Nepal Economic Forum, a private sector-led think tank in Nepal, said: "While the energy agreements are there between India and Nepal, implementation on the ground has been a challenge because India talks about not allowing Chinese-built power plants to supply energy into India and beyond."

Aid For Nepal

The US provided millions of dollars in humanitarian aid to Nepal following a devastating earthquake in 2015, and is focused on investing in the country in the longer term.

Health Foundation Nepal, a non-profit organisation registered both in the United States and Nepal since 2013, raises funds for mental health programmes in rural Nepal.

The organisation raised US$130,000 for the country after the 2015 earthquake.

Meanwhile, the US$500 million Millennium Challenge Corporation (MCC) is an infrastructure project to develop roads and facilitate cross-border electricity trade between Nepal and India.

It was signed in 2017 and ratified by Nepal last year.

Former World Bank economist Prem Sangraula said it is just one of the programmes the US is conducting in Nepal, and has drawn criticism from China who accused the US of "coercive diplomacy".

The MCC initially faced opposition from current Prime Minister Dahal, who was back then the Chair of the Communist Party of Nepal-Maoist Center, though he later voted for its ratification.

While Washington hopes to compete with Beijing in the region by growing its ties with the Indo-Pacific, Asian countries do not want to be forced to choose sides.

Mr Harry Bhandari, state delegate of Maryland since 2018, was the first lawmaker of Nepali origin to be elected in the US.

"The relationship between Nepal and United States is based on peace, economic prosperity and human rights," he said, adding that there are benefits to greater alignment with the US.

Much of the Nepalese diaspora in the US still feel a strong connection to their roots, and hope to strengthen those ties by improving health and education opportunities in Nepal, away from the complexities of geopolitics.

Source: CNA

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Devin

Energy

Iraq's oil output and capacity may peak following growth of around 25% over the next five years, analysts said, falling short of 2027 targets and ending a long-standing ambition to rival the output of top OPEC producer Saudi Arabia.

Political infighting has cost Iraq the opportunity to invest in growing output more quickly. As the energy transition gathers pace, it means Baghdad may never be able to cash in the hundreds of billions of barrels it has in the ground, even with the efforts of the country's new energy minister to attract investment.

Since 2016, Iraq's output has stalled at around 4.5 million barrels per day (bpd).

Before then, capacity grew rapidly as the government opened up the sector in 2009 and international oil companies revamped the country's biggest oilfields.

Iraq's Ambition to Match Saudi Oil Output Is Out of Reach_1

Growth slowed in part because Iraq agreed to cap output under supply policy agreed with the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+.

Iraq's Oil Minister Hayan Abdel-Ghani, who took office in October, plans to update Iraq's oil production strategies to meet local needs while complying with the OPEC+ agreement, oil ministry spokesman Asim Jihad told Reuters.

It is too early for the new government to talk about any significant increases in Iraq's oil production outside the OPEC+ agreement, Jihad said. Under the agreement, Iraq's production target is 4.43 million bpd until December.

As a result, Iraq has shifted focus to the refining and gas sectors and lowered capital expenditure in the oil sector, analysts at FGE consultancy and Rystad Energy told Reuters.

'Hard, if not impossible'

For the oil sector, the country has repeatedly delayed a target to reach 7-8 million bpd capacity, from the current 5 million bpd. The previous government said last year it hoped to reach the higher levels by 2027.

Some energy industry consultancies forecast that Iraq may never reach them.

Capacity would peak and plateau at 6.3 million bpd by 2028 before declining, Iman Nasseri, managing director for the Middle East with FGE consultancy, said. Politics, security and the investment environment were all contributing to prevent Iraq from pushing output higher than that, he said.

"We think Iraq's current target looks hard, if not impossible to achieve," Nasseri said.

Rystad Energy expected production to be limited to 5.5 million bpd by 2027 as a result of midstream growth limitations and because projects that are crucial to boosting output are stuck.

Two decades after the war began, the current targets and the even lower forecasts are far off Iraq's post-war goal to take capacity to 12 million bpd.

The ambition was scaled back in 2012 after international oil companies operating in Iraq negotiated lower output targets for their fields because of low recovery factors, high natural decline rates and because Iraq was not investing enough in infrastructure, analysts said.

The major oil companies had also hoped Baghdad would improve the terms of technical service contracts (TSCs). That never happened, and companies such as ExxonMobil Corp and Royal Dutch Shell Plc left.

Above-Ground Issues

Analysts and industry insiders say the problems are above the ground rather than in the geology below, which has significant unexplored capacity, and include repeated changes to government, political infighting and red tape.

Successive governments failed to sign off on Iraq's fifth licensing round in 2018. Six deals out of eleven oil and gas blocs on offer were eventually signed at the end of February, marking long-awaited reforms to the conditions of operating in the country.

The beneficiaries were not the international oil companies, but UAE firm Crescent Petroleum and two Chinese companies.

A source close to the Iraq energy industry who could not be named because they were not authorised to speak to the press said the contracts awarded pay royalties upfront and link revenues to oil prices.

Abdel-Ghani's decision to sign the deals four months after his appointment may show a new resolve in government to cut deals more attractive to international energy companies, the source said.

Still other issues remain.

A large-scale seawater treatment project needed to boost output at the southern oilfields through water injection, has been stalled for over a decade because of haggling over terms.

French oil major TotalEnergies is the latest to take on the project as part of a $27 billion deal to build four oil, gas and renewable projects over 25 years.

TotalEnergies CEO Patrick Pouyanne said this month contractual disagreements were unresolved.

"Iraq is not the easiest place to invest with all risk," Pouyanne said.

The water project would boost output at the five Iraqi fields by 2 mln bpd of the 2.4 mln bpd growth needed to reach Iraq's 2027 targets, according to Rystad data and Reuters research.

But completion before 2027 is unlikely, Rystad's vice president of Middle East upstream research Aditya Saraswat said.

Iraq's oil minister this month revived seven investment opportunities in Iraq's refining sector.

Even if Abdel-Ghani manages to find companies interested in those projects, Iraq's refining potential only allows 500,000 bpd of crude output growth and this would take time, Saraswat said.

Meanwhile, Iraq's southern export capacity has stalled at around 3.2-3.3 mln bpd for the last year following delays to infrastructure upgrades at its Gulf ports, data from state-owned marketer SOMO showed.

Source: Reuters

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Owen Li

Economic

At an incredible end to the first quarter for financial markets, rattled by bank turmoil, some stability will be much hoped for in coming days.

But don't bet on it. Regional U.S. banking stocks remain near their lowest levels in two years, Europe is weighing up the fallout from the forced UBS-Credit Suisse tie-up. And data will show how much the market ructions are making recession more likely.

Here's a look at the week ahead in markets from Kevin Buckland in Tokyo, Lewis Krauskopf in New York and Naomi Rovnick, Amanda Cooper and Dhara Ranasinghe in London.

1/ A Coco-Nuts Quarter

What a quarter. January saw the biggest rush into equities for the first month of the year on record as investors loaded up on cheap stocks. With "peak rates" essentially priced in, bond yields at multi-year highs suddenly looked juicy. The threat of inflation looked less severe and growth more robust. Crisis averted!

Fast-forward a few weeks and a slew of crypto-companies have folded, U.S. regional banks stocks have tanked in the wake of Silicon Valley Bank collapse and 167-year old Credit Suisse has imploded - and the writedown of some of its contingent convertible bonds (CoCos) has whipped market volatility into a 2008-style frenzy.

"Peak rates" is coming faster than many expected, not because inflation has been vanquished, but because central banks are wary of fanning the flames of a credit crunch, right as the banking sector wobbles.

2/ Don't Bank on It

The collapse of Silicon Valley Bank, a 90% share price drop over two weeks in beleaguered First Republic Bank and a shotgun marriage between Credit Suisse and UBS to avert a wider crisis: banks have gone on a wild ride.

The turmoil may not be over yet. Shares of Germany's largest bank Deutsche Bank plunged on Friday while wider indicators of financial market stress were also flashing.

SNB chief Thomas Jordan reckons the next two weeks will be vital to securing UBS's Credit Suisse takeover. Fed Chair Jerome Powell said banking stress could trigger a credit crunch with "significant" implications for a slowing U.S. economy.

And even as central banks and governments step in to stem signs of panic, there's a new challenge to grapple with - a social media-driven bank run that can be hard to control once rumour and fear take hold.

As Citigroup chief executive Jane Fraser puts it, social media is a "complete game-changer" in bank runs.

Meanwhile, Swiss financial regulator FINMA said it was considering whether to take disciplinary action against Credit Suisse managers.

3/ Did You Say At1?

Credit Suisse's forced takeover by UBS involved $17 billion of Additional Tier 1 debt, shock absorbers if a bank's capital levels fall below a threshold, being wiped out.

Prices of banks' AT1s bonds tumbled following the news. Hong Kong, Singapore, the European Union and Britain stepped into to calm the unease.

Potential legal action is also possible after Swiss authorities ruled that holders of Credit Suisse AT1 bonds would get nothing in the deal. Shareholders, who usually rank below debt investors when a company becomes insolvent, will receive $3.23 billion.

Lawyers are assessing whether there is a case against the Swiss authorities. How this plays out in coming days will be watched closely.

The saga has also rocked the $275 billion AT1 bond market, as investors scrutinise debt prospectuses for clauses that could cast doubt over recovery prospects.

4/ Data Dive

U.S. data that will give insight into the health of the consumer and the state of inflation is timely for investors trying to weigh up whether the economy can stave off a downturn.

The banking crisis has prompted fears that lending will slow, grinding the gears of the economy.

March's reading of consumer confidence is due on Tuesday. The index unexpectedly fell in February.

On Friday, the February personal consumption expenditure index will offer another look at inflation. It accelerated in January, feeding fears about a more hawkish Federal Reserve.

The Fed raised rates by another quarter point on Wednesday, but recast its outlook from a hawkish preoccupation with inflation to a more cautious stance, given market turmoil that has tightened financial conditions.

5/ Inflation Watch

Incoming Bank of Japan Governor Kazuo Ueda will be watching latest Tokyo inflation data closely.

After all, Ueda has the weight of his predecessor's decade of massive stimulus on his shoulders when he takes over in April.

Expectations are high that he will mastermind a delicate unwinding of yield curve controls and negative interest rates during his tenure, but a key question is when.

Ueda is in no rush, but pressure is building.

The release of Tokyo CPI for March on March 31 is likely to show inflation has topped the BOJ's 2% target for a 10th straight month. And wage inflation shows signs of catching up.

But policymakers say the economic recovery remains fragile. And U.S. and European banks turmoil show how quickly a crisis can surface, giving Ueda even more reason for caution.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Forex

The forex markets have been relatively quiet during today's Asian session, with currency pairs staying within Friday's range. Major stock indexes are also demonstrating mixed performance in a tight range. Inflation data from the Eurozone and the US will be closely monitored this week. Although these figures are crucial in determining the future rate path, reactions to this week's data may be somewhat subdued, given that both ECB and Fed meetings will not reconvene until May.

Ongoing developments in the banking crisis will continue to be a significant driving factor for all financial markets. As for currencies, Yen has emerged as the biggest winner for the month, seemingly bolstered by risk aversion and falling benchmark treasury yields in other markets. European majors follow closely behind, despite banking sector troubles. Commodity currencies and Dollar have been the weakest performers. It remains to be seen whether Yen could experience further gains before the month's end and which currencies will be most affected.

Fed's Kashkari warns of recession risks amid banking sector stress

Fed President Neel Kashkari expressed concerns in a recent CBS "Face the Nation" interview about the recent stress in the banking sector, warning that it could lead to a widespread credit crunch and ultimately push the US into a recession. Kashkari stated, "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. Would that slow down the economy? This is something that we're monitoring very, very closely."

He acknowledged that the situation is still relatively new, saying, "Right now, the stresses are only a couple of weeks old." However, Kashkari pointed out some positive signs, such as a slowdown in deposit outflows and a restoration of confidence among smaller and regional banks. He noted, "There are some concerning signs. The positive sign is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks."

Despite these positive developments, Kashkari emphasized the potential risks if capital markets remain closed due to nervous borrowers and lenders, stating, "If those capital markets remain closed because borrowers and lenders remain nervous, then that would tell me, okay, this is probably going to have a bigger impact on the economy."

ECB's de Guindos on rate hikes: Data-Dependent and cautious amid banking sector uncertainty

ECB Vice President Luis de Guindos recently shared his thoughts on the central bank's approach to future rate hikes, emphasizing a data-dependent and cautious stance in light of the uncertainties arising from the financial sector problems in the US and Switzerland.

In an interview, de Guindos stated, "We raised rates by 50 basis points in March and we are open-minded with respect to the future… We are not pre-committing to any action."

The impact of the US banking system and Credit Suisse events on the Eurozone economy is a pressing concern for the ECB. Over the coming weeks and months, de Guindos noted that the central bank would need to evaluate whether these events would lead to tighter financing conditions.

The ECB Vice President acknowledged that such events increase uncertainty and may result in tighter credit standards in the Eurozone, potentially affecting the economy with lower growth and inflation. However, de Guindos explained that it is too early to determine the intensity of this factor.

Regarding the ECB's inflation target, de Guindos emphasized the importance of a timely return to 2% inflation within the two-year projection horizon and highlighted the crucial role of core inflation in achieving this goal.

He stated, "Headline inflation will decline quite rapidly over the next six to seven months as the base effects play in favor of a rapid reduction in inflation… What we want to see is a steady and clear convergence towards the 2% target. In that respect, core inflation is going to be key. It is very difficult to converge towards the 2% target in a sustainable way without a clear decline in core inflation."

Inflation Data Takes Center Stage as Central Banks Weigh Next Policy Decisions

As we head into a week highlighted by inflation data, central banks are gearing up to navigate their policy decisions based on the numbers. Australia's monthly CPI, Eurozone's CPI flash, and US PCE inflation will be under close scrutiny as monetary authorities assess their next moves.

RBA has suggested the possibility of hitting the pause button in May, but the final call will largely rest on how inflation unfolds. On the other hand, ECB is expected to proceed with tightening in May, but the ultimate peak interest rate will be influenced by the pace at which inflation decelerates.

Market participants consider Fed current 4.75-5.00% interest rate as the peak already, contrasting with Fed's own projection of 5.1%. Once again, inflation trends will be the deciding factor here.

Besides inflation, other significant economic indicators to watch this week include US consumer confidence, Japan's industrial production and retail sales, Canada's GDP, Australia's retail sales, and New Zealand's ANZ business confidence.

Here are some highlights for the week:

· Monday: Japan corporate service price index; Germany Ifo business climate: Eurozone M3 money supply.

· Tuesday: Australia retail sales; US goods trade balance, house price index; consumer confidence.

· Wednesday: Australia CPI; Germany Gfk consumer climate; Swiss Credit Suisse economic expectations; UK mortgage approvals, M4 money supply; US pending home sales.

· Thursday: New Zealand building permits, ANZ business confidence; Germany CPI flash; ECB monthly bulletin;US Q4 GDP final, jobless claims.

· Friday: Japan Tokyo CPI, industrial production, retail sales, housing starts; China PMIs; Germany import prices, retail sales; UK Q4 GDP final, current account; Swiss retail sales, KOF economic barometer; France consumer spending; Germany unemployment; Eurozone CPI, unemployment rate; Canada GDP; US personal income and spending with PCE inflation, Chicago PMI.