February’s Growth Chronicle

• The spotlight today is on relative growth momentum with the release of the February PMI readings for the EU, UK, and US. Japan and Australia’s PMI improved.
• UK food stores power retail sales activity in January. GBP is firmer.
• BOJ Governor Ueda warned the bank is prepared to make JGB purchases if bond yields rise sharply. JGB yields retraced some of its recent strong gains. JPY underperforms.

USD is trading near its lowest level since mid-December on narrowing bond yield spreads between the US and other major economies. This is not sustainable as long as US economic outperformance remains a dominant theme. Today’s PMI readings will offer a timely update on global growth trends.

The US February preliminary PMI is forecast to be indicative of an encouraging growth outlook (2:45pm London). The composite index is expected at 53.2 vs. 52.7 in January.

In contrast, the Eurozone and UK February preliminary PMI prints are expected to remain consistent with a soggy growth outlook (9:00am and 9:30am London, respectively). The Eurozone composite PMI is forecast at 50.5 vs. 50.2 in January while the UK’s is expected at 50.6 vs. 50.6 in January.

The unexpected drop in the French composite PMI points to downside risk to the Eurozone PMI. France’s composite PMI plunged to a 17-month low at 44.5 (consensus: 48.0) vs.47.6 in January driven by a deeper contraction in the services sector. The PMI for Germany is up next (8:30am London).

UK

GBP is firmer after UK January retail sales growth overshot expectations. Retail sales volumes increased by 1.7% m/m (consensus: 0.5%) following a decline of -0.6% in December (revised from -0.3%). Excluding automotive fuel, retail sales volumes surged 2.1 % m/m (consensus: 0.9%) vs. -0.9% in December (revised from -0.6%).

The details were less impressive and suggests underlying consumer spending activity remains subdued. Food stores sales volumes accounted for the bulk of the pick-up in retail sales. Over the month, food stores sales volumes rose by 5.6%, the largest rise since March 2020, while non-food stores fell -1.3%.

Markets still imply a total of 50bps of BOE policy rate cuts over the next 12 months. But the BOE’s job is complicated by the UK’s near-term stagflation backdrop which is an ongoing drag on GBP.

JAPAN

Bank of Japan (BOJ) Governor Ueda warned the bank is prepared to make JGB purchases if bond yields rise sharply. JPY dipped and 10-year JGB dropped from a fresh 15-year high at 1.4660% to as much as 1.4040% following Ueda’s remark.

The comments came after the government raised concerns about surging JGB yields. Prime Minister Shigeru Ishiba said “a rise in interest rates when there are high debt-to-GDP ratios puts pressure on policy expenses through increased interest payments…I have strong concerns about this.” We agree. Servicing Japan’s 230% of GDP debt is expected to chew up a hefty 21% of total central government expenditure according to the Japan’s Ministry of Finance (MoF).

Ueda acknowledged that yields may surge if faith in Japan’s finances drops. However, he pointed out that the recent increase in JGB yields reflect the economic recovery and rising price trend. Indeed, the January CPI and February PMI prints reinforce BOJ rate hike expectations. This offers JPY and JGB yields near-term support.

In line with consensus, headline CPI rose to a two-year at 4.0% y/y vs. 3.6% in December and core ex-fresh food, energy increased to a ten-month high at 2.5% y/y vs. 2.4% in December. Core ex. food rose a tick more than anticipated to 3.2% vs. 3.0% in December. Both measures of core inflation are tracking above the BOJ’s 2025 forecast of 2.1% and 2.4%, respectively.

Meanwhile, private sector activity in Japan improved in February. The composite PMI rose to a five-month high at 51.6 vs. 51.1 in January driven by sustained growth in services activity and a softer contraction in manufacturing output.

CANADA

CAD will partly be guided today by Canada’s December retail sales report (1:30pm London) and Bank of Canada (BOC) Governor Tiff Macklem’s speech (5:30pm and 7:10pm London). Statistics Canada’s advanced retail indicator suggests sales increased 1.6% m/m in December after printing flat in November (1:30pm London).

Markets price-in 20% odds of a 25bps BOC policy rate cut in March. And a total of about 40bps of easing over the next 12 months. In our view, USD/CAD is vulnerable to more upside supported by FED/BOC policy trend and trade uncertainty.

AUSTRALIA

AUD is supported as markets continue to imply a shallow RBA easing cycle (roughly 50bps of easing over the next 12 months). RBA Governor Michele Bullock stressed again that “the Board remains cautious about prospects for further policy easing.” Bullock noted that strong employment growth could be “signaling a bit more strength in the economy, which could delay or derail the disinflation process.” Supporting the RBA’s cautious guidance, Australia’s composite PMI improved to a six-month high at 51.2 vs. 51.1 in January.

NEW ZEALAND

RBNZ Chief Economist Paul Conway reiterated the bank’s policy outlook. NZD was largely unphased by the comments. Conway highlighted that the RBNZ’s updated Official Cash Rate (OCR) forecast implied another 75bps of easing over the next year while stressing that taking the OCR below neutral (around 3%) is “not our central projection.”

Conway added that “the lower kiwi dollar is part of the reason we’re predicting growth to return over 2025 or from the end of 2024.” In fact, past weakness in NZD has already helped boost exports and shrink New Zealand’s merchandise trade deficit. The annual trade deficit narrowed to more than a three-year low at -NZ$7.2bn in January vs. -NZ$7.8bn in December.