Market Outlook for the Week of 17th-21st February

On Monday, U.S. markets will be closed in observance of Presidents' Day while parts of Canada will celebrate Family Day.

On Tuesday, the focus in Australia will be on the RBA monetary policy announcement. In the U.K., traders will be monitoring the claimant count change, the average earnings index 3m/y and the unemployment rate. Meanwhile, Canada will release its inflation data.

Wednesday's key events include Australia's wage price index q/q and New Zealand's RBNZ monetary policy announcement. The U.K. will publish inflation data, while in the U.S., the FOMC meeting minutes will be released.

On Thursday, Australia will report its employment change data and the unemployment rate, while the U.S. will release unemployment claims.

Friday will bring retail sales data m/m for both the U.K. and Canada. Additionally, flash manufacturing PMI and flash services PMI reports will be released for the eurozone, the U.K. and the U.S.

Throughout the week, some FOMC members are expected to deliver remarks.

At this week's meeting, the RBA is expected to deliver a 25 bps rate cut after a prolonged period of maintaining a hawkish tone. The primary reason for this shift is the more-than-expected decline of inflation in Q4. While still above the Bank's target of 2-3% -- the trimmed mean inflation y/y currently sits at 3.2% -- there are clear signs of moderating price pressures. Analysts anticipate that additional rate cuts will follow throughout the year.

In Canada, the consensus for CPI m/m is 0.0% vs. the prior -0.4%. The median CPI y/y is expected to remain unchanged at 2.4%, while the trimmed CPI y/y is projected to rise to 2.6% from the previous 2.5%. The common CPI y/y is likely to stay steady at 2.0%.

Analysts from RBC anticipate that y/y inflation will drop to 1.7%, primarily due to the temporary GST/HST tax holiday from mid-December to mid-February, which also dampened December’s inflation to 1.8% y/y. Without this tax break, inflation would have reached 2.2%. They emphasize that the tax holiday will continue to distort inflation readings until March.

Core inflation, however, remains sticky, but overall inflation trends are expected to decline. The BoC will closely monitor this week's data, along with labor market conditions, which have begun to stabilize, and wage growth, which is set to moderate. The Bank is expected to continue cutting rates throughout the year.

In Australia, the consensus for the wage price index q/q is 0.8% vs 0.8% prior. Analysts from Westpac emphasize that risks remain skewed to the downside, and despite this expected increase, a notable slowdown has been evident since early 2023. Annual wage growth is projected to ease to 3.5%, down from 4.1% in June and 4.2% in December 2023.

Analysts also noted that the moderation in wage inflation is broad-based across key wage-setting mechanisms. Enterprise bargaining contributions declined to 0.46 ppt from 0.66 ppt, individual arrangements softened to 0.59 ppt from 0.74 ppt, and awards/minimum wage contributions fell to 0.36 ppt from 0.63 ppt. This broad deceleration underscores the increasing sensitivity of wage growth to softer labor market conditions, suggesting downside risks to the 0.8% forecast.

In New Zealand, at this week's meeting, the RBNZ is expected to deliver a 50 bps rate cut to 3.75%. Analysts anticipate further cuts from the Bank through the end of the year.

The RBNZ projects that the medium-term inflation outlook will likely remain anchored near 2.0%. However, near-term CPI forecasts may edge higher due to a weaker trade-weighted index (TWI) and elevated commodity prices, according to analysts at Westpac.

In the U.K. the consensus for the CPI y/y is a rise from 2.5% to 2.8% and for the core CPI y/y from 3.2% to 3.7%. This comes after decreases of headline, core and services CPI in December which were attributed to volatile airfares that have since increased back. The MPC was not unanimous on the size of the rate cut for February, with two members asking for a higher 50 bps decrease instead of 25 bps. However, the MPC is likely to remain more cautious since the disinflation process looks to be far from over.

In Australia, the consensus for employment change is 19.7K, down from the prior 56.3K, while the unemployment rate is expected to rise from 4.0% to 4.1%.

The significant drop in employment growth may be attributed to seasonal volatility, particularly around leave-taking and timing of new job starts, which often dampen January figures. However, there are both upward and downward risks to the forecast, depending on whether the firmer year-end trend or the seasonal shifts will dominate, according to Westpac.

The economic outlook for the eurozone is not very promising, and the ECB is likely to continue with rate cuts throughout the year. A modest improvement is expected in this week's PMI prints, with the consensus for manufacturing PMI at 47.0 and services PMI rising to 51.5, but Wells Fargo analysts point out that manufacturing has been in contraction territory since mid-2022 and the services index remains low compared to historical standards.