Powell testimony
During his testimony before Congress, he advised that “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”. Powell also added that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. Powell reiterated the message that “although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”. The key takeaway was clearly Powell’s openness to larger hikes again and the fact that he also pointed to a higher terminal rate as well.
Jobs report
The US economy added 311k jobs in Feb. according to the Establishment survey, above the 225k print forecast and higher than “whispers” of 275-300k. Jan. and Dec. job additions were revised down by 34K in aggregate. Notable job gains occurred in leisure and hospitality, retail trade, government, and health care. Leisure and hospitality added 105k jobs in Feb., like the average monthly gain of 91k over the prior 6 months. Employment declined in information and in transportation and warehousing. The unemployment rate jumped to 3.6%, up from 3.4% in Jan. and ahead of the 3.4% forecast. The participation rate ticked higher to 62.5% (up from 62.4% in Jan and above the 62.4% forecast). Wage growth was a bit cooler than anticipated at +0.2% m-o-m and +4.6% y-o-y (vs. consensus at +0.3% and +4.7%, respectively). The softer wage growth coupled with a shorter workweek (34.5 hours vs. the St 34.6 and down from 34.6 in Jan.) shows take home compensation dropping below expectations.
US budget proposal
President Biden unveiled the administration’s initial 2023 budget proposal yesterday afternoon. The $6.9tr budget proposal is viewed as an opening bid to House GOP members, who are expected to negotiate it down in the upcoming debt ceiling negotiations. The proposal increases funding on an array of government programs, including making Medicare more solvent, lowering prescription drug prices, and trimming the deficit by $3tr over the next decade. The deficit cutting is mostly coming in the form of higher taxes on capital gains (25% on those making over $1mn), a new tax bracket of 39.6% on every dollar made over $400k, a minimum 25% on billionaires, and hiking the corporate tax rate from 21% to 28%.
Central banks
The Bank of Japan (BOJ) left its key interest rate unchanged at -0.1%, while maintaining its YCC (yield curve control) policy. In his last meeting as the BOJ’s Governor, Haruhiko Kuroda made no surprise move and lent support to the central bank’s long-standing ultra-dovish monetary policy. The Bank of Canada left rates unchanged at 4.5%, following a run of 8 successive hikes over the previous year. The move was in line with expectations, since the BoC had already announced a pause at their previous meeting. Looking forward, the statement said they were “prepared to increase the policy rate further” if required to get inflation back to target, and investors still expect the next move to be up, with another 25bps hike fully priced in by the September meeting. The Reserve Bank of Australia (RBA) hiked interest rates but argued that inflation had peaked. The 25bps increase to 3.6% was a record 10th consecutive hike but the RBA seems to be guiding away from a series of hikes in the months ahead. ECB will meet on Thursday this week. Investors have almost fully priced in a 50bps increase (97%), but there’s a bit more doubt over what they’ll do in May still, with 50bps considered the most likely outcome. Last week, ECB official Villeroy expects inflation to peak in the first half (1H) and reiterated and said “we will bring inflation toward 2% by the end of 2024 or beginning of 2025 – that’s a commitment, not just a forecast”.
