According to our economists, the February average hourly earnings data were likely impacted by calendar effects that boosted January average hourly earnings and biased February wage growth lower. As such our economists expect earnings to strengthen later this year on the back of further diminishing labour market slack. Overall one should expect further improving labour market conditions to continue lowering weak external factors’ dampening impact on prices. Indeed, inflation expectations as measured by 5y forward breakeven have been rebounding, irrespective of rising Fed rate expectations.
As of now, markets price in around 25bp in terms of tightening for the reminder of the year. This stands in contrast to our own forecasts, according to which we anticipate two more hikes
Hence, we anticipate additional room of rising rate expectations to the benefit of the USD. Accordingly we stay in favour of buying USD dips, for instance against the EUR. This is especially true as the ECB is likely to decide in favour of more aggressive policy measures this week. It must be noted too that increasing liquidity expectations on the back of this week’s ECB monetary policy announcement should prove beneficial to investors’’ appetite for risk assets. This is especially true should global growth expectations remain more supported on the back of further stabilizing US growth expectations.
Elsewhere, SNB’s Maechler stressed that they have not reached the limits of monetary policy and that the franc is still overvalued. This is nothing new but shall probably remind markets that the central bank will not hesitate to act anew if needed. This will largely depend on the ECB’s stance’s impact on the franc. We remain of the view that the CHF should be sold on rallies.
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