The dollar was mixed last week as markets remain volatile. CHF, GBP, and EUR outperformed while the Scandies and dollar bloc underperformed. The dollar ended last week on a strong note after a solid jobs report underscored the need for the Fed to tighten further. This week brings CPI, PPI, and retail sales data that should send the same message. We believe the dollar should resume climbing when markets price out Fed easing this year.
Last Friday’s jobs data supports our view that while the U.S. economy is slowing, it remains pretty, pretty, pretty good. The labor market is softening a bit but recall that pre-pandemic, a 236k reading would be considered excellent. Once again, ADP undershoots NFP. The drop in the unemployment rate to 3.5% was due to a 577k gain in the household survey, which has been outperforming the establishment survey in recent months. Average hourly earnings fell a bit to 4.2% y/y but overall, we think the Fed will still see the need for further cooling in the labor market. Indeed, its March forecast sees unemployment ending this year at 4.5%, a full percentage point higher than the actual March reading.
Inflation data take center stage this week. March CPI will be reported Wednesday. Headline is expected at 0.2% m/m and 5.1% y/y vs. 0.4% m/m and 6.0% y/y in February. Core is expected at 0.4% m/m and 5.6% y/y vs. 0.5% m/m and 5.5% y/y in February. Of note, the Cleveland Fed’s inflation nowcast model sees headline CPI at 0.30% m/m and 5.22% y/y and core CPI at 0.45% m/m and 5.66% y/y, both slightly above consensus. PPI will be reported Thursday. Headline is expected at 0.0% m/m and 3.0% y/y vs. -0.1% m/m and 4.6% y/y in February. Core is expected at 0.3% m/m and 3.5% y/y vs. 0.0% m/m and 4.4% y/y in February.
Fed tightening expectations remain depressed. WIRP suggests around 70% odds of 25 bp hike at the May 2-3 meeting, up from 50% at the start of last week. After that, it’s all about the cuts. Between 2-3 cuts by year-end are still priced in. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. This week’s CPI and PPI data are likely to underscore the fact that inflation remains stubbornly high and so we look for the hawkish tilt in Fed comments to continue this week.
FOMC minutes Wednesday will be important. At the March 21-22 FOMC meeting, the Fed hiked rates 25 bp and noted that additional policy firming may be appropriate. The Dot Plots showed the median 2023 Fed Funds forecast unchanged at 5.1%, while the 2024 median moved up slightly to 4.3%. The Fed noted that U.S. banks remain sound and resilient but acknowledged that recent events will weigh on growth. This was about as hawkish as the Fed could be given the banking sector stresses that were being felt then. The underlying message was similar to the ECB’s. That is, once we get past the banking sector stresses, the tightening cycle likely remains intact. Williams speaks Monday. Goolsbee, Harker, and Kashkari speak Tuesday. Barkin speaks Wednesday.
Retail sales data Friday will be closely watched. Headline is expected at -0.4% m/m vs. -0.4% in February and ex-autos is expected at -0.4% m/m vs. -0.1% in February. The so-called control group used for GDP calculations is expected at -0.5% m/m vs. 0.5% in February. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 GDP growth at 1.5% SAAR, down from 1.7% previously and the lowest estimate so far and well below the highest estimate of 3.5% back in late March. Next model update comes Monday.
Other minor data will be reported. February wholesale trade sales and inventories will be reported Monday. March budget statement will be reported Wednesday and is expected at -$302.0 bln vs. -$192.6 bln in February. Weekly jobless claims will be reported Thursday. March import/export prices and IP will be reported Friday. Preliminary April University of Michigan consumer sentiment will be reported Friday too. Headline is expected to fall a tick to 61.9.
Bank of Canada meets Wednesday and is expected to keep rates steady at 4.5%. WIRP suggests over 15% odds of a 25 bp cut. A cut seems very unlikely, especially after last week’s solid jobs report for March. At the last meeting March 8, the bank kept rates steady at 4.5% for the first pause since the bank started hiking last March. While the bank said it was prepared to hike again if needed, the statement removed the reference to excess demand in the economy. The bank noted that the latest data remain “in line with the bank’s expectation that CPI inflation will come down to around 3% in the middle of this year.” It added that “With weak economic growth for the next couple of quarters, pressures in product and labor markets are expected to ease.” Overall, the tone was on the dovish side and suggests the tightening cycle has ended. Looking ahead, between 2-3 cuts by year-end are still priced in, which is also highly unlikely. February manufacturing sales and March existing home sales will be reported Friday.
Eurozone reports some key data. February retail sales will be reported Tuesday and is expected at -0.8% m/m vs. 0.3% in January. IP will be reported Thursday and is expected at 0.9% m/m vs. 0.7% in January.
ECB tightening expectations have steadied. The next policy meeting is May 4 and WIRP suggests nearly 90% odds of a 25 bp hike then. After that, another 25 bp hike is priced in for Q3. There are no longer any odds of one last 25 bp hike in Q4 and so the peak policy rate is now seen near 3.50%, up from 3.25% during the height of the banking panic. De Cos speaks Monday. Villeroy speaks Tuesday. Guindos, de Cos, and Villeroy speak Wednesday. Nagel speaks Thursday and again on Friday. The hawks are likely to continue pushing back against market expectations but for now, the doves seem to be winning the messaging efforts.
The monthly U.K. data dump begins. February GDP, IP, construction output, services index, and trade will all be reported Thursday. GDP is expected at 0.1% m/m vs. 0.3% in January, IP is expected at 0.2% m/m vs. -0.3% in January, services is expected flat m/m vs. 0.5% in January, and construction is expected at 0.9% m/m vs. -1.7% in January. The trade deficit is expected at -GBP4.9 bln vs. -GBP5.9 bln in January.
BOE tightening expectations have steadied. The next policy meeting is May 11 and WIRP suggests around 70% odds of a 25 bp hike, with odds of another 25 bp hike topping out near 50% in Q3. As a result, the peak policy rate is seen between 4.50-4.75%. Governor Bailey speaks Wednesday. Chief Economist Pill speaks Thursday. Outgoing MPC member Tenreyro speaks Friday. Her second three-year term ends in July but reports have recently emerged that the Treasury will soon announce her replacement. Tenreyro has become one of the leading doves on the MPC and so her replacement could lead to a shift in the hawk-dove balance. Stay tuned.
Norway reports March CPI data Tuesday. Headline is expected at 6.1% y/y vs. 6.3% in February, while underlying is expected at 6.2% y/y vs. 5.9% in February. If so, headline would continue to fall from the 7.5% peak in October but remain well above the 2% target. At the last policy meeting March 23, Norges Bank hiked rates 25 bp to 3.0% and Governor Bache said “The policy rate will be raised further in May.” Similar to other central banks that are also tightening, Norges Bank is looking through the banking stresses as Bache noted “We see no sign now that Norwegian banks have liquidity problems or of larger contagion effects in other parts of the financial system in Norway.” Next policy meeting is May 4 and another 25 bp hike to 3.25% seems likely.
Sweden reports March CPI data Friday. Headline is expected at 11.0% y/y vs. 12.0% in February, CPIF is expected at 8.3% y/y vs. 9.4% in February, and CPIF ex-energy is expected at 9.1% y/y vs. 9.3% in February. If so, targeted CPIF would be the lowest since last July but would remain well above the 2% target. At the last policy meeting February 9, the Riksbank hiked rates 50 bp to 3.0% and delivered several other hawkish measures whilst noting “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” The Riksbank accelerated its Quantitative Tightening and put more emphasis on the exchange rate after a period of benign neglect, noting “If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target. A stronger krona would be desirable.” Lastly, forward guidance shifted more hawkish as the policy rate is now seen peaking at 3.33% in Q4 2024 and staying there through Q1 2026. WIRP suggests another 50 bp hike to 3.5% is fully priced in for the next meeting April 26. Looking further ahead, the market sees the policy rate peaking between 3.5-3.75%.
Kazuo Ueda became Governor of the Bank of Japan over the weekend. He inherits a mixed economic picture that will make any decision to remove accommodation very difficult. Inflation has been easing but due in large part to government energy subsidies, while the economy is showing signs of slowing. Given this backdrop, we do not believe Ueda will be in any hurry to tighten. WIRP suggests no odds of liftoff April 28, rising to around 10% June 16 and nearly 60% for July 28. A hike isn’t priced in until December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 20 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.
Japan orders data will be the highlight. March machine tool orders will be reported Tuesday. February core machine orders will be reported Wednesday and are expected at -6.7% m/m vs. 9.5% in January. The y/y rate is expected to remain steady at 4.5%. March PPI will also be reported Wednesday and is expected at 7.1% y/y vs. 8.2% in February. If so, it would be the lowest since September 2021.
February current account data will be reported Monday. The adjusted surplus is expected at JPY1.45 trln vs. JPY216 bln in January. However, the investment flows will be of most interest. January data showed that Japan investors turned net buyers of U.S. bonds (JPY357 bln) again after being net sellers four straight months and for thirteen of the past fifteen. Japan investors remained net sellers (-JPY152 bln) of Australian bonds for the seventh straight month and turned net sellers of Canadian bonds (-JPY101 bln) again and for eleven of the past twelve months. Investors turned net buyers of Italian bonds (JPY112 bln) again and for three of the past four months. Japan investors were total net buyers of foreign bonds (JPY885 bln) for the first time since August.
Australia highlight will be March jobs data Thursday. Consensus sees 20.0k jobs added vs. 64.6k in February, while the unemployment rate is expected to rise a tick to 3.6%. We know from the last RBA meeting that the state of the labor market is an important factor in setting policy going forward after its pause this month. Note that the latest RBA forecasts see unemployment rising to 3.8% by year-end.
The RBA tightening cycle may be over. Next meeting is May and rates are expected to remain steady at 3.60%. Updated macro forecasts then should help markets determine how the RBA is likely to proceed in the coming months. No more hikes are priced in and one cut is fully priced in by year-end.