The dollar was mixed against the majors last week. NOK, AUD, and NZD outperformed while CAD, JPY, and CHF underperformed. Despite the strong U.S. data reported, the dollar was unable to build on its recent gains. We believe underlying strength in the U.S. economy is likely to continue, making it harder for the Fed to contemplate an easing cycle anytime soon. Furthermore, inflation data this week should underscore this message, which in turn should keep the dollar rally going.
AMERICAS
Markets are still digesting last Friday’s blockbuster jobs report. As long as the labor market remains firm, the U.S. economy is likely to continue growing at or above trend in H1 2024. In turn, this suggests inflation will take even longer to move back to target. Odds of a June cut have fallen to 55% while odds of a July cut have fallen to around 95%. Both are the lowest since October and continues the much-needed repricing of the Fed easing cycle.
Growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.5% SAAR and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.25% SAAR and Q2 growth at 2.6% SAAR. This model is updated every Friday. Financial conditions remain loose and so there is very little holding the economy back right now. The Fed will simply not be in any hurry to cut rates.
U.S. yields are rising as a result. The 2-year yield ended last week at 4.75%, the highest since mid-December and just shy of the December 11 high near 4.77%. After that is the November 27 high near 4.98%. The 10-year yield ended last week at 4.40%, just shy of last week’s high near 4.43%. After that is the November 27 high near 4.51% and then the November 13 high near 4.70%. the rise in yields at the short end reflects Fed repricing, while the rise at the long end reflects persistent inflation pressures. Given our fundamental outlook for the U.S., both ends of the yield curve should continue edging higher.
Fed officials remain cautious. Last Friday, Bowman said it was “much too soon” to think about cutting rates, and that she is increasingly concerned that inflation will stall out. Logan stressed that the risk of cutting rate too soon is higher than being late. There are many Fed speakers this week and we believe most share Logan’s view. Goolsbee and Kashkari speak Monday. Bowman and Goolsbee speak Wednesday. Williams, Collins, and Bostic speak Thursday. Bostic and Daly speak Friday.
FOMC minutes will be released Wednesday. In light of subsequent developments, the March 19-20 meeting no longer seems very relevant to current economic or market conditions. Recall that Chair Powell delivered a dovish message in his press conference. However, as we have said time and time again, markets should listen to the data, not Powell. The data say steady rates for now. If the Dots were redone now, we are quite confident that the median Dots would rise across the forecast horizon and that 2024 median would come in at 4.875% vs. 4.625% seen in March.
March inflation data take center stage. CPI will be reported Wednesday. Headline is expected at 3.4% y/y vs. 3.2% in February, while core is expected at 3.7% y/y vs. 3.8% in February. The Cleveland Fed’s Nowcast model forecasts headline and core CPI at 3.4% and 3.7%, respectively. Looking ahead to April, the model forecasts headline and core CPI at 3.3% and 3.6%, respectively. PPI will be reported Thursday. Headline is expected at 2.2% y/y vs. 1.6% in February and core is expected at 2.3% y/y vs. 2.0% in February. With energy prices on the rise, we see upside risks to the inflation readings this month and on.
New York Fed reports March inflation expectations Monday. 1-year expectations have been stuck near 3% for three straight months, still well above the 2% target. Both 3- and 5-year expectations picked up in February, another development that will keep the Fed on its toes.
University of Michigan reports preliminary April consumer sentiment Friday. Headline is expected at 79.0 vs. 79.4 in March, with current conditions seen dropping to 81.5 and expectations seen rising to 78.0. The March headline reading was the highest since July 2021, driven by steady gains in both current conditions and expectations. This is at odds with recent softness seen in the Conference Board's consumer confidence measure. Lastly, 1-year inflation expectations are seen steady at 2.9%, while 5- to 10-year expectations are seen rising a tick to 2.9%.
Bank of Canada meets Wednesday and is expected to keep rates steady at 5.0%. The market sees about 20% of a 25 bp cut is low at around 20%. However, we see risks of a dovish surprise this week. Canada’s labor market is rapidly losing steam, progress on inflation is faster than the BOC projected in January, and the business outlook survey remains weak. Updated macro forecasts will be released at this meeting and 2026 will be added to the forecast horizon. We expect downward revisions to the growth and inflation forecasts. Looking ahead, the market sees 70% odds of a cut in June.
EUROPE/MIDDLE EAST/AFRICA
The two-day European Central Bank meeting ends Thursday with a widely expected hold. The bank should also reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. The probability of a 25 bp cut is rather low at just under 10%. Most key ECB officials have telegraphed preference of a first rate cut in June, as they would have more information on wage dynamics as well as updated macro forecasts. President Lagarde’s post-meeting press conference will be key. Her comments will again be scrutinized for any hints about the timing and scope of future interest rate cuts.
Some eurozone countries will report key data this week. Germany reports February IP and trade data Monday. IP is expected at 0.5% m/m vs. 1.0% in January. Elsewhere, exports are expected at -0.5% m/m vs. 6.3% in January and imports are expected at -1.2% m/m vs. 3.7% in January. Italy reports February retail sales Wednesday and IP Thursday. IP is expected at 0.5% m/m vs. -1.2% in January. Eurozone IP will be reported next Monday.
The monthly U.K. data dump begins Friday. GDP is expected at 0.1% m/m vs. 0.2% in January, IP is expected at 0.0% m/m vs. -0.2% in January, services is expected at 0.1% m/m vs. 0.2% in January, and construction is expected at -0.4% m/m vs. 1.1% in January. The improvement in the composite U.K. PMI points to some upside risks to these numbers.
Bank of England expectations have remained fairly steady. The first cut is fully priced in for August, with three cuts total seen in 2024. Breeden speaks Monday. Greene speaks Thursday. Recall that Greene was the first of the hawks to shift to a hold at the February meeting and was joined by both Mann and Haskel at the March 21 meeting. On Friday, the bank releases a report on its economic forecasting by former Fed Chair Bernanke. Governor Bailey has said that he expects the bank to drop its so-called fan charts in favor of a new regime.
Norway highlight will be March CPI Wednesday. Headline is expected at 4.1% y/y vs. 4.5% in February, while underlying is expected at 4.7% y/y vs. 4.9% in February. If so, headline would be the lowest since October but still well above the 2% target. At the last meeting March 21, Norges Bank kept rates steady at 4.50% and reiterated that “the policy rate needs to be maintained at the current level for some time ahead.” According to the Norges Bank, “the Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then weaken.” The Norges Bank projects the policy rate to stay at 4.50% until Q3 before gradually moving down, which is consistent with market pricing.
Sweden highlight will be March CPI Friday. Headline is expected at 4.4% y/y vs. 4.5% in February, CPIF is expected at 2.6% y/y vs. 2.5% in February, and CPIF ex-energy is expected at 3.2% y/y vs. 3.5% in February. If so, CPIF would move further above the 2% target while CPIF ex-energy would fall to a more than a two-year low. At the last meeting March 27, the Riksbank delivered a dovish hold as it indicated “that the policy rate can be cut in May or June if inflation prospects remain favorable.” Of note, the market sees 45% odds of a cut May 8 and becomes fully priced in June 27. Looking ahead, the market is pricing in 100 bp of total easing over the next year.
ASIA
Japan data highlight will be February cash earnings Monday. Nominal earnings are expected at 1.8% y/y vs. 2.0% in January, while real earnings are expected at -1.4% y/y vs. -0.6% in January. Keep an eye on scheduled pay, which rose 1.4% y/y in January. The Bank of Japan is closely monitoring whether a virtuous cycle between wages and prices will intensify to gage the extent of its normalizing cycles. So far, annual wage growth suggests the BOJ’s tightening process will be gradual. Indeed, Governor Ueda last week hinted that the next hike will likely come in H2. The market is pricing in only 50 bp of tightening over the next three years.
February current account data will also be reported Monday. An adjusted surplus of JPY1.995 trln is expected vs. JPY2.73 trln in January. However, the investment flows will be of more interest. The January data showed that Japan investors stayed net buyers of U.S. bonds (JPY3.14 trln) for the fifth time in six months. Japan investors turned net sellers (-JPY4 bln) of Australian bonds again and remained net sellers of Canadian bonds (-JPY199 bln) for the seventh straight month and for eleven of the past twelve months. Investors turned net sellers of Italian bonds (-JPY24 bln) again. Overall, Japan investors stayed total net buyers of foreign bonds (JPY2.53 trln) for the fifth time in six months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.
March machine tool orders will be reported Tuesday. Keep an eye on domestic orders, which have been underperforming foreign orders.
Australia reports only minor data this week. February lending indicators will be released Monday and will likely show again that the demand to purchase new dwellings remains subdued. The March NAB business survey and April Westpac consumer confidence index Tuesday will offer a timely update on the growth outlook. Despite some softness in the data, the market is not pricing in the first cut until November.
Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. There is no press conference or updated macro projections at this meeting. However, risks are skewed in favor of a dovish surprise because New Zealand economic data have underwhelmed since the last meeting February 28. Real GDP (production-based) fell -0.1% q/q in Q4, while measures of consumer and business confidence fell to multi-month lows in March. The market is pricing in the first cut in August, with 75 bp of total easing this year.
