Drivers for the Week of March 27, 2022

March 27, 2022
Here's a look at the main drivers in Developed Markets this week.
  • This is a big data week for the U.S. and yet the readings are unlikely to have much impact on policy; the Fed’s post-FOMC messaging has been nothing but hawkish; U.S. rates continue to move in the dollar’s favor; March jobs data will be reported Friday; February core PCE Thursday will probably be more important; Treasury has a heavy schedule of coupon issuance this week; BOC tightening expectations are running hot
  • Key eurozone CPI data will be reported this week; ECB tightening expectations have picked up further; some important real sector data will also be reported; BOE tightening expectations have picked up a bit; Switzerland reports March CPI Friday
  • Japan reports some key data this week; fiscal stimulus may be announced this week; BOJ tightening expectations are going nowhere fast; Australian Treasurer Josh Frydenburg presents the annual budget Tuesday; the budget comes just two months ahead of the May 21 deadline for Prime Minister Morrison to call a general election; RBA tightening expectations continue to rise

AMERICAS

This is a big data week for the U.S. and yet the readings are unlikely to have much impact on policy. Barring a complete collapse in the economy, the Fed is dead set on removing accommodation quickly and aggressively. 50 bp hikes for May 4 and June 15 are both about 75% priced in. Looking ahead, the swaps market sees the policy rate at 2.75% over the next 12 months and peaking near 3.0% over the following months. Despite the steady move higher in expectations, we believe the Fed Funds rate may have to move above 3% in order to properly cool inflation. Stay tuned.

The Fed’s post-FOMC messaging has been nothing but hawkish. Last week, Powell and company all spoke about the likely need for a 50 bp hike at the May meeting. Though a handful of officials did not commit to such a move, they acknowledged they would if the data dictate it. Harker and Bostic speak Tuesday. Barkin and George speak Wednesday. Williams speaks Thursday and then again Saturday. In between, Evans speaks Friday. All are expected to maintain the hawkish tone.

U.S. rates continue to move in the dollar’s favor. The 2-year yield traded as high as 2.33% Friday, the highest since May 2019. Charts point to an eventual test of the November 2018 high near 2.97%. Similarly, the 10-year yield traded as high as 2.50% Friday, also the highest since May 2019. Here, charts point to an eventual test of the October 2018 high near 3.26%. The 2-year differentials with Germany, Japan, and the U.K. continue to rise to multi-year highs and point to further weakness in the euro, yen, and sterling vs. the dollar.

March jobs data will be reported Friday. Consensus sees 490l vs. 678k in February, while the unemployment rate is expected to fall a tick to 3.7% and average hourly earnings are expected to pick up a few ticks to 5.5% y/y. Ahead of that, ADP reports its private sector jobs data Wednesday and is expected at 450k. The other usual clues won’t come until after the employment report, as ISM manufacturing PMI will be reported later Friday morning and headline is expected at 59.0 vs. 58.6 in February. ISM services PMI will be reported next week. Chicago PMI will be reported Thursday and is expected at 57.0 vs. 56.3 in February.

February core PCE Thursday will probably be more important. The Fed’s preferred measure of inflation is expected to pick up three ticks to 5.5% y/y. If so, it would be the highest since March 1983 and further above the 2% target. Personal income and spending will also be reported at the same time. Both are expected at 0.5% m/m.

Treasury has a heavy schedule of coupon issuance this week. $50 bln of 2-year and $51 bln of 5-year notes will be sold Monday, followed by $47 bln of 7-year notes Tuesday. With yields at multi-year highs, will investors snap up new issuance or wait for yields to move even higher first? Keep an eye on the demand metrics. Bid/cover ratio at the last 2-year auction was 2.64 and indirect bidders took 65.6%. Bid/cover ratio at the last 5-year auction was 2.49 and indirect bidders took 67.8%. Lastly, bid/cover ratio at the last 7-year auction was 2.36 and indirect bidders took 63.9%.

Other minor data will round out the week. February advance goods trade (-$106.3 bln expected), wholesale (1.2% m/m expected) and retail inventories (1.4% m/m expected), and March Dallas Fed survey (11.0 expected) will be reported Monday. January S&P CoreLogic house prices, February JOLTS job openings (11.0 mln expected), and March Conference Board consumer confidence (107.0 expected) will be reported Tuesday. Another revision to Q4 GDP will be reported Wednesday. March Challenger job cuts and weekly jobless claims will be reported Thursday. February construction spending (1.0% m/m expected) and March auto sales (13.90 mln annual rate expected) will be reported Friday.

Bank of Canada tightening expectations are running hot after it started the cycle with a 25 bp hike to 0.5% earlier this month. WIRP suggests nearly 85% odds for a 50 bp hike at the next policy meeting April 13, with a 50 bp hike fully priced in at the subsequent meeting June 1. Looking ahead, swaps market sees the policy rate at 2.75% over the next 12 months and at 3.25% over the following 12 months. Canada has a limited data calendar this week. January GDP will be reported Thursday and is expected at 3.7% y/y vs. 3.9% in December. March S&P Global manufacturing PMI will be reported Friday. Overall, the economy remains strong even as inflation remains high.

EUROPE/MIDDLE EAST/AFRICA

Key eurozone CPI data will be reported this week. Spain and Germany report Wednesday. Headline EU Harmonized CPI for Spain is expected at 8.3% y/y vs. 7.6% in February and for Germany at 6.8% y/y vs. 5.5% in February. France and Italy report Thursday. Headline EU Harmonized CPI for France is expected at 4.9% y/y vs. 4.2% in February and for Italy at 7.2% y/y vs. 6.2% in February. Eurozone CPI will be reported Friday. Headline is expected at 6.7% y/y vs. 5.8% in February, while core is expected at 3.1% y/y vs. 2.7% in February.

ECB tightening expectations have picked up further. Swaps market is now pricing in 100 bp of tightening over the next 12 months, up from 70 bp at the start of last week. Another 60 bp of tightening is priced in over the following 12 months. This seems way too aggressive to us, especially in light of recent weakness in the real sector data. Rehn speaks Monday. Kazimir, Lagarde, Wunsch, Makhlouf, and Panetta all speak Wednesday. Lane and Guindos speak Thursday, followed by Centeno, Makhlouf, and de Cos Friday. Schnabel and Knot speak Saturday.

Some important real sector data will also be reported. Spain reports retail sales Tuesday and is expected at 1.0% y/y vs. 4.0% in January. Germany reports February retail sales Thursday and is expected at 0.5% m/m vs. 1.4% in January. France reports consumer spending (0.7% m/m expected) and Germany reports unemployment (-20k expected) Thursday. Final March manufacturing PMI will be reported Friday, while final services and composite PMIs will be reported next Tuesday.

BOE tightening expectations have picked up a bit. WIRP suggests a hike at the next meeting May 5 is fully priced in, with nearly 50% odds of a 50 bp move then. Swaps market sees the policy rate at 2.25% over the next 12 months, up from 2.0% at the start of last week, with some risks of another 25 bp of tightening over the following 12 months that would see the policy rate peak near 2.50%. Baily speaks Monday, while Chancellor Sunak testifies. Broadbent speaks Wednesday. It’s a quiet week for the U.K. February consumer credit will be reported Tuesday. Q4 current account and final GDP data will be reported Thursday. Final March manufacturing PMI will be reported Friday.

Switzerland reports March CPI Friday. Both headline and core are expected to pick up two ticks to 2.4% y/y and 1.5% y/y, respectively. Last week, the Swiss National Bank delivered a dovish hold. President Jordan said maintaining negative rates is still important for the bank, and that it never waits for another central bank to figure out what to do. He sees low second-round inflation risks, and added that Russia so far poses no risks to Switzerland’s financial sector. There was a sharp upward revision to the 2022 inflation forecast to 2.1%, but the 2023 and 2024 (just added) forecasts of 0.9% suggest liftoff won’t be seen until 2025 at the earliest. Swaps market is pricing in 75 bp of tightening over the next 12 months followed by another 75 bp over the following 12 months, which seems way too aggressive in light of the SNB’s dovish forward guidance.

ASIA

Japan reports some key data this week. February labor market data will be reported Tuesday. Retail sales will be reported Wednesday. IP and housing starts will be reported Thursday. Q1 Tankan survey will be reported Friday along with final March manufacturing PMI. Q1 is shaping up to be week due to the spread of the virus. As the numbers fade, Q2 should recover.
Fiscal stimulus may be announced this week. Last week, Finance Minister Suzuki said “I believe there’ll be instructions from the prime minister next week, so we’ll consider measures based on those orders. There needs to be a solid response to reduce the impact of rises in oil and grain prices on citizens and firms.” Kishida has come under increasing pressure to do something to help households and firms cope with rising fuel and commodity prices. While we thought that Kishida would wait until Q2 to better gauge the situation, it appears that he is willing to move sooner rather than later.

BOJ tightening expectations are going nowhere fast. Comments from Kuroda and other MPC members suggest the bar is very high for any withdrawal of accommodation. Not only must core inflation be sustainably around the 2% target, but higher wage must also be seen. Meanwhile, the 10-year JGB yield continues to creep higher. At 0.23%, it is already at the level that last brought BOJ intervention and is nearing the 0.25% upper limit of YCC.

Australian Treasurer Josh Frydenburg presents the annual budget Tuesday. It will be a tricky balancing act, as the government will be under pressure to deliver some relief to households suffering from high living costs whilst trying to repair the fiscal balances damaged by the pandemic. One potential measure that’s been floated is a cash payment to households, though many worry this would just add to the inflationary pressures. Others have suggested a more targeted approach, with payments only going to lower income groups. Revenues have been boosted by the strong economic recovery and high global commodity prices, while outlays have been limited by the improved labor market as well as low debt servicing costs.

The budget comes just two months ahead of the May 21 deadline for Prime Minister Morrison to call a general election. Polls show Morrison’s Liberal-National coalition trailing opposition Labor by a margin close to 10 percentage points. However, one should recall the 2019 elections, when polls showed Labor similarly ahead 54-46% before Morrison’s coalition emerged the winner. Otherwise, Australia has a limited data calendar this week. February retail sales will be reported Tuesday and are expected to rise 0.9% m/m vs. 1.8% in January. Building approvals and price sector credit will be reported Thursday. Final March manufacturing PMI will be reported Friday.

RBA tightening expectations continue to rise. WIRP suggests liftoff is fully priced in for the June 7 meeting now. At the beginning of March, liftoff was priced in for the August 2 meeting. Swaps market sees 225 bp of tightening over the next 12 months and another 110 bp over the following 12 months that would see the policy rate peak near 3.5%.

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