The major currencies were mixed last week, reflecting the fact that the dollar continues to search for direction. GBP, NZD, and SEK outperformed while JPY, AUD, and NOK underperformed. We believe the U.S. data this week will prove to be supportive for the dollar. This week is likely to see further tightening of global monetary condition, with the Fed, ECB, and Norges Bank all expected to deliver 25 bp hikes. Furthermore, official China PMI readings reported over the weekend show that the reopening story leaves much to be desired, which adds to the headwinds for the growth-oriented currencies as well as risk assets in general.
This will be one of the most eventful weeks of the year. Not only do the Fed, ECB, Norges Bank, and RBA meet, but we also get the April jobs report and a host of other key U.S. data. Add in a dose of banking sector concerns and we have a recipe for heightened volatility in the coming days. As of this writing, a resolution for First Republic remains elusive. Final bids were submitted Sunday by several banks but if none are accepted, regulators may be forced to take over the troubled bank. We know from the March FOMC meeting that the Fed is willing to look through banking sector turmoil and focus on its inflation mandate. We expect a repeat performance this week.
The two-day FOMC meeting ends Wednesday and is expected to deliver a 25 bp hike. At the last meeting March 21-22, the Fed hiked rates 25 bp and noted that additional policy firming may be appropriate. 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 impacting markets then The underlying message was similar to the ECB’s. That is, despite the banking sector stresses, the Fed’s focus remains in inflation. Chair Powell noted then that a significant group on the FOMC expects credit tightening to result and that this could mean less need to hike rates. Powell also acknowledged that the Fed considered a pause but added that it was too soon to say how Fed policy has been impacted by the banking crisis. We think that still holds true now and so we expect the Fed to leave the door open to further hikes. Updated forecasts and Dot Plots will come at the June meeting. Of note, WIRP is still pricing in 1-2 cuts by year-end and we continue to view this as unlikely.
Jobs data Friday will be the data highlight. Consensus for NFP currently stands at 180k vs. 236k in March, while the unemployment rate is expected to rise a tick to 3.6% and average hourly earnings are expected to remain steady at 4.2% y/y. Ahead of that, March JOLTS job opening will be reported Tuesday and is expected at 9.725 mln vs. 9.931 mln in February. ADP reports its private sector jobs estimate Wednesday and is expected at 150k vs. 145k in March. April Challenger job cuts and weekly jobless claims will be reported Thursday. While there have been some signs of cooling in the labor market, it remains relatively tight.
April ISM PMI readings will also be important. Manufacturing will be reported Monday, with headline expected at 46.8 vs. 46.3 in March. Keep an eye on prices paid, which is expected to fall two ticks to 49.0. Services will be reported Wednesday, with headline expected at 51.8 vs. 51.2 in March. Of note, S&P Global preliminary April PMIs came in stronger than expected. Manufacturing came in 50.4 vs. 49.0 expected and 49.2 in March while services came in at 53.7 vs. 51.5 expected and 52.6 in March. As a result, the composite rose to 53.5 vs. 51.2 expected and 52.3 in March and was the highest since May 2022. Chicago PMI also came in much stronger than expected last week and at 48.6 is the highest since last August.
Other data will be round out the picture of the U.S. economy. March construction spending will be reported Monday and is expected at 0.1% m/m vs. -0.1% in February. Factory orders (1.3% m/m expected) and April vehicle sales (15.0 mln annual pace expected) will be reported Tuesday. March trade data and Q1 unit labor costs and productivity will be reported Thursday. March consumer credit will be reported Friday and is expected at $17.5 bln vs. $15.29 bln in February. Of note, the Atlanta Fed’s GDPNow model last week issued its initial estimate for Q2 growth at 1.7% SAAR, which would represent an improvement from 1.1% in Q1. Next model update comes this Monday. Bloomberg consensus sees Q2 at 0.6% SAAR and Q3 at -0.6% SAAR.
Canada highlight will be April jobs data Friday too. Consensus sees 20.0k jobs added vs. 34.7k in March, while the unemployment rate is expected to rise a tick to 5.1%. Ahead of that, April S&P Global manufacturing PMI will be reported Monday. March trade data and April Ivey PMI will be reported Thursday.
Bank of Canada expectations have steadied. After the bank held rates at 4.5% at both the March 8 and April 12 meetings, WIRP suggests another hold is expected at the next meeting June 7. Indeed, markets are pricing in steady rates over the next six months, with a cut fully priced in at the December 6 meeting. This seems too soon to us.
The ECB meets Thursday and is expected to hike rates 25 bp. There are around 10% odds of a larger 50 bp move. QT will be maintained at the initial EUR15 bln per month through June. We know the hawks want to quicken the pace but we do not expect any announcement until the June meeting, with a possibly faster pace beginning in July. At the last meeting March 16, the bank hiked rates 50 bp whilst acknowledging recent market tensions had added uncertainty to its baseline assessments. The ECB refrained from signaling future rate moves in its statement. President Lagarde stressed the bank would a data-dependent approach going forward. That said, she noted that if the ECB’s baseline scenario remains intact after this period of heightened uncertainty, “more is needed.” Madame Lagarde stressed then that there is no trade-off between price and financial stability. This was a very strong statement, one that has been echoed since by other central banks and likely to be maintained going forward. Updated macro forecasts were released in March and so the next set will come at the June meeting. Looking ahead, WIRP suggests another hike is priced in for June 15 and another for September 14, with the deposit rate seen peaking at 3.75%.
Ahead of that, April eurozone CPI data will be reported Tuesday. Headline is expected to pick up a tick to 7.0% y/y while core is expected to fall a tick to 5.6% y/y. Last week, country-level EU Harmonised CPI data were mixed. France picked up two ticks to 6.9% y/y, Spain picked up seven ticks to 3.8%, and Germany fell two ticks to 7.6% y/y. Italy will also report its EU Harmonised CPI Tuesday and is expected to fall a tick to 8.0% y/y. March M3 data will also be reported Tuesday and is expected at 2.4% y/y vs. 2.9% in February. March PPI will be reported Thursday and is expected at 5.9% y/y vs. 13.2% in February.
Final April PMI readings will be reported. Manufacturing PMIs will be reported Tuesday. Italy and Spain report for the first time and are expected at 49.5 and 49.9, respectively. Services and composite PMIs will be Thursday. Here too, Italy and Spain report for the first time and are expected at 56.6 and 59.3, respectively.
March eurozone retail sales will be reported Friday. Sales are expected at -0.2% m/m vs. -0.8% in February, while the y/y rate is expected at -3.3% vs. -3.0% in February. Italy also reports Friday. France and Spain have already reported sales at -5.6% y/y and 9.5% y/y, respectively.
Germany reports key data for March. Retail sales will be reported Tuesday and are expected at 0.4% m/m vs. -0.4% in February, with the y/y expected at -6.5% vs. -5.9% in February. Trade data will be reported Thursday. Exports are expected at -2.2% n/n vs. 4.2% in February while imports are expected at -2.3% m/m vs. 4.6% in February. Factory orders will be reported Friday and are expected at -2.5% m/m vs. 4.8% in February, with the y/y rate expected at -3.1% vs. -5.7% in February. Renewed weakness in the German data support our view that China reopening continues to have little impact on its major trading partners.
U.K. has a quiet week. Final April PMI readings will be reported, with manufacturing Tuesday and services and composite Thursday. March consumer credit will also be reported Thursday. While the economy has surprised to the upside recently, it’s hard for us to get excited about the growth outlook.
Bank of England meets next week and is expected to hike rates 25 bp to 4.5%. WIRP suggests 15% odds of a larger 50 bp move. Looking ahead, another 25 bp hike is priced in for June 22 and another one for September 21. Inflation remains stubbornly high and so more may need to be done.
Norges Bank meets Thursday and is expected to hike rates 25 bp to 3.25%. 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 looked 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.” There was also a hawkish shift in the expected rate path then. Since that meeting,
Switzerland reports April CPI data Friday. Headline is expected at 2.8% y/y vs. 2.9% in March while core is expected at 2.3% y/y vs. 2.2% in March. If so, headline would be the lowest since December but still above the 2% target. At the last policy meeting March 23, the bank hiked rates 50 bp to 1.5% and said that more rate hikes can’t be ruled out. It pledged to intervene in the FX market if needed in either direction. Much of President Jordan’s press conference focused on Credit Suisse, which had just been taken over by UBS. Jordan speaks Friday. Next policy meeting is June 22 and WIRP suggests a 25 bp hike to 1.75% is priced in, with over 10% odds of a larger 50 bp move. Another 25 bp hike September 21 is priced in, with 50% odds of a last 25 bp hike December 14. This means the policy rate is seen peaking near 2.0%.
Japan has a quiet data week. Final April manufacturing PMI will be reported Monday. Japan bucked the global trend in April as manufacturing picked up to 49.5 vs. 49.2 in March. Services and composite PMIs won’t be reported until next Monday. Overall, the economy is still recovering but recent data have shown some signs of softness. No wonder the Bank of Japan delivered a hold last week.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 3.60%. At the last meeting April 4, the bank delivered its first hold and Governor Lowe noted that “The decision to hold rates steady this month does not imply that interest rate increases are over. Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” However, he added that “The board is prepared to have a slightly slower return of inflation to target than some other central banks,” adding that “Our judgment at the moment is that if we can get inflation back to 3% by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses.” The market clearly believes the tightening cycle has ended but sees steady rates through year-end followed by the start of an easing cycle in early 2024. This seems about right. The bank releases it Statement on Monetary Policy Friday that will contain updated macro forecasts.
Key Australia data will also be reported. Final April PMI readings will be reported, with manufacturing Monday and services and composite Wednesday. March retail sales will be reported Wednesday and are expected at 0.2% m/m vs. 0.2% in February. Trade data will be reported Thursday. Both exports and imports have been slowing significantly and we see that trend continuing.
New Zealand highlight will be Q1 labor market data Wednesday. The unemployment rate is expected to rise a tick to 3.5%, as a 0.5% q/q gain in employment is seen being offset by a rise in the participation rate to 71.8%. If so, it would continue the slow but steady rise off of the Q4 2021 and Q1 2022 low of 3.2%. Private wages are expected to rise 1.1% q/q, both including and excluding overtime.
Reserve Bank of New Zealand publishes its financial stability report Wednesday. At the last policy meeting April 5, the bank delivered a hawkish surprise and hiked rates 50 bp to 5.25% vs. 25 bp expected. The bank also said it discussed recent global banking stresses and concluded that local banks are well placed to face any risks and repeated ECB President Lagarde’s mantra that there is no trade-off between price stability and financial stability. As such, we expect the bank to maintain that sort of upbeat tone in this week’s report. The next meeting policy is May 24 and a 25 bp hike to 5.5% is expected. After that, the market is pricing in steady rates through year-end followed by two 25 bp cuts through April 2024.