Drivers for the Week of April 10, 2022

April 10, 2022
Here's a look at the main drivers in Developed Markets this week.
  • The Fed is removing accommodation much faster than expected; U.S. rates continue to move higher; Fed officials remain hawkish; we get key U.S. inflation data this week; retail sales data Thursday will also be important; BOC meets Wednesday and is expected to hike rates 50 bp to 1.0%.
  • ECB meets Thursday and is expected to keep all rates steady; ECB tightening expectations remain heightened; reports suggest the ECB is crafting a crisis tool that would be activated if eurozone bond yields jump; France held its presidential election Sunday; U.K. has its monthly data dump this week; BOE tightening expectations remain steady; Norway reports March CPI Monday; Sweden reports March CPI Thursday
  • Japan has a busy week; there seems to be more discomfort with the weak yen; RBNZ meets Wednesday and is expected to hike rates 25 bp to 1.25%; Australia highlight is jobs data Thursday; with the economy pretty much at full employment, no wonder the RBA has tilted more hawkish

AMERICAS

The Fed is removing accommodation much faster than expected. Not only is 275 bp of tightening priced in over the next 12 months, but Quantitative Tightening will progress at a rate that’s nearly double what we saw in the last period of QT back in 2017-2019. More specifically, the March FOMC minutes released last week suggested QT may be implemented as soon as the May 3-4 meeting and set out a likely scenario for balance sheet runoff at a $95 bln monthly cap after a phase-in period of three months or “modestly longer if market conditions warrant.” Last time, the phase-in period was 12 months and the monthly cap was $50 bln.

U.S. rates continue to move higher. The 10-year yield traded at a new cycle high near 2.73% and is on track to test the October 2018 high near 3.26%. With inflation expectations remaining fairly steady, the real 10-year yield has risen to -0.18%, the highest since March 2020 and poised to move into positive territory for the first time since before the pandemic. The 2-year yield traded near 2.60% and is on track to test the November 2018 high near 2.97%. As a result, the 2-year differentials continue to widen in the dollar’s favor.

Fed officials remain hawkish. Bostic, Bowman, Waller, and Evans speak Monday. Brainard and Barkin speak Tuesday. Mester and Harker speak Thursday. WIRP suggests nearly 90% odds of back-to-back 50 bp hikes at the May 3-4 and June 14-15 FOMC meetings. Looking ahead, swaps market is pricing in nearly 275 bp of tightening over the next 12 months that would see the policy rate peak between 3.0-3.25%. We see room for the expected terminal rate to move even higher if inflation proves to be even more stubborn than expected.

We get key U.S. inflation data this week. March CPI data will be reported Tuesday. Headline is expected at 8.4% y/y vs. 7.9% in February, while core is expected at 6.6% y/y vs. 6.4% in February. The expected 1.2% m/m gain in headline CPI would be a new cycle high and suggests price pressures are still rising. PPI will be reported Wednesday. Headline is expected at 10.6% y/y vs. 10.0% in February, while core is expected to remain steady at 8.4% y/y. If anything, this data is likely to cement a 50 bp hike at the May 3-4 FOMC meeting.

Retail sales data Thursday will also be important. Headline is expected at 0.6% m/m vs. 0.3% in February, while ex-autos is expected at 1.0% m/m vs. 0.2% in February. The so-called control group used for GDP calculations is expected at -0.1% m/m vs. -1.2% in February. For now, consumption is holding up despite the hit to household spending power due to high inflation.

There is a huge slate of minor data as well. March budget statement will be reported Tuesday. March import/export prices, weekly jobless claims, February business inventories, and preliminary April University of Michigan consumer sentiment will be reported Thursday. February TIC data will be reported Friday. Empire survey will also be reported Friday and is expected at 1.0 vs. -11.8 in March. March IP will also be reported Friday and is expected at 0.5% m/m vs. 0.5% in February.

Bank of Canada meets Wednesday and is expected to hike rates 50 bp to 1.0%. However, nearly half the analysts polled by Bloomberg see a 25 bp move instead. WIRP suggests a 50 bp hike is fully priced in and so the BOC is likely to meet those expectations. Looking ahead, swaps market sees the policy rate peaking near 3.0% over the next 12 months. Updated macro forecasts will be released this week and 2024 will be added to the forecast horizon. After the decision, February manufacturing and wholesale trade sales will be reported Thursday.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank meets Thursday and is expected to keep all rates steady. There will not be updated macro forecasts until the June 9 meeting. While this week is widely expected to be placeholder meeting, the forward guidance will still be important. Bundesbank President Nagel said last week that the ECB will decide on its next monetary policy steps at the June meeting and hinted at an imminent rate hike. Specifically, he said “We’ll take new decisions on the basis of numbers that we’ll see in June. What we’re seeing at the moment suggests that savers could potentially enjoy higher rates soon.” German April ZEW survey will be reported Tuesday. Italy reports February IP Wednesday and is expected at 1.2% m/m vs. -3.4% in January.

ECB tightening expectations remain heightened. Some major banks have moved their liftoff calls up to September from December previously. However, market pricing is way ahead of them as WIRP suggests odds of liftoff June 9 are nearly 60% while July 21 is fully priced in. Swaps market is pricing in 125 bp of tightening over the next 12 months, with another 75 bp of tightening 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.

Reports suggest the ECB is crafting a crisis tool that would be activated if eurozone bond yields jump. No further details were given as ECB staff is still designing it. To be quite frank, the ECB already has tools to dampen bond yields and they're called APP and PEPP. Both have worked quite well and so we’re not sure why the ECB feels the need to roll out something new when they already have the tools. Either way, this is worth keeping an eye as any willingness to renew some form of QE should be considered euro-negative.

France held its presidential election Sunday. No candidate won an outright majority and so a runoff well be held April 27 between Macron and Le Pen. Macron got 28% of the vote vs. 24% for Le Pen in the first round, with leftist Melenchon coming in third with 20%. One early poll shows Macron winning 54-46% in the second round, while another one is a lot closer at 51-49%. We warn of the so-called Bradley effect, which likely understates Le Pen’s support. The euro bounced on the headline results but has since given up its gains already.

U.K. has its monthly data dump this week. The first slug comes Monday. February GDP is expected at 0.2% m/m vs. 0.8% in January, IP is expected at 0.3% m/m vs. 0.7% in January, construction output is expected at 0.5% m/m vs. 1.1% in January, and services index is expected at 0.2% m/m vs. 0.8% m/m. Lastly, the trade deficit is expected at -GBP7.15 bln vs. -GBP16.16 bln in January. The second slug comes Tuesday when labor market data will be reported. Unemployment for the three months ending February is expected to fall a tick to 3.8% while employment is expected to rise 53k vs. -12k previously. If so, the unemployment rate would match the pre-pandemic low. The final slug comes Wednesday when March CPI data will be reported. Headline is expected at 6.7% y/y vs. 6.2% in February, CPIH is expected at 5.9% y/y vs. 5.5% in February, and core is expected at 5.3% y/y vs. 5.2% in February.

Bank of England tightening expectations remain steady. WIRP suggests another 25 bp hike to 1.0% is fully priced in for the next meeting May 5. Swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 2.5%. There are no BOE speakers scheduled for this week.

Norway reports March CPI Monday. Headline inflation is expected at 5.0% y/y vs. 3.7% in February and underlying is expected at 2.4% y/y vs. 2.1% in February. If so, headline would be the highest since the cycle peak of 5.3% in December and further above the 2% target. At the last policy meeting March 24, Norges Bank hiked rates 25 bp to 0.75%, as expected. The updated rate path suggested a longer, greater tightening cycle ahead as the bank now sees the policy rate peaking near 2.5% in 2024 vs. 1.75% previously. The bank said the rate will mostly likely be hiked again at the June 23 meeting, adding “The committee was concerned with the prospect that the war in Ukraine could result in weaker-than-expected global growth amid rising inflation. If there are prospects of persistently high inflation, the policy rate may be raised more quickly.” Next policy meeting is May 5 and rates are likely to remain steady as the bank sticks to quarterly hikes for the time being.

Sweden reports March CPI Thursday. Headline inflation is expected at 5.6% y/y vs. 4.3% in February, CPIF is expected at 5.7% y/y vs. 4.5% in February, and CPIF ex-energy expected at 3.7% y/y vs. 3.4% in February. If so, CPIF would be the highest since December 1991 and further above the 2% target. At the last policy meeting February 10, the Riksbank delivered a dovish hold as it expected liftoff “slightly earlier” in H2 24 vs. Q4 24 at the previous meeting November 25. Markets were looking for a much bigger shift forward. However, Governor Ingves pivoted to a more hawkish stance mid-March when he said the bank is likely to hike rates before its forward guidance for H2 24 liftoff. When asked about possible 2022 liftoff, he said “we cannot rule anything out.” Next policy meeting is April 28 and we expect a hawkish hold that moves up the timing for liftoff. WIRP shows June 30 liftoff is nearly 90% priced in, while swaps market sees 175 bp of tightening over the next 12 months. All of this seems too aggressive to us.

ASIA

Japan has a busy week. March machine tool orders will be reported Monday. PPI will be reported Tuesday and is expected to ease a tick to 9.2% y/y. February core machine orders will be reported Wednesday and are expected at -1.5% m/m vs. -2.0% in January. March department store sales could be reported sometime this week but there is not set schedule. In general, the Q2 data have been weak due to omicron. Bloomberg consensus sees GDP coming in at -0.1% SAAR but then rebounding to 4.8% in Q2. That is a mighty big if, and so the government is preparing another fiscal package to help boost growth.

There seems to be more discomfort with the weak yen. First it was officials but now Japan corporates are complaining about it. The next Bank of Japan meeting April 27-28 will be very important. Does the BOJ underscore its commitment to ultra-loose policy? Or does it express a desire for a stronger yen? They can’t have both, not as long as the “Impossible Trinity” holds. We think that when push comes to shove, policymakers will refrain from making any moves that risk a sharply stronger yen. That means it’s steady as she goes for the BOJ.

Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 25 bp to 1.25%. WIRP suggests nearly 66% odds of a 50 bp move. At the last meeting February 23, the bank hiked 25 bp and noted “It was agreed that more monetary tightening was needed than signaled in the November statement” and would also begin a gradual reduction of its bond holdings in July. The bank said it was willing to hike rates in larger increments if needed and its expected rate path saw the policy rate at 2.5% by early 2023 before peaking near 3.5% in 2024. Updated macro forecasts and expected rate path won’t come until the May 25 meeting. Swaps market sees 250 bp of tightening over the next 12 months and another 50 bp over the following 12 months that would see the policy rate peak near 4.0%. 

Australia highlight is jobs data Thursday. Consensus sees 30.0k jobs added vs. 77.4k in February, while the unemployment rate is expected to fall a tick to 3.9%. If so, it would be another all-time low and suggests that the economy is at full employment. Ahead of that, March NAB business conditions will be reported Tuesday and April Westpac consumer confidence will be reported Wednesday.

With the economy pretty much at full employment, no wonder the RBA has tilted more hawkish. At last week’s policy meeting , the RBA dropped its reference to remaining “patient” on policy and instead moved to being data dependent. Governor Lowe said the bank will assess upcoming inflation and wage data as it “sets policy to support full employment in Australia and inflation outcomes consistent with the target.” This shift would seem to validate market expectations for liftoff coming sooner rather than later and so RBA tightening expectations continue to rise. WIRP suggests liftoff is now fully priced in for the June 7 meeting; at the beginning of March, liftoff was priced in for the August 2 meeting. Swaps market sees 250 bp of tightening over the next 12 months and another 75 bp over the following 12 months that would see the policy rate peak near 3.5%.  

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