The majors were mostly firmer last week as the dollar came under broad-based weakness. CAD, NZD, and GBP outperformed while JPY, NOK, and SEK underperformed. U.S. data this week should underscore the ongoing momentum in the economy as well as the ongoing need for further tightening by the Fed. It may take some time but eventual repricing of Fed tightening should eventually boost the dollar at the expense of most risk assets.
Another weekend has passed and there have been no more bank failures. Markets are slowly returning to normal while policymakers have so far been justified in looking through the banking sector stresses and focusing policy on inflation. The RBNZ is likely to follow the Fed, ECB, SNB, and BOE in hiking rates during this period of market mayhem. The RBA is not expected to follow suit but it had flagged a likely pause back at its last meeting March 7, before SVB collapsed. Comments last week by Fed officials underscore the view that the banking crisis will be addressed with changes in regulatory policy, not monetary policy. That emphasis should be maintained by the Fed in the runup to the next FOMC meeting.
Fed tightening expectations still need to adjust higher. WIRP suggests around 60% odds of 25 bp hike at the May 2-3 meeting. After that, it’s all about the cuts. Nearly two cuts by year-end are priced in. In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year. Last week’s PCE data were mixed. While headline and core both came in a tick lower than expected, super core accelerated for a second straight month to 4.63% y/y and is the highest since October. This is not the direction that the Fed desires and so we look for the hawkish tilt in Fed comments to continue. Cook speaks Monday. Cook and Mester speak Tuesday. Bullard speaks Thursday.
The March jobs report Friday will be the data highlight. NFP consensus stands at 240k vs. 311k in February, while the unemployment rate is seen steady at 3.6%. Average hourly earnings are expected to slow to 4.3% y/y vs. 4.6% in February. It's worth noting that the data will come on Good Friday. With markets likely to be very thin, we could get some outsize movements from the numbers, whether good or bad. Ahead of NFP, ADP reports its private sector jobs estimate Wednesday and is expected at 210k vs. 242k in February. Other key labor market data will be reported this week. February JOLTS job openings will be reported Tuesday and is expected at 10.500 mln vs. 10.824 mln in February. March Challenger jobs cuts and weekly jobless claims will be reported Thursday.
March ISM PMI readings will also be important. Manufacturing PMI will be reported Monday. Headline is expected at 47.5 vs. 47.7 in February. Keep an eye on prices paid (51.1 expected vs. 51.3 in February) and new orders (47.5 expected vs. 47.0 in February). Services will be reported Wednesday. Headline is expected at 54.3 vs. 55.1 in February. Of note, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May. Last week, Chicago PMI came in at 43.8 vs. 43.0 expected and 43.6 in February.
Other minor data will round out the economic picture. February construction spending (flat m/m expected) and March vehicle sales (14.60 mln annual rate expected) will be reported Monday. February factory orders will be reported Tuesday and are expected at -0.5% m/m vs. -1.6% in January. February trade data will be reported Wednesday and the deficit is expected at -$68.8 bln vs. -$68.3 bln in January.
Canada highlight will be March jobs data Thursday. Consensus sees 15.0k jobs created vs. 21.8k in February, while the unemployment rate is expected to rise a tick to 5.1%. March Ivey PMI will also be reported Friday. Ahead of that, S&P Global manufacturing PMI will be reported Monday. February building permits will be reported Tuesday. Trade data will be reported Wednesday.
Bank of Canada publishes its Q1 business outlook survey Monday. The bank next meets April 12 and WIRP suggests around 10% odds of a rate cut then. Two rate cuts by year-end are fully priced in and this seems very unlikely.
Eurozone has a quiet week. Final March PMI readings will come out, with manufacturing Monday and services and composite Wednesday. Italy and Spain report for the first time. Their manufacturing PMIs are expected at 51.0 and 50.0, services are expected at 53.3 and 57.7, and composites are expected at 53.1 and 56.0, respectively.
Individual eurozone nations report some key data. Germany reports February trade data Tuesday. Exports are expected at 1.8% m/m vs. 2.7% in January and imports are expected at 1.5% m/m vs. -2.1% in January. Factory orders will be reported Wednesday and are expected at 0.5% m/m vs. 1.0% in January. IP will be reported Thursday and is expected at -0.3% m/m vs. 3.5% in January. France and Spain report February IP and are expected at 0.5% m/m and 0.4% m/m, respectively. Eurozone IP won’t be reported until April 13. Italy reports February retail sales Wednesday.
Markets have repriced the ECB tightening outlook upwards. 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 July 27. After that, odds of one last 25 bp hike top out near 30% in October and so the peak policy rate is now seen near 3.50%, up from 3.25% during the height of the banking panic. ECB speakers are likely to show the ongoing split between the hawks and the doves. Simkus and Vujcic speak Monday. Lane speaks Wednesday.
The U.K. has a quiet week. Final March PMI readings will come out, with manufacturing Monday and services and composite Wednesday. We just cannot get excited about the recent strength in the U.K. data.
Bank of England tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 65% odds of a 25 bp hike, with odds of another 25 bp hike topping out near 70% in Q3. As a result, the peak policy rate is now seen between 4.50-4.75%, up from 4.25% during the height of the banking panic. Tenreyro and Pill speak Tuesday. Tenreyro speaks again Wednesday.
Switzerland reports March CPI Monday. Headline is expected at 3.2% y/y vs. 3.4% in February, while core is expected at 2.5% y/y vs. 2.45 in February. Last month, the bank hiked rates 50 bp to 1.5% and flagged more hikes ahead as Governor Jordan said “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” We concur. The market is pricing in a peak policy rate near 2.0%, which seems about right.
Bank of Japan Q1 Tankan survey will be reported Monday. Large manufacturing index is expected at 3 vs. 7 in Q4 and large manufacturing outlook is expected at 3 vs. 6 in Q4. Large non-manufacturing is expected at 20 vs. 19 in Q4 and large non-manufacturing outlook is expected at 17 vs. 11 in Q4. Lastly, all-industry capex is expected at 14.2% vs. 19.2% in Q4.
Labor cash earnings Friday will be key. Nominal earnings are expected at 1.3% y/y vs. 0.8% in January and real earnings are expected at -2.3% y/y vs. -4.1% in January. Last week, labor market data came in soft and if this trend continues, it may be tough for wages to rise enough for the Bank of Japan to feel comfortable removing accommodation.
Recent data should keep the Bank of Japan on hold for now. WIRP suggests no odds of liftoff April 28, rising to around 10% June 16 and 55% for July 28. A hike isn’t priced in until October 31. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 15 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.
Final March PMI readings will be reported. Manufacturing will come out Monday and services and composite will come out Wednesday.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 3.60%. It hiked rates 25 bp the last meeting March 7 but its forward guidance was dovish. Governor Lowe then noted that the RBA will be guided by incoming data on employment, inflation, retail sales, as well as various business surveys in deciding on whether to hike rates or pause at the April 4 meeting. He noted that “If collectively they suggest the right thing is to pause then we’ll do that, but if they suggest that we need to keep going we’ll do that. So we’ve got a completely open mind about what happens at the next board meeting.” Updated macro forecasts won’t come until the bank’s Statement of Monetary Policy for its next meeting May 2. The market is pricing in a rate cut before year-end, which seems very unlikely. Lowe speaks Wednesday. The RBA releases its Financial Stability Report Thursday.
Australia reports key data too. Final March PMI readings will come out, with manufacturing Monday and services and composite Wednesday. February home loan data will also be reported Monday. Trade data will be reported Thursday.
Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 25 bp to 5.0%. At the last policy meeting February 22, it hiked rates 50 bp to 4.75% and signaled more hikes ahead as it noted that “While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation. The Committee agreed that monetary conditions need to tighten further.” Updated macro forecasts were little changed, with the policy rates still seen peaking near 5.5% this year and staying there for much of next year. Looking ahead, WIRP suggests one final 25 bp hike July 12 is priced in that would see the policy rate peak near 5.25%, down from 5.5% after the last meeting. Updated macro forecasts won’t come until the bank’s Monetary Policy Statement for its next meeting May 24.
OPEC+ announced a surprise oil output cut of 1.1 mln bbl/day. Saudi Arabia will cut its output by 500k bbl/day and will account for the lion’s share of the total, while Iraq will cut its output by 211k bbl/day, UAE by 144k bbl/day, and Kuwait by 128k bbl/day. Russia said will extend its already announced 500k bbl/day cut through Q2 until e3’;[year-end, which means that total OPEC+ output will fall 1.6 mln bbl/day in H2. This latest round of cuts will take effect in May and last through year-end, and comes after OPEC+ cut output 2 mln bbl/day back in October. Oil prices are likely to rise as a result of the cuts, but higher oil prices are the last thing the world needs right now.