Drivers for the Week of May 28, 2023

May 28, 2023
Here's a look at the main drivers in Developed Markets this week.

The majors were weaker across the board as broad-based dollar strength continued. CHF, EUR, and CAD outperformed while NZD, SEK, and AUD underperformed. There will be several drivers for the dollar this week. Risk on sentiment due to the debt ceiling deal could lead to some gains in the foreign currencies, but this is likely to be offset by heightened Fed tightening expectations and firm U.S. data. Overall, we believe the dollar rally remains intact and so the foreign currencies are likely to remain under pressure near-term.


A preliminary debt ceiling deal was struck over the weekend. Some details have emerged but we suspect there will still be concessions made by both parties in order to get it passed by Congress ahead of the June 5 x-date. The deal would suspend the ceiling through January 2025, which is positive for President Biden as there won’t be another disruptive showdown ahead of the November 2024 elections. There will be caps on discretionary spending while mandatory programs like Medicare and Social Security will be exempted. Defense spending would rise 3.3% next year, precisely what Biden requested in his budget. The deal also includes a phased-in expansion of work requirements for food stamps and welfare recipients, with some exemptions for veterans and the homeless. $20 bln of IRS funding will be diverted to other non-defense spending. At first blush, the deal seems modest enough to elicit support from the moderates in both parties. However, there could be some hiccups in the coming days due to posturing from both sides.

We believe this deal cements a 25 bp hike at the June 13-14 FOMC meeting. With banking sector stresses fading, a potential default was really the only thing that could have prevented a hike next month. WIRP suggests odds of a hike then are nearly 60% and is pretty much priced in for the July 25-26 meeting. More importantly, rates cuts by year-end are now totally priced out, as they should have been long ago. The market now sees the first rate cut at the January 30-31 meeting but even that still seems too soon. Fed repricing has finally gone our way but more needs to be seen.

May jobs report Friday will be the data highlight this week. Consensus for NFP stands at 190k vs. 253k in April, with the unemployment rate expected to rise a tick to 3.5% and average hourly earnings seen steady at 4.4% y/y. Ahead of that, ADP reports its private sector jobs estimate Wednesday and is expected at 165k vs. 296k in April. Other labor market data will be reported this week. April JOLTS data will be reported Wednesday and is expected at 9.439 mln vs. 9.590 mln in March. May Challenger job cuts and weekly jobless claims will be reported Thursday.

Key PMI readings for May will also be reported. Chicago PMI will be reported Wednesday and is expected at 47.2 vs. 48.6 in April. ISM manufacturing PMI will be reported Thursday and the headline is expected to fall a tick to 47.0. Keep an eye on employment and prices paid, which stood at 50.2 and 53.2 in April, respectively. Of note, ISM services PMI will be reported next Monday. Dallas Fed manufacturing index will be reported Tuesday, followed by its services index Wednesday. Last week, S&P Global reported mixed May PMI readings as manufacturing fell to 48.5 vs. 50.2 while services rose to 55.1 vs. 53.6 in April. This led to the composite PMI to rise to 54.5 vs. 53.4 in April and was the highest since April 2022.

Fed Beige Book report for the June FOMC meeting will be released Wednesday. Since the May 2-3 meeting, there has been some cooling in some parts of the economy but the labor market remains fairly firm even as inflation remains elevated. More importantly, banking sector stresses have eased significantly and the much-feared credit crunch has yet to materialize. In all, we expect the Beige Book to leave the door wide open for further tightening. Between now and the June 13-14 FOMC meeting, we will still get one more jobs report as well as one more each of CPI, PPI, and retail sales data. Those readings will likely be the final determinant for the Fed decision. There will be several Fed speakers this week. Barkin speaks Tuesday. Collins, Bowman, Harker, and Jefferson speak Wednesday. Harker speaks again Thursday. At midnight Friday, the media blackout period begins and there will be no Fed speakers until Chair Powell’s press conference June 14.

Other minor data will round out the picture. March FHFA and S&P CoreLogic house price indices will be reported Tuesday. May Conference Board consumer confidence will also be reported Tuesday. Headline is expected at 99.0 vs. 101.3 in April. April construction spending (0.2% m/m expected) and May vehicle sales (15.3 mln annual rate expected) will be reported Thursday. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth at 1.9% SAAR, down from 2.9% previously. Next model update comes Thursday.

Canada highlight will be Q1 GDP data Wednesday. Annualized growth is expected at 2.5% vs. 0.0% in Q4. The Canadian economy remains fairly robust in spite of BOC tightening. With inflation still elevated, the market sees more hikes ahead despite the current pause. WIRP suggests another 25 bp hike is priced in for September 6. Similar to what we’ve seen for Fed expectations, a BOC rate cut by year-end is now totally priced out. Ahead of that, Q1 current account data will be reported Tuesday and is expected at -CAD10.22 bln vs. -CAD10.64 bln in Q4.


Eurozone May CPI data will be reported. Spain kicks things off Tuesday and its EU Harmonised CPI Is expected at 3.4% y/y vs. 3.8% in April, while core is expected at 6.4% y/y vs. 6.6% in April. Germany, France, and Italy report CPI Wednesday and their EU Harmonised CPI y/y readings are expected at 6.7%, 6.4%, and 7.5%, respectively. All would be significant drops from April. Eurozone then reports Thursday, with headline expected at 6.3% y/y vs. 7.0% in April and core expected at 5.5% y/y vs. 5.6% in April. If so, headline would be the lowest since February 2022 and would also be the first deceleration in core since June 2022. Eurozone April M3 will be reported Tuesday and is expected at 2.0% y/y vs. 2.5% in March. If so, it would be the slowest since July 2014 and points to slower growth ahead.

The ECB releases its account of the May 3-4 meeting Thursday. At that meeting, the bank hiked rates 25 bp in a decision that was described as “almost unanimous” as some favored a larger 50 bp move. The bank said that the pace of QT would be maintained at EUR15 bln through June but said it expects to stop all APP reinvestments as of July. President Lagarde later estimated that the halt of APP reinvestments would average EUR25 bln per month and so it’s almost double the current pace. Lagarde reiterated that while future decisions are data dependent, it’s very clear that the ECB isn’t pausing. Updated macro forecasts will come at the June 14-15 meeting. Looking ahead, WIRP suggests another hike is priced in then, followed by another 25 bp hike in either July or September. The odds of one last 25 bp hike top out near 40% in December. ECB speakers are plentiful this week. Simkus , Holzmann, Centeno, and Villeroy speak Tuesday. Villeroy and Visco speak Wednesday while the ECB releases its Financial Stability Review. Knot, Lagarde, and Villeroy speak Thursday.

Eurozone countries will report some key real sector data. Spain reports April retail sales Tuesday. France reports April consumer spending Wednesday and is expected at 0.3% m/m vs. -1.3% in March. Germany reports May unemployment Wednesday and is expected to remain steady at 5.6%. Germany reports April retail sales Thursday and is expected at 1.0% m/m vs. -2.2% in March. France reports April IP Friday and is expected at 0.3% m/m vs. -1.1% in March. April eurozone retail sales won’t be reported until June 6 while April IP won’t be reported until June 14.

Bank of England tightening expectations remain elevated after last week’s CPI data. WIRP suggests a 25 bp hike June 22 is priced in, with around 20% odds of a larger 50 bp move. 25 bp hikes for August 3, September 21, and November 2 are also fully priced in, which would take the bank rate up to 5.5% vs. 4.5% currently. Yet this repricing has done little for cable, which has been overwhelmed by broad dollar strength. However, the EUR/GBP cross is trading at recent lows near .86670 and the more hawkish BOE could see this pair test the December low near .85475. Mann speaks Wednesday. The U.K. has a quiet week in terms of data. May house prices, April consumer credit, and final manufacturing PMI will be reported Thursday.


Japan reports key April data for the real sector. Jobs data will be reported Tuesday. Unemployment is expected to fall a tick to 2.7%, while the job-to-applicant ratio is expected to remain steady at 1.32. Retail sales, IP, and housing starts will be reported Wednesday. Sales are expected at 0.5% m/m vs. 0.6% in March, while IP is expected at 1.3% m/m vs. 1.1% in March. Q1 capital spending and company profits and final May manufacturing PMI will be reported Thursday.

Bank of Japan tightening expectations remain fairly steady. WIRP suggests liftoff is likely at the December 18-19 meeting. However, the expected rate path remains very modest, with 15 bp of tightening seen over the next 12 months followed by another 15 bp over the subsequent 12 months.

Australia highlight will be April CPI Wednesday. Headline is expected to pick up a tick to 6.4% y/y. If so, it would be the first acceleration since December and would move inflation further above the 2-3% target range. Private sector credit will also be reported Tuesday. Final May manufacturing PMI will be reported Thursday. In terms of RBA policy, WIRP suggests odds of one more 25 bp hike top out around 75% September 5. Governor Lowe testifies Wednesday.

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