Drivers for the Week of May 5, 2024

May 05, 2024

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar came under broad-based pressure last week. JPY, NOK, and NZD outperformed while CAD, GBP, and EUR underperformed. Weak U.S. data and a dovish Fed hold took the wind out of the dollar’s sails. With no major U.S. data this week, we expect the greenback to remain under pressure.

AMERICAS

We finally got some signs that the U.S. economy is slowing. NFP came in at 175k in April, the smallest gain since October, even as the unemployment rate ticked up to 3.9% and average hourly earnings slowed to 3.9% y/y. Both ISM PMIs fell into contractionary territory, with manufacturing at 49.2 and services at 49.4. While it’s too early to push the panic button, the data could signal the start of a slower phase for the U.S. economy.

We also got a dovish hold from the Fed. As a result, Fed easing expectations have adjusted. Odds of a June cut remain steady at around 10%, but July odds have risen to 40% vs. 25% ahead of the decision. September odds have risen to nearly 90% vs. 55% ahead of the decision, while a November cut is fully priced in vs. 75% ahead of the decision. There will be many Fed speakers this week. Barkin and Williams speak Monday. Kashkari speaks Tuesday. Jefferson, Collins, and Cook speak Wednesday. Daly speaks Thursday. Bowman, Logan, Goolsbee, and Barr speak Friday. No matter what the hawks may say, they cannot erase the dovish message sent by the Fed last week.

Yet Q2 growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.3% SAAR and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 2.2% SAAR and will be updated Friday. Its initial read for Q3 growth will be released in early June.

Fed releases its Senior Loan Officer Opinion Survey Monday. The results will offer an overview of bank lending practices over Q1. We don’t expect any major surprises. The March FOMC meeting minutes pointed out that credit continued to be available to most businesses, households, and municipalities. Even beleaguered commercial real estate (CRE) borrowers continued to find credit readily accessible while CRE loans at banks picked up moderately in January and February. Of note, SLOOS respondents compare lending standards vs. the previous quarter. While credit standards for loans to large and medium firms still tightened in Q4, the number of banks reporting tighter standards fell to 14.5% vs. 33.9% in Q3.

Preliminary May University of Michigan consumer sentiment will be reported Friday. Headline is expected at 76.2 vs. 77.2 in April, which would be consistent with resilient household spending activity. Both current conditions and expectations expected to fall. 1-year inflation expectations are expected to rise a tick to 3.3%, while 5- to 10-year expectations are expected to remain steady at 3.0%. Both are well above the 2% target, which should keep the Fed cautious.

Canada highlight will be April jobs data Friday. Consensus sees a 20.0k rise in jobs vs. -2.2k in March, with the unemployment rate seen rising a tick to 6.2% and hourly wages slowing two ticks to 4.8% y/y. If so, this would be the highest unemployment rates since January 2022. The March labor market reading was poor. As such, another soft print in April would solidify the case for a June rate cut. Market puts 66% odds on a cut then, with July fully priced in.

Bank of Canada releases its Financial System Review Thursday. Last year’s FSR pointed out that indicators of financial stress among households remain low but are rising. We suspect the upcoming FSR will highlight increasing pockets of strains amongst households considering that interest rates are higher versus a year ago. If so, it would reinforce the case for a BOC rate cut in June,

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank releases the account of its April 11 meeting Friday. It kept rates steady then and stuck to the script. The bank appeared more confident about the disinflationary process and reinforced the case for a June rate cut. The ECB noted that “incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook.” Recall that Lagarde admitted that a few members felt confident enough to back a rate cut then but added that a very large majority of members wanted to wait for June. Reports later emerged that a larger group initial favored cutting rates at the April meeting, with some then joining the majority that favored waiting until the June meeting. There will be plenty of ECB speakers. Villeroy, Nagel, and Panetta speak Monday. De Cos speaks Tuesday. Wunsch speaks Wednesday. Cipollone and Guindos speak Thursday. Cipollone speaks Friday.

Eurozone reports final April services and composite PMIs Monday. Italy and Spain report for the first time and their composite PMIs are expected at 53.0 and 55.1, respectively. Eurozone March PPI will also be reported Monday and is expected at -7.7% y/y vs. -8.3% in February.

Germany reports March factory orders and trade data Tuesday. Orders are expected at 0.4% m/m vs. 0.2% in February. Exports are expected at 0.3% m/m vs. -2.0% in February, while imports are expected at -1.0% m/m vs. 3.2% in February.

Eurozone reports March retail sales Tuesday. Sales are expected at 0.7% m/m vs. -0.5% in February. The eurozone economy has recovered quickly from its downturn as real GDP grew 0.3% q/q over Q1. Eurozone Sentix May investor confidence index will be reported Monday. Italy reports sales Wednesday and expected at 0.1% m/m.

March IP data will continue rolling out. Germany and Spain report March IP Wednesday. Italy reports IP Friday. Eurozone IP won’t be reported until May 15.

Bank of England meeting ends Thursday with a decision. The bank is widely expected to leave the policy rate at 5.25%. The focus instead will be on the voting split and the updated macroeconomic projections. In March, Dhingra voted to reduce the policy rate while all others voted to keep rates on hold. The risk is that the MPC decision to keep the policy rate steady in May becomes unanimous. Leading indicators point to a pick-up in U.K. economic activity and underlying inflation pressures (private sector regular pay growth and services CPI) are tracking higher than the BOE’s March projections. Chief Economist Pill speaks both Thursday and Friday. Dhingra also speaks Friday.

BOE also releases its April Decision Maker Panel inflation survey Thursday. 1-year expectations are expected to fall a tick to 3.1%. However, both short- and medium-term expectations remain above the 2% target, warranting cautious on the part of the BOE.

March U.K. data dump begins Friday. GDP is expected at 0.1% m/m v. 0.1% in February, IP is expected at -0.5% m/m vs. 1.1% in February, construction output is expected at 0.8% m/m vs. -1.9% in February, and services is expected at 0.0% m/m vs. 0.1% in February. Q1 GDP will also be reported Friday and growth is expected at 0.4% q/q vs. -0.3% in Q4. The decline in core retail sales volumes in March suggests some downside risk to Q1 growth. Of note, the BOE forecast Q1 growth of 0.1% q/q back in March.

Riksbank meets Wednesday and is expected to cut rates 25 bp to 3.75%. However, nearly a third of the analysts polled by Bloomberg look for steady rates. The decision is certainly live as the Riksbank indicated at the last meeting March 27 “that the policy rate can be cut in May or June if inflation prospects remain favorable.” The market sees nearly 60% odds of a rate cut this week, while a June cut is fully priced in. Fresh forward looking policy guidance is unlikely before the updated Monetary Policy Report is published at the June 20 meeting.

Norway highlight will be April CPI Friday. Headline is expected at 3.5% y/y vs. 3.9% in March, while underlying is expected at 4.2% y/y vs. 4.5% in March. If so, headline would be the lowest since September but still well above the 2% target. Overall, inflation is tracking marginally lower than the Norges Bank’s forecast but is still well above target. As such, the Norges Bank is in no rush to loosen policy. At last week’s meeting, the Norges Bank pointed out “the data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged.” Market sees steady rates through year-end.

ASIA

The Bank of Japan releases its Summary of Opinions for its April meeting. Recall that the bank delivered a dovish hold at the April 25-26 meeting. Rate were kept steady but the BOJ’s updated macro forecasts remained consistent with a gradual and modest tightening cycle. Moreover, BOJ Governor Kazuo Ueda did not specify when the BOJ will start to cut purchases of government bonds and pointed out that certainty for achieving the inflation target is rising gradually.

Japan highlight will be March cash earnings data Thursday. Nominal earnings are expected to remain steady at 1.4% y/y, while real earnings are expected at -1.5% y/y vs. -1.8% in February. March household spending will be reported Friday and is expected at -2.3% y/y vs. -0.5% in February. The Bank of Japan is closely monitoring whether a virtuous cycle between wages and prices will intensify to gage the extent of its normalizing cycles. So far, low annual wage growth suggests the BOJ’s tightening process will be gradual.

Japan also reports March current account data Friday. The adjusted surplus is expected at JPY2.044 trln vs. JPY1.369 in February. However, the investment flows will be of more interest. The February data showed that Japan investors stayed net buyers of U.S. bonds (JPY814 bln) for the sixth time in seven months. Japan investors stayed net sellers (-JPY106 bln) of Australian bonds for the second straight month and remained net sellers of Canadian bonds (-JPY600 mln) for the eighth straight month and for twelve of the past eleven months. Investors remained net sellers of Italian bonds (-JPY35 bln) for the second straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY1.04 trln) for the sixth time in seven months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.35%. We also anticipate the RBA to stick to its neutral policy guidance that “the Board is not ruling anything in or out.” Inflation has tracked above the RBA’s February projections and the unemployment rate remains below the lower end of the RBA’s estimated full-employment range of 4.0-5.75%. The swaps market is pricing in some odds of another hike over the next three to six months. However, we don’t expect any hawkish surprises as the household spending outlook is sluggish and wages growth has peaked.

Q1 real retail sales will also be reported Tuesday. Retail turnover is expected at -0.3% in Q1 vs. 0.3% in Q4. Weak household spending activity should reinforce the case that the RBA move is a cut.

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