Drivers for the Week of April 11, 2021

Here's a look at the main drivers in Developed Markets this week.
  • The US growth outlook remains very strong; US yields are creeping higher and giving the dollar some support; March retail sales data Thursday will be the data highlight; US inflation data will remain in focus; heavy US Treasury issuance will be seen this week; Fed manufacturing surveys for April will start to roll out; Fed Beige Book report will be released Wednesday
  • Eurozone has a fairly busy week; EU fiscal policy will command some attention; the situation remains tense in Northern Ireland; UK has its monthly data dump Monday
  • Japan has a quiet week; Australia reports March jobs data Thursday; RBNZ meets Wednesday and is expected to keep rates steady at 0.25%

After a rough week, the dollar got some traction Friday as US yields rose on higher than ay expected PPI data. With US data expected to come in strong this week, we believe the dollar’s rise can continue. DXY found some support last week near 92 but needs to break above the 92.888 area to set up a test of the March 31 high near 93.437. The euro really ran out of steam above $1.19 but needs to break below $1.1790 to set up a test of the March 31 low near $1.1705. Sterling traded at a new cycle low Friday and tested the March 25 low near $1.3670. It rebounded a bit but still feels heavy. With risks related to Ireland and Scotland picking up, cable is likely to eventually test the February 4 low near $1.3565. USD/JPY has reversed higher after testing 109 last week has retraced over a third of the April drop. Next major retracement objectives from that move come in near 110 (50%) and 110.20 (62%).



The US growth outlook remains very strong. The Atlanta Fed’s GDPNow model suggests Q1 growth is 6.0% SAAR, while the New York Fed’s Nowcast model suggests Q1 and Q2 growth of 6.1% and 1.5% SAAR, respectively. Of note, Bloomberg consensus for Q1 is currently at 5.1% SAAR, picking up to 8.0% SAAR in Q2 before easing to a still stellar 6.9% in Q3. And this is before the next two rounds of stimulus have been accounted for. The same consensus sees core PCE picking up to 2.2% y/y in Q2 from 1.5% in Q1 before edging back down to 1.8% in Q3 and 2.0% in Q4.

US yields are creeping higher and giving the dollar some support. The 10-year yield is trading around 1.66%, up from last week’s 1.61% low that was the lowest since March 26. Still, the 10-year remains well below the March 30 peak near 1.77% and a break of the 1.71% level is needed to set up a test of that cycle peak. Similarly, the 30-year yield is trading around 2.33%, up from last week’s 2.30% low that was the lowest since March 25. Here too, the 30-year yield remains well below the March 18 peak near 2.51% and break of the 2.40% level is needed to set up a test of that cycle peak.

March retail sales data Thursday will be the data highlight this week. Headline sales are expected to jump 5.5% m/m vs. -3.0% in February, while sales ex-autos are expected to jump 4.8% m/m vs. -2.7% in February. The so-called control group used for GDP calculations is expected to rise an astounding 7.0% m/m vs. -3.5% in February. The rebound is due to a combination of the stimulus checks and stellar job growth as more and more parts of the country reopened.

US inflation data will remain in focus. March CPI will be reported Tuesday, with headline expected at 2.5% y/y vs. 1.7% in February and core expected at 1.5% y/y vs. 1.3% in February. Last week, March PPI came in higher than expected, with headline at 4.2% y/y vs. 3.8% consensus and 2.8% in February and core at 3.1% y/y vs. 2.7% consensus and 2.5% in February. While there is never a one-to-one correlation, the PPI readings point to upside risks to the CPI data. Some acceleration is to be expected due to low base effects that will boost y/y readings in March, April, and May. However, there is a growing belief in the markets that inflation isn’t as transitory as the Fed believes.

All of this comes on top of heavy US Treasury issuance this week. These include a $58 bln 3-year note auction and a $38 bln 10-year note auction both on Monday, followed by a $24 bln 30-year bond auction Tuesday. Keep an eye on indirect bidders, which largely represent foreign buyers. At last month’s auctions, this share was 47.8% for the 3-year, 56.8% for the 10-year, and 60.6% for the 30-year. Bid-to-cover ratios should also be watched. At last month’s auctions, this ratio was 2.69 for the 3-year, 2.38 for the 10-year, and 2.28 for the 30-year.

Fed manufacturing surveys for April will start to roll out. Empire survey will be reported Thursday and is expected at 18.8 vs. 17.4 in March. Philly Fed survey will also be reported Thursday and is expected at 40.0 vs. 51.8 in March. These are the first snapshots for April and will help set the tone for other data to come. March IP will also be reported Thursday and is expected to rise 2.5% m/m vs. -2.2% in February. The US manufacturing sector remains solid, and services are expected to catch up as the vaccine roll out continues.

Fed Beige Book report will be released Wednesday. Since the last Beige Book release back on March 3, the US outlook has improved rather dramatically. We expect this report to highlight increased economic activity and hiring across most Fed districts, though recent weekly claims data underscore the spotty nature of the job creation. There will plenty of Fed speakers this week too. Rosengren speaks Monday, followed by Harker, Daly, Mester, Bostic, and Rosengren Tuesday. Kaplan, Powell, Williams, Clarida, and Bostic speak Wednesday. Bostic, Daly, Logan, Clarida, and Mester speak Thursday, while Kaplan speaks Friday. All in all, we do not expect the Fed to waver from its dovish message ahead of and at the upcoming FOMC meeting April 27-28.

Other minor data round out the week. March budget statement will be released Monday. A deficit of -$658 bln is expected. If so, the 12-month total would rise to another all-time record of -$4.1 trln. March import/export prices will be reported Wednesday. February TIC data and business inventories will be reported Thursday, followed by March building permits (1.7% m/m expected), housing starts (12.6% m/m expected), and preliminary University of Michigan consumer confidence (89.0 expected) Friday.



Eurozone has a fairly busy week. Eurozone February retail sales will be reported Monday and are expected to rise 1.7% m/m vs. -5.9% in January. Italy reports February IP Tuesday and is expected to rise 0.7% m/m vs. 1.0% in January. April eurozone ZEW survey will also be reported Tuesday. Eurozone February IP will be reported Wednesday and is expected at -1.2% m/m vs. 0.8% in January. Eurozone February trade data and final March CPI will be reported Friday. The expected Q2 improvement in the eurozone economy may not be as strong in light of the continued lockdowns in the major countries. Stay tuned.

EU fiscal policy will command some attention this week. IMF Managing Director Georgieva and EC Commissioner Gentiloni will discuss the European Recovery and Resilience Facility Tuesday. Last week, French Finance Minister Le Maire warned that the EUR750 bln plan is “not on the right track” and that he’s “deeply concerned” at the extremely slow implementation of the initiative that was first agreed to last July. Other officials piled on, with Bank of Italy Governor Visco calling the recovery fund “crucial” and ECB Executive Board member Schnabel saying that a long delay would be a “disaster.” Contrast this to the US, where the fiscal response has been quick and aggressive, with more to come. Italian Prime Minister Draghi’s government then submits its economic and budget forecasts to the lower house Wednesday. The annual budget process under the previous governments was fraught with risk. Under Draghi, we expect much smoother sailing but the waters remain treacherous.

The situation remains tense in Northern Ireland. The EU will reportedly postpone legal action against the UK for breaching the Northern Irish Brexit deal. The EU said it is postponing the legal action while it works with the UK to try and halt the escalating violence. This is a laudable gesture on the part of the EU, which began the proceedings last month after the UK unilaterally extended a waiver of checks on some goods entering Northern Ireland beyond April 1. The temporary exemption was part of the post-Brexit trade agreement but the border issue has remained a serious problem. Under the deal negotiated by UK Prime Minister Johnson, Northern Ireland effectively stayed in the EU customs union. While this avoided the need for border checks in Ireland, they became necessary for goods coming into Northern Ireland from Britain.

UK has its monthly data dump Monday. February IP, construction output, services index, trade, and GDP will all be reported then. IP is expected at 0.5% m/m vs. -1.5% in January, construction is expected at 0.5% m/m vs. 0.9% in January, services are expected at 0.6% m/m vs. -3.5% in January, and GDP is expected at 0.5% m/m vs. -2.9% in January. Lastly, a trade deficit of -GBP2.4 bln is expected. With the lockdowns easing and vaccinations rising, January may have been the worst of it for the UK economy. However, it’s clear from the limited bounce in February that it will take months and months for the UK to fully recover.

Of note, the UK takes another step towards reopening restaurants, pubs, and shops this week. The travel ban will remain in place but reports suggest the government will decide by early next month whether its citizens can begin traveling abroad again. The Department for Transport said that at a minimum, travelers will need to buy a two-test package that typically costs around GBP220 per person or even higher. There are lingering concerns that the faltering UK vaccination program will lead to a setback for the economy, but that may be too pessimistic. There may be some delays to full reopening but not a derailment.



Japan has a quiet week. March PPI will be reported Monday and is expected to rise 0.5% y/y vs. -0.7% in February. If so, it would be the first positive reading since February 2020. March machine tool orders will also be reported Monday. February core machine orders will be reported Wednesday and are expected to rise 2.4% y/y vs. 1.5% in January. On Friday, Prime Minister Suga travels to Washington to become the first foreign leader to meet in person with President Biden. While this may help burnish his popularity ahead of fall elections, we think he will remain unpopular enough to force Suga to pass another budget over the summer.

Australia reports March jobs data Thursday. A 35.0k gain expected vs. 88.7k in February, while the unemployment rate expected to a tick to 5.7%. While the recovery continues and the labor market improves, the RBA (like the Fed) has made it quite clear that it is nowhere close to hiking rates. For now, the RBA is benefitting from lull in global bond markets. However, we believe this week may prove to be a crucial one for US yields and another leg higher would have global implications and the RBA would be likely be tested again.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 0.25%. At its last meeting February 24, the bank’s messaging was very dovish. The RBNZ said then that inflation and employment are likely to remain below targets and so “prolonged“ monetary stimulus remains necessary. It said that it will look through temporary price shifts and is prepared to provide additional stimulus if required. We expect this dovish tone to be maintained at this meeting. While the bank may again pay lip service to negative rates, it’s worth noting that they have now been priced out fully by the markets. Any further stimulus would move likely come from more QE.

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