Drivers for the Week of April 4, 2021

Here's a look at the main drivers in Developed Markets this week.
  • Last week’s jobs data confirm our view that the US economy is gathering momentum; the US growth outlook remains very strong; there are two more fiscal packages shaping up; US inflation data take center stage this week as US yields remain elevated; FOMC minutes will be released Wednesday
  • Weekly ECB asset purchases will be reported Monday; the eurozone and the UK have fairly quiet weeks; Norway reports March CPI Friday
  • Japan has a fairly busy week; RBA meets Tuesday and is expected to deliver a very dovish hold; markets continue to test the RBA

The dollar should continue to power ahead. After trading at a new cycle high near 93.437 last week, DXY fell back to trade just below the 93 level. Despite this minor setback, the break above the November 11 high near 93.208 sets up a test of the November 4 high near 94.302. The euro remains heavy and continues to trade below $1.18. We believe it is still on track to test the November low near $1.1605. Sterling has been outperforming but also feels heavy despite last week’s bounce. We believe it is still on track to test of the February 4 low near $1.3565. The rise in USD/JPY continues and last week’s break above the June 5 high near 109.8 sets up a test of the March 2020 high near 111.70.



Last week’s jobs data confirm our view that the US economy is gathering momentum. NFP rose 916k in March, while the February gain was revised to 468k from 379k previously. With vaccinations and reopening picking up, the labor market should continue to improve in April and beyond. This underscores are long-standing call that the US economy and US dollar will continue to outperform in Q2 (and likely beyond).

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 6.2% and 1.6% SAAR, respectively. Of note, Bloomberg consensus for Q1 is currently at 4.7% SAAR, picking up to 7.0% SAAR in Q2 and 6.9% in Q3. And this is before the next round of stimulus has been accounted for. The same consensus sees core PCE picking up to 2.1% y/y in Q2 from 1.5% in Q1 before edging back down to 1.8% in Q3 and 1.9% in Q4.

There are two more fiscal packages shaping up. The first package just announced will amount to a little more than $2 trln and will cover traditional road, bridge, and airport projects but will also include items like increasing access to high-speed broadband, updating the electrical grid, replacing lead pipes in homes and schools, and improved weatherizing for commercial buildings. This will ostensibly be paid for with a hike in the corporate tax to 28% from 21% and the introduction of a minimum tax on global corporate earnings. This will be followed by a second package to be detailed later this month. Reports suggest it may come in north of $1 trln and is meant to address healthcare, childcare. While there will be lots of horse-trading to come, the bottom line is that fiscal stimulus is shaping up to be much greater than markets anticipated when the year began.

US inflation data take center stage this week. March PPI will be reported Friday, with headline expected at 3.8% y/y vs. 2.8% in February and core expected at 2.7% y/y vs. 2.5% in February. Such acceleration would be noteworthy, though much of it will be due to low base effects that will boost y/y readings in March, April, and May. CPI will be reported next Tuesday.

US yields remain elevated. After the 10-year yield hit an intraday high near 1.77% early last week, it has since eased to around 1.72% currently. Given the Fed’s clear signal that it’s not worried about rising yields as the economy gains momentum, we believe the 10-year yield is on track to test the December 2019 high near 1.95%. The 3-month to 10-year curve is at 171 bp, just below the cycle peak near 1.73% from last week and on track to test the December 2016 high near 210 bp. Elsewhere, the 2- to 10-year curve is at 154 bp, just below the cycle peak near 158 bp from last week and on track to test the June 2015 high near 176 bp.

FOMC minutes will be released Wednesday. At the March 17 meeting, Chair Powell stuck with the dovish party line. That is, the Fed is nowhere close to removing accommodation as the expected rise in inflation is seen as transitory. When asked about rising US yields, Powell said financial conditions remain highly accommodative and that this is very important. He added the he would be concerned by disorderly market conditions. Basically, he signaled that the Fed is not concerned with the current level of yields but is well aware that a pace that becomes disorderly may need stronger action. Minutes may shed light on when this might happen. Elsewhere, Evans, Kaplan, and Barkin also speak Wednesday. Bullard and Powell speak Thursday, followed by Kaplan Friday.

Weekly jobless claims Thursday should show resumed improvement in the labor market. Regular initial claims are expected at 690k vs. 719k last week, which rose unexpectedly after the previous week’s 658k was the lowest reading since pre-pandemic March. Regular continuing claims are expected at 3.65 mln vs. 3.794 mln last week, which was the lowest reading since pre-pandemic March. Together with emergency PUA and PEUC claims, total continuing claims fell to 17.1 mln, the lowest since mid-April.

Other data round out the week. ISM services PMI will be reported Monday and is expected at 59.0 vs. 55.3 in February. February factory orders will also be reported Monday and are expected to fall -0.5% m/m. February JOLTS job openings will be reported Tuesday and are expected at 6900 vs. 6917 in January. February trade (-$70.4 bln expected) and consumer credit ($2.8 bln expected) will be reported Wednesday. February wholesale trade sales and inventories will be reported Friday.

Canada reports March jobs data Friday. A 90k gain is expected vs. 259.2k in February, while the unemployment rate is expected to fall a couple of ticks to 8.0%. Like the US, Canada saw a loss of momentum in the economy going into year-end but is seeing a strong recovery in Q1. Yet the vaccine rollout in Canada has lagged even the laggards in Europe and so maintaining momentum will be hindered somewhat. We expect fiscal policy to carry the burden of stimulus in 2021. Ahead of the jobs data, March Ivey PMI and February trade will be reported Wednesday.



Weekly ECB asset purchases will be reported Monday. The pace has finally started to pick up but this needs to be sustained in order to underscore the ECB’s resolve. Gross purchases should remain close to EUR20 bln. Last week, they were EUR20.4 bln, down from the EUR21.9 bln the previous week that were the highest since early December. Redemptions were relatively small at EUR1.4 bln and so net purchases were EUR19 bln, down from the EUR21 bln the previous week that were the highest since early December. The ECB will also publish the account of its March 10-11 meeting Thursday.

The eurozone has a fairly quiet week. Final March services and composite PMI reading will be reported Wednesday. Germany reports February factory orders Thursday and are expected to rise 1.2% m/m vs. 1.4% in January. German IP, trade, and current account data will be reported Friday. IP is expected to rise 1.5% m/m vs. -2.5% in January, while exports are expected to rise 1.0% m/m vs. 1.5% in January and imports are expected to rise 2.2% m/m vs. -4.0% in January. France also reports IP Friday and is expected to rise 0.5% m/m vs. 3.3% in January. Italy reports February retail sales Friday and is expected to rise 2.0% m/m vs. -3.0% in January. With France going back into lockdown and Italy and Germany extending partial lockdowns, the weak eurozone outlook is carrying over into Q2.

UK also has a quiet week. Final March services and composite PMI reading will be reported Wednesday. This will be followed by construction PMI Thursday. Sterling should continue to outperform as the vaccine rollout remains amongst the best worldwide. While cable remains hostage to broad dollar strength, the EUR./GBP cross should continue to fall after trading at a new cycle low last week near .8493. The pair remain on track to test the February 2020 low near .8282.

Norway reports March CPI Friday. Headline is expected to pick up a tick to 3.4% y/y, while underlying is seen steady at 2.7% y/y. Inflation readings have taken on more importance after the last Norges Bank meeting March 18, when it shifted its rate path up to show likely lift-off in Q4 followed by the policy rate near 1.0% by mid-2023 and 1.5% by end-2024 vs. 0% now. Next policy meeting is May 6. With the Swedish Riksbank on hold for the foreseeable future, we see scope for the NOK/SEK cross to reach the 2020 high near 1.0715 and then potentially the 2019 high near 1.1055.



Japan has a fairly busy week. Final March services and composite PMI reading will be reported Monday. February real cash earnings and household spending will be reported Tuesday. Earnings are expected to remain steady at -0.1% y/y, which will help keep household spending down at an expected -5.0% y/y vs. -6.1% in January. February current account data will be reported Thursday, where an adjusted JPY1.02 trln surplus is expected. While Q1 was hurt by lockdowns, the economic outlook should improve in Q2 and beyond. Indeed, we still expect another fiscal package over the summer as Suga tries to boost his flagging popularity ahead of fall elections. In that regard, Suga will be the first foreign leader to meet in person with President Biden at the scheduled summit April 16.

Reserve Bank of Australia meets Tuesday and is expected to deliver a very dovish hold. We think it is under pressure to deliver stronger pushback against rising yields. It did not do so at its last meeting March 2, as the bank simply repeated its existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest” given subdued wage pressures that are offsetting the impact of the recovery. Governor Lowe also repeated the mantra that “The bank is prepared to make further adjustments to its purchases in response to market conditions.” However, the market was disappointed that the RBA did not make a stronger commitment to keep rates low.

Without that commitment, markets continue to test the RBA. Since that meeting, the 10-year yield is up nearly 20 bp to 1.84% and the 30-year up 10 bp to 2.72%. The upward creep in longer-dated yields should lead the RBA to take a stronger stand this week. Of note, the 3-year yield has moved back above the 0.10% target to trade around 0.31% currently. The only good news for the RBA is that the Australian dollar has depreciated more than 2% since that meeting. Final March services and composite PMI reading will be reported Wednesday.  

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