Drivers for the Week of March 28, 2021

Here's a look at the main drivers in Developed Markets this week.
  • The next fiscal package is shaping up to be quite large; March jobs data Friday will be the data highlight for the week; the US outlook remains strong; it's a fairly quiet week in terms of Fed speakers; Canada has a quiet week
  • Eurozone has a fairly busy week; weekly ECB asset purchases will be reported Monday; UK and EU agreed on a new process for discussing financial market regulation; UK has a quiet week
  • Japan has a busy week; BOJ releases the minutes to its March 18 meeting Monday; Australia reports some key data

The dollar continues to power ahead. DXY broke above its 200-day moving average last week to trade at the highest level since mid-November just below the 93 level. A break above the November 11 high near 93.208 would set up a test of the November 4 high near 94.302. The euro remains heavy and is trading just below $1.18. It is on track to test the November low near $1.1605. Sterling has been outperforming but also feels heavy despite Friday’s bounce. We believe it is on track to test of the February 4 low near $1.3565. The rise in USD/JPY has resumed and is in track to break above the June 5 high near 109.85 after last week’s test. A break would set up a test of the March 2020 high near 111.70.



The next fiscal package is shaping up to be quite large. Early reports suggest a $3 trln price tag for a package that addresses infrastructure, climate change, and a whole grab bag of progressive policies. Given the divided Senate, a couple of moderate Democrats hold the key to how big this package ends up. For instance, we know that Senator Manchin was not shy about using his leverage during the negotiations over the last $1.9 trln package. There will be lots of horse-trading to come, but the key takeaway here is that there is still significant fiscal stimulus in the pipeline.

March jobs data Friday will be the data highlight for the week. Consensus sees 643k jobs added vs. 379k in February, with unemployment falling a couple of ticks to 6.0%. Average hourly earnings are expected to slow to 4.5% y/y from 5.3% in February, while average weekly hours are expected to rise a tick 34.7. Ahead of the jobs data, we get ADP private sector jobs Wednesday, expected at 550k vs. 117k in February.

Weekly jobless claims Thursday should show continued improvement in the labor market. Regular initial claims are expected at 680k vs. 684k last week, which were the lowest since pre-pandemic March. Of note, regular and PUA initial claims together fell to 899k, also the lowest since pre-pandemic March. Regular continuing claims are expected at 3.775 mln vs. 3.87 mln last week, which was the lowest since mid-March and for the BLS survey week and bodes well for NFP this Friday.

Other important March snapshots will be reported. Chicago PMI will be reported Wednesday, which is expected at 60.0 vs. 59.5 in February. ISM manufacturing PMI will be reported Thursday and is expected at 61.4 vs. 60.8 in February. Auto sales will be also reported Thursday and are expected at 16.40 mln annual rate vs. 15.67 mln in February. All are expected to show the economy gaining momentum as we move into Q2.

Indeed, the US outlook remains strong. The Atlanta Fed’s GDPNow model suggests Q1 growth is 4.7% SAAR, while the New York Fed’s Nowcast model suggests Q1 growth is 6.1% SAAR. The New York Fed just started tracking Q2 and suggests 0.7% SAAR growth, but it’s way too early to get a clean read. Of note, Bloomberg consensus for Q1 is currently at 4.8% SAAR, picking up to 6.9% SAAR in Q2 and 7.0% in Q3. We suspect all of these readings will pick up as the next round of stimulus comes into better focus,

It's a fairly quiet week in terms of Fed speakers. Waller speaks Monday, followed by Quarles and Williams Tuesday. Harker speaks Thursday, followed by Bostic Friday. All are expected to stick with the party line that Powell and the Fed leadership have set forth. Despite some hiccups now and then in US yields, the markets appear to be digesting this view quite well. Yields are below their recent highs while US equity markets remain near record highs. The strong dollar at the margin will also act to dampen inflationary pressures and so the US economy appears to be in a Goldilocks situation right now.

Fed manufacturing surveys for March will continue to roll out. Dallas Fed reports Monday and is expected at 14.5 vs. 17.2 in February. So far, Empire survey came in at 17.4 vs. 12.1 in February, Philly Fed came in at 51.8 vs. 23.1 in February, Richmond Fed came in at 17 vs. 14 in February, and Kansas City came in at 26 vs. 24 in February. The US manufacturing sector remains in solid shape, with services expected to catch up quickly as lockdowns end.

Other minor US data will trickle out this week. January S&P CoreLogic house prices and March Conference Board consumer confidence (96.8 expected) will be reported Tuesday. February pending homes sales (-2.9% m/m expected) will be reported Wednesday. February construction spending (-1.0% m/m expected) and March Challenger job cuts will be reported Thursday.

Canada has a quiet week. January GDP will be reported Wednesday and is expected to contract -2.6% y/y vs. -3.0% in December. February building permits and Markit March manufacturing PMI will be reported Thursday. The economy continues to heal, leading the Bank of Canada to start removing its emergency measures last week. In addition, Deputy Governor Gravelle started laying the groundwork for tapering as he said the process will be “gradual and in measured steps” and will conclude with net purchases at zero when the “recovery is well underway.” He added that “We will eventually get down to a pace of QE purchases that maintains -- but no longer increases -- the amount of stimulus being provided.”



Eurozone has a fairly busy week. Germany reports March CPI Tuesday, March unemployment Wednesday, and February retail sales Thursday. Headline inflation (EU Harmonized) is expected at 2.0% y/y vs. 1.6% in February, unemployment is expected to fall -1k vs. +9k in February, and sales are expected to rise 2.0% m/m vs. a revised -6.5% (was -4.5%) in January. France reports March CPI and February consumer spending Wednesday, which are expected to rise 1.1% m/m and 1.4% y/y (EU Harmonized), respectively. Final March manufacturing PMI readings will be reported Thursday.

Eurozone CPI will also be reported Wednesday, with headline inflation expected at 1.4% y/y vs. 0.9% in February. If so, it would be the highest since January 2020 but still well below the 2% target. Much of this is likely due to low base effects from 2020. Like the Fed, the ECB views the acceleration in inflation as transitory in nature and so there are no policy implications to a high reading. Policymakers are quite aware of the need to avoid premature tightening. Executive Board member Schnabel said last week that “Preserving favorable financing conditions therefore puts the drivers of changes of financing conditions, and their speed of adjustment, into the focus of our assessment.”

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 last week were EUR21.9 bln, the highest since early December. Redemptions were relatively smack at EUR900 mln and so net purchases were EUR21.05 bln, also the highest since early December. ECB President Lagarde told the European Parliament that a faster pace of bond buying will become apparent over time, stressing that “The step-up in the run-rate of our program will become visible when ascertained over longer time intervals.”

The UK and the EU agreed on a new process for discussing financial market regulation. The two sides have reportedly agreed on a memorandum of understanding (MOU) on financial services. UK officials said the deal has been finalized and that the two sides are now working on its formal validation. The MOU sets out a framework for regulatory cooperation and a joint forum for discussing rules and procedures as well as the sharing of information. While it is entirely separate from the issue of equivalence, the MOU is nevertheless a potential first step in that process.

The UK has a quiet week. The biggest news is that the “stay at home” rule ends Monday, though many other restrictions remain in place. Final Q4 GDP data will be reported Wednesday. Final March manufacturing PMI will be reported Thursday. Sterling continues to outperform within the majors, joining CAD as the only major currencies to be up against the dollar year to date. Despite Friday’s bounce, however, cable is on track to test the January low near $1.3450. EUR/GBP is nearing the cycle low near .8533 and is on track to test the February 2020 low near .8282.



Japan has a busy week. February labor market data, department store and supermarket sales, and retail sales data will be reported Tuesday. Unemployment is expected to rise a tick to 3.0% while the job-to-applicant ratio is seen steady at 1.10. Retail sales are expected to rise 0.8% m/m vs. a revised -1.7% (was -0.5%) in January. February IP will be reported Wednesday and is expected to fall -1.3% m/m vs. a 4.3% in January. Housing starts, construction orders, and Q1 Tankan report will all be reported Thursday. Large manufacturing index is expected at -1 vs. -10 in Q4, while large non-manufacturing is expected to remain steady at -5. All-industry capex is expected at -1.4% vs. -1.2% in Q4.

The Bank of Japan releases the minutes to its March 18 meeting Monday. While the policy review amounted to little of substance, markets will be interested in how the discussions went at that meeting. Despite what we viewed as unnecessary tinkering, the BOK should be happy that JGB yields remain depressed and the steady rise in USD/JPY has not been derailed. At Friday’s high near 109.85, the pair matched the June 2020 high and is on track to test the March 2020 high near 111.70.

Australia reports some key data. Final March manufacturing PMI, February trade, and final February retail sales will all be reported Thursday. Exports are expected to rise 2% m/m vs. 6% in January, while imports are expected to rise 4% m/m vs. -2% in January. Sales are expected at -1.1% m/m. The RBA should be happy with asset market movements in recent weeks. The 3-year yield remains below the 0.10% target, while the 10- and 30-year yields are trading at multi-week lows. Elsewhere, ADUD is testing support near .76 and a break below would set up a test of the December low near .7460.

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