Drivers for the Week of May 2, 2021

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

-The U.S. economy continues to sizzle; therein lies the crux of our strong dollar outlook; April jobs data Friday will be this week’s highlight; with the FOMC meeting out of the way, Fed speakers will be plentiful; Canada also reports April jobs data Friday
-BOE meets Thursday and is expected to deliver a hawkish hold; why does the market expect tapering by the BOE?; Germany has a busy week; ECB net asset purchases for the week ending April 30 will be reported Monday; eurozone yields are making new highs; Norges Bank meets Thursday and is expected to keep policy steady
-Japan has a quiet week due to the Golden Week holiday; RBA meets Tuesday and is expected to deliver a  dovish hold

The dollar is getting some more traction post- FOMC.  DXY is up two straight days and three of the past four.  Friday’s gain of 0.73% was the largest since March 4.  Still, to keep things in perspective, DXY has retraced less than a third of the April drop.  The euro traded at a new cycle high near $1.2150 last week but is now testing support near $1.20.  Sterling was unable to break above the $1.40 level during the dollar’s recent sell-off and is currently testing $1.38.  Lastly, USD/JPY is trading at the highest level since April 13 near 109.35.  A break of 109.65 is needed to set up a test of the March 31 high near 111.  We continue to look for continued dollar strength on the strong economic outlook (see below) but this will require a more significant turnaround in U.S. yields. 


The U.S. economy continues to sizzle.  While Q1 GDP growth came in a little below consensus at 6.4% SAAR, the details were strong and point to further strength in Q2.  The Atlanta Fed’s GDPNow model just started its forecast for Q2 with an eye-opening 10.4% print, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 5.3% SAAR.  Of note, Bloomberg consensus sees 8.1% growth in Q2 and 7.0% in Q3 before easing to 4.7% in Q4, all in SAAR terms.

And therein lies the crux of our strong dollar outlook.  Compare the U.S. with the eurozone, which just posted its second straight quarter of economic contraction.  Its -0.6% q/q drop translates into an annualized -2.4% and so we are looking at a difference of 8 full percentage points in Q1!  One factor being cited for recent euro strength are rising expectations that the economic divergences will narrow in Q2 and beyond.  However, we just don’t see it.  Europe is very unlikely to post anything near the growth numbers that are expected from the US the rest of this year.  By extension, we believe the Fed is likely to taper its asset purchases in 2021 and that the ECB will have to maintain its accelerated pace of asset purchases for much longer than anticipated.

Keep an eye on two spreads that will support our bearishness on the euro.  The 10-year U.S.-German spread is currently around 183 bp, down from the April 2 peak near 205 bp but above the 179 low posted this month.  Much of the attention has been on the recent fall in U.S. rates, but German rates have been steadily rising.  At last week’s high of -18 bp, the German 10-year yield was the highest since March 2020.  We expect U.S. yields to rise and German yields to stabilize and so this spread should move back in the dollar’s favor.  Elsewhere, the 10-year Italy-Germany spread has been rising.  To us, this signals market discomfort with the peripheral eurozone that is perhaps driven by delays to the EU recovery fund.  At 111 bp, this is the highest since early February as Italian 10-year yields have risen faster than Germany’s to stand around 90 bp currently, the highest since last September.

April jobs data Friday will be this week’s highlight.  Consensus see 978k jobs added vs. 917k in March, with the unemployment rate falling three ticks to 5.7%.  The expected -0.4% y/y drop in average hourly earnings would be a statistical quirk, as the jobs being added will tend to be at lower wages.  ADP private sector jobs will be reported Wednesday, with consensus currently at 875k.  Weekly claims data for the BLS survey week suggest a strong NFP number, but the final clues will be revealed this week.

We will get some other very important readings for the US earlier in the week.  April ISM manufacturing PMI will be reported Monday and is expected at 65.0 vs. 64.7 in March, while ISM services PMI will be reported Wednesday and is expected at 64.1 vs. 63.7 in March.  The employment components will be closely watched for both.  Last week, Chicago PMI came in at a whopping 72.1 vs. 65.0 expected and 66.3 in April and so there are upside risks to this week’s survey readings.  Auto sales will also be reported Monday and are expected at a 17.6 mln annual rate vs. 17.75 in March. 

Other data round out the week.  March construction spending (1.7% m/m expected) will be reported Monday. Trade (-$74.3 bln expected) and factory orders (1.3% m/m expected) will be reported Tuesday.  April Challenger job cuts and Q1 nonfarm productivity (4.2% y/y expected) will be reported Thursday.  March wholesale trade sales and inventories and consumer credit ($20.0 bln expected) will be reported Friday.

With the FOMC meeting out of the way, Fed speakers will be plentiful.  Powell speaks Monday, followed by Daly and Kaplan Tuesday.  Evans and Mester speak Wednesday, followed by Kaplan and Mester  Thursday.  All are expected to toe the dovish line except for Kaplan, who continues to push for tapering sooner rather than later.  Kaplan is shaping up to be one of the least dovish at the Fed and we think he is the only one to admit to being one of the four "dots" that see a hike before end-2022.  Of note, Kaplan is not a voter in either 2021 or 2022 but becomes one in 2023 and so his 2022 "dot" is a moot one.  That said, we suspect more FOMC members will shift closer to Kaplan’s view in the coming weeks and this would be dollar-positive.  The Fed also releases its Financial Stability Report Thursday.

Canada also reports April jobs data Friday.  A drop of -162.5k is expected vs. a rise of 303.1k in March, while the unemployment rate is seen rising three ticks to 7.8%.  Ahead of the jobs data, April Markit manufacturing PMI and March leading indicator will be reported Monday.  March building permits and trade will be reported Tuesday.  April Ivey PMI will also be reported Friday.  While the economy has recovered enough for the BOC to begin tapering, risks remain and so we expect the bank to remain cautious as the data unfold. 


Bank of England meets Thursday and is expected to deliver a hawkish hold.  Rates are expected to remain steady but the bank may start tapering its asset purchases.  At the last meeting March 18, the BOE didn't seem overly concerned with the rise in gilt yields and noted then that "An aggregate measure of UK financial conditions has been broadly unchanged since the February Report." Since then, UK yields are pretty much unchanged and so the concern probably remains low.  GBP tends to strengthen on BOE decision days.  Of the last six dating back to August, cable has gained on five of them. 

Why does the market expect tapering by the BOE?  The bank is currently buying GBP4.4 bln of bonds per week.  So far, it has bought a total of GBP787 bln and plan to continue the purchases until year-end.  At the current pace, it would hit the GBP875 bln limit by mid-September and so we think BOE tapering should be viewed as more of a technical decision than a fundamental one.  Yes, the UK economy will benefit from vaccinations and reopening, but risks remain.  The bank’s Monetary Policy Report will contain updated macro forecasts.  Of note, the short sterling futures strip suggests some odds of the first hike in Q4 2021, rising significantly in Q1 2022 to being fully priced by mid-2022.

Other than the BOE, it’s a quiet week in terms of U.K. data.  Monday is a holiday.  Final April PMI readings are the only major data to be reported this week, with manufacturing Tuesday, services and composite Thursday, and construction Friday. 

Germany has a busy week.  It reports March retail sales Monday, which are expected to rise 3.0% m/m vs. 2.7% in February.  Factory orders will be reported Thursday, which are expected to rise 1.5% m/m vs. 1.2% in February.  IP, trade, and current account data will be reported Friday.  IP is expected to rise 2.0% m/m vs. -1.6% in February, while exports are expected to rise 0.5% m/m vs. 0.9% in February and imports are expected to rise 0.7% m/m vs. 3.6% in February France (2.0% m/m expected) and Spain (0.5% m/m expected) also report IP Friday, while Italy reports retail sales (-0.6% m/m expected).  Eurozone retail sales will be reported Thursday and are expected to rise 1.5% m/m vs. 3.0% in February.  Final eurozone April PMI readings will be reported this week, with manufacturing Monday followed by services and composite Wednesday. 

ECB net asset purchases for the week ending April 30 will be reported Monday.   Net purchases were EUR22.25 bln for the week ending April 23, up from a net EUR16.3 bln for the week ending April 16 and  EUR17.1 bln for the week ending April 9.  This was the highest weekly net purchase amount since June 2020 and so the accelerated pace remains in place.  Of note, redemptions were EUR2.8 bln for the week ending April 23, leaving gross purchases at EUR25.0 bln vs. EUR28.4 bln the previous week.  These are the highest gross purchases since June 2020 and also suggest that the ECB is quite serious about keeping yields down. 

Yet eurozone yields are making new highs.  The 10-year Bund yield is currently around -20 bp and above the February high near -21 bp, while the 10-year BTP yield is currently around 90 bp and above the February high near 84 bp.  This despite accelerated asset purchases since the March meeting.  We think the ECB may have to accelerate its purchases even further if eurozone yields continue to climb.  The accelerated pace should be maintained until at least the June 10 meeting, when the ECB will likely reassess its program.  If yields continue to rise, then the accelerated pace is likely to be extended into Q3, which would be a dovish sign.

Norges Bank meets Thursday and is expected to keep policy steady.  At the last meeting March 18, the bank delivered a hawkish hold and we see no need to update its stance at this meeting.  Back then, rates were kept at zero but the bank updated its rate path to show hikes starting in Q4 2021 and the policy rate near 1.0% by mid-2023 and 1.5% by end-2024.  Previously, the rate path showed likely lift-off in H1 2022 and the policy rate near 1.0% by end-2023.  NOK tends to strengthen on Norges Bank decision days.  Of the last four dating back to November, NOK has gained on three of them vs. both USD and EUR.  With the Swedish Riksbank signaling that it is likely on hold through Q2 2024, 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 quiet week due to the Golden Week holiday.  Markets are closed until Thursday.  Final April services and composite PMI readings will be reported Friday.  Last week, final manufacturing PMI came in at 53.6 vs. 53.3 preliminary.  March real cash earnings will also be reported Friday and are expected to be flat y/y vs. 0.1% in February.  Renewed concerns about the economy coupled with a dovish BOJ have helped push USD/JPY higher in recent days.  The pair has retraced about half of the March-April drop.  A break of the 109.65 area is needed to set up a test of the March 31 high near 111.

Reserve Bank of Australia meets Tuesday and is expected to deliver a  dovish hold.  At the last meeting April 6, all policy settings were left unchanged and the RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.”  The bank said then that it would decide later this year whether to maintain the April 2024 bond as its YCC target or shift to the next maturity of November 2024.  A decision to do so could be announced at this meeting and this would be very dovish as it signals an extension of QE.  AUD tends to strengthen on RBA decision days.  Of the last five dating back to November, AUD has gained on four of them.  The RBA’s Statement on Monetary Policy will  be made Friday and will contain updated macro forecasts.  March trade will be reported Tuesday, with exports expected to rise 4% m/m and imports by 9% m/m.  Final April PMI readings will be reported this week, with manufacturing Monday followed by services and composite Wednesday. 

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