• Fed officials are acknowledging the potential impact of the banking sector turmoil; the Fed Beige Book for the May 2-3 FOMC meeting was released and supports a 25 bp hike next month whilst leaving the door open for further tightening if needed; regional Fed business surveys for April will continue rolling out; weekly jobless claims will be important
  
• The ECB releases the account of its March 16 meeting; ECB hawks remain vocal; outgoing BOE MPC member Tenreyro speaks today
  
• Reports suggest the BOJ is unlikely to tweak YCC so soon after the banking sector turmoil; Japan reported March trade data; the results of the RBA review came in pretty much as expected; New Zealand reported Q1 CPI data; Taiwan reported weak March export orders

The dollar is consolidating as the recent rise in yields takes a breather. DXY is trading flat just below 102 but the recent break above 102.036 sets up a test of the April 10 high near 102.807. The euro is trading higher near $1.0970 but the recent clean break below $1.0925 sets up a test of the April 10 low near $1.0830. Sterling is trading flat near $1.2445 but remains on track to test its April 10 low near $1.2345. USD/JPY traded at the highest since March 10 near 135.15 yesterday before falling back to trade near 134.55 currently. A clean break of the March 15 high near 135.10 would set up a test of the March 8 high near 138. Recent data have been dollar-supportive and we are finally seeing a reaction in U.S. yields. Until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable. However, it seems that this process is now under way.

AMERICAS

Fed officials are acknowledging the potential impact of the banking sector turmoil. Williams said “The banking system is sound and resilient. Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending.” He stressed that “It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy.” Elsewhere, Goolsbee said “How much squeezing is going to be coming from the bank side I think is going to matter for whether this economy is going to slow down. Everybody is forecasting some growth slowdown for the second half of the year. How intense that will be is going to depend a lot on the financial part.” He stressed that “My message is: be prudent, be patient. If banks are pulling back it behooves us to pay attention to the data and ask how much of our normal monetary policy job is getting done for us by the credit conditions.”

The Fed Beige Book for the May 2-3 FOMC meeting was released. On Overall Economic Activity: Nine Districts reported either no change or only a slight change in activity this period while three indicated modest growth. Lending volumes and loan demand generally declined across consumer and business loan types. On Labor Markets: Employment growth moderated somewhat this period as several Districts reported a slower pace of growth than in recent Beige Book reports. Wages have shown some moderation but remain elevated. On Prices: Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing. Consumer prices generally increased due to still-elevated demand as well as higher inventory and labor costs.

We believe the Beige Book supports a 25 bp hike next month and leaves the door open for further tightening if needed. WIRP suggests around 90% odds of 25 bp hike at the May 2-3 meeting, up from 80% at the start of this week, 70% at the start of last week, and 50% at the start of the week before that. Despite these rising odds, one cut is still priced in by year-end. While down from two cuts at the start of last week, this needs to be completely priced out. The Fed will have a lot of time and data before having to make a decision in June. Between the May 2-3 and June 13-14 meetings, the Fed will have digested two more job reports, two CPI/PPI reports, and one retail sales report. A pause in June might just be the most likely outcome but it really will depend on how all that data come in. Waller, Mester, Bowman, Logan, Bostic, and Harker all speak today. Cook speaks tomorrow. Then at midnight tomorrow, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference May 3.

Regional Fed business surveys for April will continue rolling out. Philly Fed is expected at -19.3 vs. -23.2 in March. Empire manufacturing survey kicked things off Monday at 10.8 vs. -18.0 expected and -24.6 in March. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR. Next model update will come next Wednesday.

Housing data are expected to show continued weakness. March existing home sales are expected at -1.8% m/m vs. 14.5% in February. Earlier this week, April NAHB housing market index came in as expected at 45 vs. 44 in March, while March building permits and housing starts came in at -8.8% m/m and -0.8% m/m, respectively.

Weekly jobless claims will be important. This is because initial claims will be for the BLS survey week containing the 12th of the month. Initial claims are expected at 240k vs. 239k last week. If so, the 4-week moving average would edge lower vs. 240k last week. Continuing claims are expected at 1.825 mln vs. 1.81 mln last week. The claims data have been trending higher in recent weeks and are the first real signs of softness in the labor market. Current consensus for April NFP stands at 175k vs. 236k in March, while the unemployment rate is seen rising a tick to 3.6%.

EUROPE/MIDDLE EAST/AFRICA

The ECB releases the account of its March 16 meeting. At that meeting, the bank hiked rates 50 bp despite the banking sector turmoil but stressed that future moves would be data dependent. President Lagarde stressed then that were was no tradeoff between price and financial stability. However, the account could shed more light on just how concerned the ECB was about banking sector risks before deciding to hike. We believe this was a compromise move, with the hawks agreeing to leave out specific forward guidance in favor of a more data-dependent approach. We know from subsequent comments that the hawks and the doves continue to struggle to provide a unified message and so the account could also shed some light on how large that divide was.

The ECB hawks remain vocal. Despite the March agreement to be more data-dependent, Knot said “It’s too early to talk about a pause. For a pause, I would really need to see a convincing reversal in underlying-inflation dynamics.” He added that he’s “not uncomfortable” with the current market pricing for a further 75 bp of tightening. Lagarde, Vasle, Vujcic, Visco, Holzmann, and Schnabel all speak later today. Of note, ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests nearly 30% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June 15 followed by another one in either July or September. There are nearly 35% odds of one last 25 bp hike in Q4 and so the peak policy rate is now seen between 3.75-4.0%, up from3.75% at the start of this week and 3.50% at the start of last week and 3.25% during the height of the banking panic.

Outgoing BOE MPC member Tenreyro speaks today. Her second three-year term ends in July but reports have recently emerged that the Treasury will soon announce her replacement. Tenreyro has become one of the leading doves on the MPC and so her replacement could lead to a shift in the hawk-dove balance. Of note, BOE tightening expectations have picked up after the March CPI data. The next policy meeting is May 11 and WIRP suggests a 25 bp hike is fully priced in, with another 25 bp hike priced in for June 22 and one more for September 21. As a result, the peak policy rate is seen near 5.0% vs. 4.75% at the start of this week and between 4.50-4.75% at the start of last week.

ASIA

Reports suggest the Bank of Japan is unlikely to tweak Yield Curve Control so soon after the banking sector turmoil. Instead, policymakers see a need to keep current policy settings in place for now in order to support the economy until more progress has been made toward achieving the inflation target. The two-day meeting April 27-28 will be the first under Governor Ueda. Reports suggest that BOJ officials view the banking sector turmoil as increasing uncertainties for the economic outlook. Lastly, officials acknowledged that the banking sector crisis has led to a break in upward pressures on global yields and helped smooth out the shape of Japan’s yield curve, which in turn suggests less immediate need to tweak YCC.

BOJ tightening expectations remain low. WIRP suggests no odds of liftoff April 28 or June 16 before rising to around 20% for July 28. A hike isn’t priced in until 2024 as the odds stand at only 60% for December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.

Japan reported March trade data. Exports came in at 4.3% y/y vs. 2.4% expected and 6.5% in February, while imports came in at 7.3% y/y vs. 11.6% expected and 8.3% in February. Import growth has fallen sharply due in large part to lower energy prices and so the adjusted deficit fell to -JPY1.2 trln from a peak -JPY2.3 trln back in October. Still, the continued weakness in exports is very concerning; with the external sector slowing, it’s no surprise that BOJ policymakers seem to be leaning towards steady policy for the time being.

The results of the RBA review came in pretty much as expected. The review supported maintaining the current inflation targeting regime but recommended that the bank’s financial stability role be legislated. It also called for 8 monetary policy meetings per year rather than the current 11, to be followed by press conference explaining its policy decisions. Treasurer Chalmers announced in-principle agreement with all 51 recommendations, some of which will require parliament to change the RBA’s operating law. RBA Governor Lowe welcomed the recommendations and noted that the changes won’t fundamentally change how the system operates but added that “We have to be realistic.” In our view, this brings the RBA more into line with other major central banks and should improve the monetary transmission mechanism in Australia. Next policy meeting is May 2 and WIRP suggests 20% odds of another hike then, rising to nearly 90% by September 5.

New Zealand reported Q1 CPI data. Headline came in at 6.7% y/y vs. 6.9% expected and 7.2% in Q4. This was the lowest since Q4 2021 but still well above the 2% target. At the last policy meeting April 5, the RBNZ delivered a hawkish surprise and hiked rates 50 bp to 5.25% vs. 25 bp expected. It noted then that “The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.” Updated macro forecasts won’t come until the next meeting May 24, but the RBNZ noted that “In aggregate, economic projections were little changed relative to the February statement.” Of note, the February forecasts see the policy rate peaking near 5.5% this year and staying there for much of next year. Looking ahead, WIRP suggests odds of a 25 bp hike at around 80% May 24, followed by nearly 15% odds of one final hike July 12 vs. no odds at the start of this week.

Taiwan reported weak March export orders. Orders came in at -25.7% y/y vs. -18.6% expected and -18.3% in February. This was the weakest since January 2009 and suggests there will be very little improvement in shipments seen over the next six months. China reopening has had very little impact on regional trade and activity. Korea reports trade data for the first twenty days of April tomorrow and is likely to show ongoing weakness as well.