• The RBA sent a message that should reverberate across global markets; the two-day FOMC meeting begins today and ends tomorrow with a likely 25 bp hike; reports suggest President Biden is considering promoting Fed Governor Jefferson to Vice Chair and naming Adriana Kugler to fill his open seat; special accounting maneuvers to keep the government running could be exhausted as soon as June 1; March JOLTS job openings will be the first in a string of labor market readings this week; Colombia central bank releases its quarterly inflation report
  
• April eurozone CPI data were reported; data come ahead of the ECB decision Thursday when it is expected to hike rates 25 bp; final eurozone and U.K. April manufacturing PMI readings were reported; Germany reported weak March retail sales
  
• RBA delivered a hawkish surprise and hiked rates 25 bp to 3.85% vs. an expected hold; AUD jumped on the surprise but we'd fade this bounce; Korea reported April CPI

The dollar is firm as Europe returns from holiday. DXY is trading higher for the fourth straight day near 102.294, the highest since April 11 and on track to test the April 10 high near 102.807. Break above that would set up a test of the April 3 high near 103.058. AUD is the top performer today after the RBA surprise, which we believe has significant implications for global markets (see below). The euro is trading lower near $1.0950 while sterling is trading lower near $1.2460. USD/JPY is testing the March 8 high near 138 and a break above sets up a test of the November 30 high near 140 and then the November 21 high near 142.25. Recent data have been dollar-supportive but until rate cuts this year are finally priced out, the dollar is likely to have trouble getting any sort of extended traction. Perhaps the First Republic deal and a hawkish Fed tomorrow will open up the next stage higher for the greenback.

AMERICAS

The Reserve Bank of Australia sent a message that should reverberate across global markets. By hiking rates unexpectedly today (see below), the RBA action underscored just how difficult it is proving to get stubbornly high inflation back to target. Simply put, it is obvious that interest rates around the world will go higher for longer. It’s really that simple and so any notions of quick monetary policy pivots are misguided. We believe that any easing by the major central banks is a 2024 story. Period. In particular, we continue to believe that the markets are underestimating the Fed’s capacity to tighten policy and to then keep it there for an extended period. This should be a huge, huge wakeup call for investors that have become way too complacent about a Fed pivot.

The two-day FOMC meeting begins today and ends tomorrow with a likely 25 bp hike. At the last meeting March 21-22, the Fed hiked rates 25 bp and noted that additional policy firming may be appropriate. The Fed noted that U.S. banks remain sound and resilient but acknowledged that recent events will weigh on growth. This was about as hawkish as the Fed could be given the banking sector stresses that were impacting markets then The underlying message was similar to the ECB’s. That is, despite the banking sector stresses, the Fed’s focus remains in inflation. Chair Powell acknowledged that the Fed considered a pause but added that it was too soon to say how Fed policy has been impacted by the banking crisis. We think that still holds true now and so we expect the Fed to leave the door wide open to further hikes. Updated forecasts and Dot Plots will come at the June meeting, which we believe is more in play than markets believe. Of note, WIRP now suggests 25% odds of another hike June 14 and we think this is likely to move higher. Yet the market is still pricing in a cut by year-end and we continue to view this as highly unlikely.

Reports suggests that President Biden is considering promoting Fed Governor Jefferson to Vice Chair and naming Adriana Kugler to fill his open seat. If this were to happen, Jefferson would replace Lael Brainard and serve out her term ending May 15 2026 while Kugler would replace Jefferson and serve out his term ending January 21 2036. Kugler is of Colombian descent and is currently the U.S. executive director at the World Bank. Her choice would fulfil Senator Menendez’ wish for a Latino candidate for the Fed Board of Governors, which would be a first. Kugler has a Ph.D. in economics from U.C. Berkeley and served as chief economist for the Labor Department in the Obama administration.

Treasury Secretary Yellen told lawmakers that her ability to use special accounting maneuvers to keep the government running could be exhausted as soon as June 1. The so-called x-date was initially thought to be in August but has been moved forward significantly after April tax receipts came in weaker than expected. Yellen warned “Our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.” She added that because revenue and spending are variable, “the actual date that Treasury exhausts extraordinary measures could be a number of weeks later than these estimates.” After the letter was published, President Biden invited top congressional leaders for a May 9 meeting on the debt limit. Time is clearly of the essence.

March JOLTS job openings will be the first in a string of labor market readings this week. Headline is expected at 9.725 mln vs. 9.931 mln in February. ADP reports its private sector jobs estimate tomorrow and is expected at 150k vs. 145k in March. April Challenger job cuts and weekly jobless claims will be reported Thursday. Jobs data Friday will be the data highlight. Consensus for NFP currently stands at 180k vs. 236k in March, while the unemployment rate is expected to rise a tick to 3.6% and average hourly earnings are expected to remain steady at 4.2% y/y. While there have been some signs of cooling in the labor market, it remains relatively tight.

April ISM manufacturing PMI firmed. Headline came in at 47.1 vs. 46.8 expected and 46.3 in March. The detail were solid, as employment rose to 50.2 vs. 46.9 in March and new orders rose to 45.7 vs. 44.3 in March. This was the first reading above 50 for employment since January. Prices paid unexpectedly rose to 53.22 vs. 49.2 in March and was the highest since last July. Of note, supplier deliveries fell to 44.6 vs. 44.8 in March and is the lowest since March 2009, while backlog of orders fell to 43.1 vs. 43.9 in March. The lower these numbers are, the lower the strains in the supply chains. If these measures remain low, this is obviously a good sign for inflation going forward, notwithstanding the big jump in prices paid in April. ISM services PMI will be reported tomorrow, with headline expected at 51.8 vs. 51.2 in March. Factory orders (1.3% m/m expected) and April vehicle sales (15.0 mln annual pace expected) will also be reported today. Of note, the Atlanta Fed’s GDPNow model is now tracking Q2 growth at 1.8% SAAR, up from the initial estimate of 1.7% SAAR. Next model update comes this Thursday. Bloomberg consensus sees Q2 at 0.6% SAAR and Q3 at -0.6% SAAR.

Colombia central bank releases its quarterly inflation report. Central bank minutes will be released tomorrow. Last Friday, the bank hiked rates 25 bp to 13.25%. At the start of last week, it was a toss-up but once the peso sold off from rising political risk, a hike became unavoidable. The vote was split, with 4 in favor of the hike, 2 in favor of holding, and 1 in favor of a larger 50 bp move. Governor Villar said there are signs that inflation is starting to ease. April CPI will be reported Friday. Headline is expected at 12.97% y/y vs. 13.34% in March. If so, it would be the first deceleration since last May but would still be well above the 2-4% target range. Next policy meeting is June 30 and what happens then will depend in large part on whether the government has regained market confidence or not.

EUROPE/MIDDLE EAST/AFRICA

April eurozone CPI data were reported. Headline picked up a tick as expected to 7.0% y/y while core fell a tick as expected to 5.6% y/y. This was the first deceleration in core inflation since last June. March M3 was also reported and came in a tick higher than expected at 2.5% y/y vs. 2.9% in February. However, this was still the slowest since October 2014 and underscores our conviction that the eurozone growth outlook remains worse than many believe. March PPI will be reported Thursday and is expected at 5.9% y/y vs. 13.2% in February.

Data come ahead of the ECB decision Thursday when it is expected to hike rates 25 bp. There are around 10% odds of a larger 50 bp move. QT will be maintained at the initial EUR15 bln per month through June. We know the hawks want to quicken the pace but we do not expect any announcement until the June meeting, with a possibly faster pace beginning in July. At the last meeting March 16, the bank hiked rates 50 bp whilst acknowledging recent market tensions had added uncertainty to its baseline assessments. The ECB refrained from signaling future rate moves in its statement and President Lagarde stressed the bank would a data-dependent approach going forward. Updated macro forecasts were released in March and so the next set will come at the June meeting. Looking ahead, WIRP suggests another hike is priced in for June 15 and another for September 14, with the deposit rate seen peaking at 3.75%.

Final eurozone April manufacturing PMI readings were reported. Headline came in at 45.8 vs. 45.5 preliminary. Looking at the country breakdown, Germany was revised to 45.5 vs. 45.0 preliminary and France was revised to 45.6 vs. 45.5 preliminary. Italy and Spain report for the first time and came in at 46.8 and 49.0, respectively, and were both lower than expected. Services and composite PMIs will be Thursday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 55.5 and 58.5, respectively.

Germany reported weak March retail sales. Sales came in at -2.4% m/m vs. 0.4$ expected and revised -0.3% (was -1.3%) in February. March eurozone retail sales will be reported Friday and are expected at -0.2% m/m vs. -0.8% in February, while the y/y rate is expected at -3.3% vs. -3.0% in February. Italy also reports retail sales Friday. France and Spain have already reported sales at -5.6% y/y and 9.5% y/y, respectively. Renewed weakness in the German data support our view that China reopening continues to have little impact on its major trading partners. Germany reports trade data Thursday and factory orders Friday and there are clearly downside risks after the sales data today.

U.K. reported final April manufacturing PMI. It was revised to 47.8 vs. 46.6 preliminary but still continues the recent downward trajectory. Services and composite PMI will be reported Thursday. While the economy has surprised to the upside recently, it’s hard for us to get excited about the growth outlook.

Bank of England meets next week and is expected to hike rates 25 bp to 4.5%. WIRP no longer suggests any odds of a larger 50 bp move vs. 15% at the start of this week. Looking ahead, another 25 bp hike is priced in for June 22 and another one for September 21. Inflation remains stubbornly high and so more may need to be done.

ASIA

Reserve Bank of Australia delivered a hawkish surprise and hiked rates 25 bp to 3.85% vs. an expected hold. Similar to its statement from the April 4 meeting, when it held rates, the bank said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.” Governor Lowe said unit labor costs were rising “briskly” even as productivity remains low, adding that the RBA “remains alert” to a wage-price spiral. Lowe will speak tonight to give a fuller explanation of the decision, which quite frankly will simply add to complaints about the bank’s communication style. The bank releases it Statement on Monetary Policy Friday that will contain updated macro forecasts. Some forecasts were released and were little changed from the February forecasts, which begs the question of why the RBA decided to hike again after a one month pause. WIRP suggests odds of another 25 bp hike top out around 45% for August 1, while an easing cycle is not seen until early 2024.

AUD jumped on the surprise but we'd fade this bounce. China data continue to disappoint while coal and iron ore prices remain under pressure. Despite the hike today, the RBA remains one of the more dovish major central banks. AUD gets as high as .6715 but so far has been unable to make a clean break above .6695 (62% retracement objective of the April 20-28 drop). This may be a good level to go short AUD.

Korea reported April CPI. Headline came in as expected at 3.7% y/y vs. 4.2% in March. It is the lowest since last February but still well above the 2% target. Core eased to 4.6% y/y and was the lowest since September. At the last policy meeting April 11, the Bank of Korea kept rates steady at 3.5% and said it will judge whether a further hike is needed but stressed that a restrictive stance is warranted for a considerable time. Governor Rhee stressed that rate cut talk is unlikely until CPI is to hit its 2% target and that most BOK policymakers see market easing expectations as “excessive.” The market is pricing in a peak policy rate near 3.5% but it really will depend on the data going forward. Next policy meeting is May 25 and rates are likely to be kept steady again.