• Warnings of slower global growth are mounting; April trade data and consumer credit will be reported; BOC is expected to keep rates steady at 4.5%
  
• ECB hawks are trying to regain control of the narrative ahead of next week’s meeting; Germany reported soft April IP; TRY remains under pressure
  
• Japan Prime Minister Kishida unveiled a long list of policy proposals; RBA Governor Lowe sounded much more hawkish; Australia reported Q1 GDP data; China reported soft May trade data

The dollar is trading softer as markets await fresh drivers. The absence of any top tier economic data or Fed speakers are causing the greenback to drift lower. DXY is trading lower near 104 but we still look for a retest of last Wednesday’s cycle high near 104.699 and then the mid-March high near 105.103. The euro is trading higher near $1.0715 but we still look for a retest of last Wednesday’s low near $1.0635 and then the mid-March low near $1.0515. Sterling is trading higher near $1.2455but we still look for a test of the late May low near $1.2310. USD/JPY is trading lower near 139.35 but we still look for a test of the late May high near 141. The headwinds on the dollar (banking sector weakness, debt ceiling battle) have been resolved even as the tailwinds (strong economy and robust labor market) pick up. We look for this post-NFP rally to continue.

AMERICAS

Warnings of slower global growth are mounting. Yesterday, the World Bank said “Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth.” The bank raised its 2023 global growth forecast to 2.1% vs. 1.7% in January but cut its 2024 forecast to 2.4% vs. 2.7% in January, adding that the risks remain tilted to the downside. Today, the OECD similarly warned “Significant uncertainty about economic prospects remains, and the major risks to the projections are on the downside.”

In the U.S., April trade data and consumer credit will be reported. A deficit of -$75.8 bln is expected vs. -$64.2 bln in March, while credit is expected at $22.0 bln vs. $26.514 bln in March. There will also be annual revisions to the trade data. So far, signs of a true credit crunch remain elusive. The Atlanta Fed’s GDPNow model is currently tracking Q2 growth at 2.0% SAAR and an update will be released today after the data. There are no Fed speakers due to the media blackout.

Bank of Canada is expected to keep rates steady at 4.5%. However, yesterday’s RBA decision reminds us that there are risks of a hawkish surprise today. Over a fifth of the analysts polled by Bloomberg look for a 25 bp hike, while WIRP suggests nearly 45% odds of a hike. After the RBA decision yesterday, it’s clear that there are significant risks of a hawkish surprise. Looking ahead, that hike is fully priced in for July 12, followed by nearly 60% odds of a second hike September 6 that rise to nearly 75% October 25. Similar to what we’ve seen for Fed expectations, a BOC rate cut by year-end is now totally priced out. Updated macro forecasts won’t be released until the July meeting. April trade data will be reported today. Yesterday, May Ivey PMI came in at 53.5 vs. 56.8 in April.

EUROPE/MIDDLE EAST/AFRICA

ECB hawks are trying to regain control of the narrative ahead of next week’s meeting. Schnabel said “We have more ground to cover. It will depend on the incoming data by how much more rates will have to increase.” Elsewhere, Knot said “I’m not yet convinced that the current tightening is sufficient. Inflation could well remain too high for a long time and further rate hikes will then be necessary.” WIRP suggests a 25 hike is priced in for next Thursday, followed by another 25 bp hike in either July or September. Odds of one last hike after that top out near 20% in October. Updated macro forecasts will be released next week and its 2023 and 2024 growth forecasts are likely to be revised down closer to the World Bank’s new forecasts of 0.4% and 1.3%, respectively. The ECB’s March forecasts, which are close to the OECD’s new forecasts of 0.9% and 1.5%, seem too optimistic in light of further slowing in the major eurozone economies.

Germany reported soft April IP. It came in at 0.3% m/m vs. 0.6% expected and a revised -2.1% (was -3.4%) in March. Elsewhere, Italy reported April retail sales at 0.2% m/m vs. 0.3% expected and flat in March. Italy reports April IP Friday and is expected at 0.2% m/m vs. -0.6% in March. Eurozone IP will be reported June 14.

The Turkish lira remains under pressure. Despite attempts by the government to create a more market-friendly economic team, it’s clear that the markets (including us) remain very skeptical. USD/TRY spiked to a new record high near 23.17 after state banks reportedly pulled back their support of the lira. On the other hand, Turkish equities and bonds have rallied today. It’s possible that allowing further lira weakness is a sign of a new regime change but simply put, we do not think policymakers will be able to enact the kind of shock treatment that’s needed to stabilize the economy after years of mismanagement.

ASIA

Japan Prime Minister Kishida unveiled a long list of policy proposals. The package is expected to be approved by the cabinet in mid-June and will certainly feed into the notion of early elections. That said, the proposals and targets are fairly vague and contain no details of how they will be funded. The package focuses on many challenges to be addressed, including childcare policy, labor market reform, supply chains, and the green transformation of its economy. Kishida stressed that “We want to solve social issues, and by doing so create new growth engines, and build a more sustainable and inclusive society.” However, these proposals will eventually be at odds with the government’s existing goal of fiscal health and a primary balance by FY25. Stay tuned.

Reserve Bank of Australia Governor Lowe sounded much more hawkish. Lowe said “We want to get inflation back to target within a couple of years and that hasn’t changed. What has changed over the past couple of months is our assessment of the risks. We have been prepared to be patient in getting inflation back to target but our patience has a limit and the risks are testing that limit.” Lowe added that “The desire to preserve the gains in the labor market does not mean that the board will tolerate higher inflation persisting,” This change in tone basically encapsulates what almost every central banker is feeling right now. No policymaker wants to risk a recession, but the balance of risks are clearly tilted towards too-high inflation right now, not just in Australia but globally. WIRP suggests nearly 25% odds of a hike at the next meeting July 4, rising to nearly 75% August 1 and fully priced in for September 5. Odds of another 25 bp hike after that top out near 10% for November 7 but are clearly subject to change.

Australia reported Q1 GDP data. Growth came in at 0.2% q/q vs. 0.3% expected and a revised 0.6% (was 0.5%) in Q4, while the y/y rate came in at 2.3% vs. 2.4% expected and a revised 2.6% (was 2.7%) in Q4. This was the slowest y/y rate since Q1 2021 and so it’s clear that despite slowing growth, the RBA’s primary focus remains on lowering inflation.

China reported soft May trade data. Exports came in at -7.5% y/y vs. -1.8% expected and 8.5% in April, while imports came in at -4.5% y/y vs. -8.0% expected and -7.9% in April. We have been skeptical of the recent gains in mainland exports, which did not jibe with soft trade data from its major trading partners. The May readings are much more consistent with its regional peers and support our view that the mainland economy continues to struggle.