- April retail sales data will be the data highlight; heavy US Treasury issuance wrapped up yesterday with a soft $27 bln sale of 30-year bonds; there were encouraging signs from all sides with regards to the infrastructure bill; the BOC is starting to push back against currency strength; Peru and Chile kept rates unchanged yesterday, as expected
- E.U.-U.K. tensions remain high; the BOE’s tone on growth and inflation remains upbeat; Israel reports April CPI; reports suggest an Egyptian delegation has arrived in Tel Aviv to broker a truce
- Virus restrictions are still widening in Japan; the rout in metals continued, especially for iron ore
The dollar is giving up some of its recent gains as U.S. rates fall. DXY is down after two straight up days and is trading soft after being unable to break above 91. A break below 90.355 would set up a test of the May 11 low just below 90. The euro is trading back above $1.21 and sterling is testing the $1.41 area. USD/JPY has held up better and continues to trade above 109. In order for any dollar rally to have legs, we need a further rise in U.S. yields.
April retail sales data will be the data highlight. Headline sales are expected to rise 1.0% m/m vs. 9.7% in March, while sales ex-autos are expected to rise 0.7% m/m vs. 8.4% in March. The so-called control group used for GDP calculations is expected fall -0.4% m/m vs. 6.9% in March. The big question now is whether consumption can remain strong in light of the uneven recovery in the labor market. We also know that many states are working to eliminate the extra $300 per week unemployment benefit ahead of its expiration in September, which could be another headwind on consumption. Stay tuned. Meanwhile, April import/export prices, IP (1.0% m/m expected), March business inventories (0.3% m/m expected), and preliminary May University of Michigan consumer confidence (90.0 expected) will also be reported today.
The U.S. growth outlook remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 11.0% SAAR, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 5.1% SAAR. Both models will be updated today. Of note, Bloomberg consensus is smack in the middle of these two at 8.1% growth in Q2, easing to 7.0% in Q3 and 4.7% in Q4, all in SAAR terms.
U.S. inflation concerns should remain heightened for the foreseeable future after the upside surprises this week. After the April CPI data Wednesday, PPI data yesterday also offered an upside surprise, with headline at 6.2% y/y vs. 5.8% expected and 4.2% in March and core at expected at 4.1% y/y vs. 3.8% expected and 3.1% in March. Some acceleration is to be expected due to low base effects that will boost y/y readings in March, April, and May. However, we think there is a growing belief in the markets that inflation isn’t as transitory as the Fed claims. Noted gadfly and former Treasury Secretary Summers said that inflation is accelerating even faster than he forecast, warning “I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted. That has to make us nervous going forward.”
Heavy US Treasury issuance wrapped up yesterday with a soft $27 bln sale of 30-year bonds. After strong 3- and 10-year auctions, demand for the long bond ebbed and the yield rose to 2.395% from 2.320% at the last auction. The bid-to-cover ratio and indirect bidders (mostly foreign demand) fell to 2.22 and 2.59% from 2.47 and 61.0% at the last auction, respectively. Next week sees a $22 bln 20-year auction Wednesday and a $13 bln 10-year TIPS auction Thursday.
Yet given all these negative drivers, US Treasuries have recovered. The 10-year yield is trading around 1.64% today after testing the 1.70% level yesterday. Elsewhere, 10-year breakeven inflation rates have also eased to 2.53% from the 2.59% peak Wednesday, which puts the real rate around -0.90%. Until the real rate moves higher on a sustained basis, the dollar is likely to remain under pressure.
There were encouraging signs from all sides with regards to the infrastructure bill. Republican senators say they’re encouraged about the prospects for a deal with President Joe Biden after a white House meeting to discuss significant areas of disagreement. Senator Capito said “We think this infrastructure package can carry forward. The president has asked us to come back and re-work an offer so that he can then react to that, and then re-offer to us.” While there’s significant GOP opposition to the size of Biden’s plan and the tax hikes that have bene proposed to fund it, several Senators said they see room for compromise. Biden also sounded optimistic, saying afterward that “We had a very, very good meeting. And I am very optimistic that we can reach a reasonable agreement.” Of note, House Minority leader McCarthy said after a separate session with Biden that his party would release an infrastructure proposal of less than $800 bln as soon as next week.
Kaplan is the only Fed speaker today after a very full week of speakers. So far, all have toed the dovish Fed line but the exception has been Kaplan. He is shaping up as one of the most hawkish Fed officials and the June FOMC will be key in seeing if any other Fed officials are tilting more like Kaplan. Yesterday, Waller delivered the usual defense of the transitory inflation narrative, calling for patience. He said it would still take “several more months of data before we get a clear picture” about the Fed’s mandate goals.
The Bank of Canada is starting to push back against currency strength. Governor Macklem said that recent CAD appreciation reflects in part higher commodity prices, which are good for the economy. However, he added that continued gains could begin to pose a risk to the central bank’s most recent forecasts from last month, which assumed an exchange rate of 1.25. Macklem noted that “If it moves a lot further that could have a material impact on our outlook and it’s something we’d have to take into account in our setting of monetary policy. If the dollar were to continue to move -- particularly if it’s not reflecting good developments for Canada -- that could become more of a headwind on our export projection.”
Central banks of Peru and Chile kept rates unchanged yesterday, as expected. The Chilean central bank’s rates stood at 0.50%, keeping the forward guidance for the first hike in Q1 next year. Official communication also highlighted improved economic activity and the recovery in business and household demand, as well as a better external outlook. Peru’s central bank kept rates at 0.25%, as well as a stable inflation outlook. The growth picture remains very weak, so expansionary monetary policy will remain in place, as well as its extraordinary liquidly provisions.
E.U.-U.K. tensions remain high. Reports suggest France is pushing to stall an agreement on regulatory cooperation in the financial industry until the ongoing fishing dispute is unresolved. This stance would also seem to delay any sort of deal on so-called equivalence for U.K. financial firms. The U.K. government was highly critical, noting “This is another example of the E.U. issuing threats at any sign of difficulty, instead of using the mechanisms of our new treaties to solve problems.” Tensions have been heightened since last week, when France and the U.K. both sent navy ships to the island of Jersey, where dozens of French boats had staged a protest. While the fishermen are now back in port and talks set to restart, France said that many of its crews are still awaiting licenses to resume working in Jersey’s waters.
The BOE’s tone on growth and inflation remains upbeat. Governor Bailey reiterated the solid recovery in the U.K. economy, including the potential for growth in sectors that employ a large number of workers. However, he also noted the upside surprise in U.S. inflation and said he is watching the trend in the U.K. “very carefully.” Implied inflation readings such as 5-year 5-year breakevens remain very elevated in the U.K., but not trending higher anymore like those in the US and Germany. With the departure of Chief Economist Haldane after the June meeting, it appears Bailey may take up the mantle of resident hawk on the MPC. Of note, the short sterling futures strip suggests significant odds of the first hike in Q1 2022 and fully priced in by Q3 2022.
Israel reports April CPI. Headline inflation is expected to pick up to 0.9% y/y from 0.2% in March. If so, it would be the highest since May 2019 but still below the 1-3% target range. Next policy meeting is May 31 and rates are expected to remain steady at 0.10%. For now, the bank continues to rely on its efforts to weaken the shekel and recently reported that it bought $5.266 bln in FX last month. It has now bought $19 bln in FX so far this year vs. $21.2 bln in all of 2020. Governor Yaron admitted that bank is likely to end up buying more than the planned $30 bln for all of 2021.
Elsewhere, reports suggest an Egyptian delegation has arrived in Tel Aviv to broker a truce. If so, this would be good news and would complement reports of U.S. and Qatari envoys being dispatched as well. On the other hand, Israeli artillery continues to fire on Gaza amidst growing fears of a ground assault. With tensions running high, the situation could quickly and easily get much worse. For now, the conflict has only national and regional implications. With the greater Middle Eastern powers staying on the sidelines (for now), the risks of a broader geopolitical event seem limited.
Virus restrictions are still widening in Japan. Prime Minister Suga added three more prefectures to the growing list of those in a state of emergency. Hokkaido, Hiroshima, and Okayama will start virus restrictions effective May 16 through the end of the month. This comes on top of existing restrictions in Tokyo, Osaka, Hyogo, Kyoto, Aichi, and Fukuoka prefectures which together already make up about 40% of the economy. Q2 is shaping up to be another lost quarter of growth. Current Bloomberg consensus sees GDP growing 4.5% SAAR in Q2 vs. an expected -3.9% in Q1. Of note, Q1 data will be reported next week.
COMMODITIES AND ALTERNATIVE INVESTMENTS
The rout in metals continued, especially for iron ore. Iron ore futures are down 6.5% today and about 10% over the last two sessions. The main driver here still seems to be China’s Premier Li Keqiang’s comment yesterday urging the government to deal with rising commodity prices. Moreover, the local government of the city Tangshang started a crackdown on price manipulation for steel. Copper is also taking a hit, but the moves have been far less expressive.
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