• The FOMC delivered the expected hold; Powell delivered the fireworks in his post-meeting press conference; the Fed announced it will slow the pace of its balance sheet runoff in June; Q1 unit labor costs and nonfarm productivity will be reported
  
• Eurozone reported firm final April manufacturing PMIs; Switzerland April CPI ran hot; Czech Republic is expected to cut rates 50 bp to 5.25%
  
• The five yen drop in USD/JPY late yesterday had all the hallmarks of BOJ intervention; BOJ released the minutes for the March meeting; Australia reported March trade and building permits

The dollar is steadying after the post-FOMC selloff. DXY is trading flat near 105.782 after trading as high as 106.490 ahead of the FOMC decision. The yen is the worst performing major today as USD/JPY shook off likely BOJ intervention late yesterday (see below), trading near 155.25 now vs. yesterday’s low near 153. We expect the pair to continue rising as monetary policy divergences continue to favor the dollar. The euro is trading lower near $1.07 while sterling is trading lower near $1.2515. CHF is the top performing major today on higher-than-expected Swiss inflation (see below). Powell delivered a dovish message yesterday but when all is said and done, it will come down to the data. The ongoing backdrop of persistent inflation and robust growth in the U.S. should keep the Fed on hold and put upward pressure on U.S. yields, which in turn should be supportive of the dollar. We believe that while market easing expectations have adjusted violently this past month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

The FOMC delivered the expected hold. The tone of the policy statement was little changed, with the Fed acknowledging the worsening inflation outlook by adding that “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” There are no updated macroeconomic projections until the June meeting. Markets were disappointed that the statement came in more neutral than hawkish but reserved final judgment until Chair Powell spoke.

Of course, Powell delivered the fireworks in his post-meeting press conference. He characterized current policy as restrictive and weighing on demand, and later added that over time, policy will be “sufficiently restrictive.” If that weren’t clear enough, Powell then said, “I think it’s unlikely that the next policy rate move will be a hike.” He then went on to say that rate cut timing will depend on the data, adding that unexpected weakening in the labor market could warrant a cut. Bottom line: it's clear from his press conference that Powell is still itching to cut rates and will do so at the first opportunity. Once again, it will all come down to the data.

Fed easing expectations have adjusted modestly. Odds of a June cut remain steady at around 10%, while July odds have risen to 33% vs. below 25% ahead of the decision. September odds have risen to nearly 70% vs. below 55% previously, while odds of a November cut have risen to around 95% vs. below 75% ahead of the decision. It seems that despite Powell’s dovish message, markets realize that the Fed can’t cut until the data allow it.

The Fed announced it will slow the pace of its balance sheet runoff in June. The monthly cap for UST redemptions will be cut to $25 bln vs. $60 bln currently, while the monthly cap for MBS redemptions will be kept unchanged at $35 bln. Earlier this month, the New York Fed came up with two scenarios for ending QT: “higher reserves” and “lower reserves.” This appears to be the “higher reserves” scenario, where QT slows in H1 2024 and ends early 2025 with bank reserves falling to around $3.0 trln by early 2026 and the balance sheet falling to $6.5 trln.

ADP private sector job estimate was solid. It came in at 192k vs. 183k expected and a revised 208k (was 184k) in March. This points to a solid jobs report Friday. Of note, NFP has outperformed ADP for eight straight months. Bloomberg consensus sees 240k jobs added vs. 303k in March, while its whisper number has risen to 245k. The unemployment rate is expected to remain steady at 3.8%. The pace of wage growth, a key driver of core services CPI inflation, will also draw plenty of attention. Average hourly earnings are expected to slow a tick to 4.0% y/y.

April ISM manufacturing PMI is worth discussing. Headline came in at 49.2 vs. 50.0 expected and 50.3 in March. Employment fell to 58.6 vs. 47.4 in March and new orders fell to 49.1 vs. 51.4 in March. Supplier deliveries fell to 48.9 vs. 49.9 in March, while the backlog of orders fell to 45.4 vs. 46.3 in March. The lower these readings are, the less stress there is in supply chains. This suggests that the jump in prices paid to 60.9 vs. 55.8 in March was mostly demand driven. This is not good news for the Fed, to state the obvious.

The U.S. growth outlook remains solid. The Atlanta Fed GDPNow model is now tracking Q2 growth at 3.3% SAAR vs. its initial estimate of 3.9%. These early reads are often revised significantly in both directions, but this estimate suggests momentum remains fairly strong. Next update comes today after the data. March trade and factory orders will be reported. The New York Fed GDP nowcast model sees Q2 growth at 2.7% SAAR and will be updated tomorrow. Its initial estimate for Q3 will come in early June.

April vehicle sales remain strong. Sales came in at an annual rate of 15.74 mln vs. 15.70 expected and 15.49 mln in March. This pace remains near the cycle highs and suggests that consumption remains robust.

Q1 unit labor costs and nonfarm productivity will be reported. Productivity (GDP/hours worked) is expected at 0.5% q/q vs. 3.2% in Q4, while ULC is expected at 4.0% q/q vs. 0.4% in Q4. Annual productivity growth has improved significantly over the last year and is running above its post-war average of 2.1%. Rising productivity leads to low inflation economic growth, which translates to higher real interest rate and an appreciation in the currency over the longer term. April Challenger job cuts and weekly jobless claims will also be reported. Initial claims are expected at 211k vs. 207k last week and continuing claims are expected at 1.79 mln vs. 1.781 mln last week.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported firm final April manufacturing PMIs. Headline came in a tick higher than the preliminary at 45.7. Looking at the country breakdown, Germany came in three ticks higher than the preliminary at 42.5, while France came in four ticks higher at 45.3. Italy and Spain reported for the first time and their manufacturing PMIs came in at 47.3 and 52.2, respectively. Final April services and composite PMIs will be reported next Monday.

European Central Bank expectations remain steady. Overall, the eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June. Chief Economist Lane speaks later today.

Switzerland April CPI ran hot. Headline picked up to 1.4% y/y vs. 1.1% expected and 1.0% in March, while core picked up to 1.2% y/y vs. 0.9% expected and 1.0% in March. CHF rallied across the board as SNB easing expectations adjusted lower. The market is now pricing in 65% odds of another cut June 20 vs. 75% at the start of this week.

Czech National Bank is expected to cut rates 50 bp to 5.25%. Governor Michl recently said that rates may be cut but warned that any further easing will be “very cautious” and that the cycle could be halted at any time if inflation is more persistent than currently expected. Elsewhere, Vice Governor Zamrazilova said she would consider a 25 or 50 bp cut, while both Holub and Prochazka favor maintaining the 50 bp pace. At the last meeting March 20, the bank cut rates 50 bp by a 5-2 vote, and minutes showed Frait and Holub wanted to cut by 75 bp. The market is pricing in 125 bp of total easing over the next 12 months.

ASIA

The five yen drop in USD/JPY late yesterday had all the hallmarks of BOJ intervention. The pair quickly fell from 157.55 to 153.05 before bouncing. If it was intervention, the timing (like Monday’s action during a Japanese holiday) would guarantee the maximum bang for the buck since markets are particularly thin towards the North American close and before the Asian open. While we believe intervention was quite possible, don’t expect any confirmation from Japan officials. We will have to wait until the end of May to see the MOF data. However, changes in the BOJ’s current account balances today suggest it spent about JPY3.5 trln yesterday vs. an estimated JPY5.5 trln in Monday’s intervention.

Bank of Japan released the minutes for the March meeting. At that meeting, the BOJ raised the policy rate and ended yield curve control. Some members felt it was important to communicate that the rate hike wasn’t meant to signal a move to a rapid tightening cycle. Some members also felt that inflation could come in higher than expected and if that materialized, the March policy change would make it easier to respond. One member felt it was appropriate to proceed slowly but steadily with policy normalization. Lastly, the minutes noted that the yen's value had deviated notably from purchasing power parity. Indeed, we estimate long-term fundamental equilibrium for USD/JPY at 95.00, implying a 60% overvaluation relative to the current spot rate. However, this overvaluation is justified by wide US-Japan real long-term interest rate differentials.

Australia reported mixed March trade data. Exports came in at 0.1% m/m vs. a revised -3.2% (was -2.2%) in February, while imports came in at 4.2% m/m vs. a revised 4.4% (was 4.8%) in February. In y/y terms, export growth slowed to -11.4% while import growth picked up to 12.3%. Of note, exports to China fell -14.5% y/y, suggesting that the mainland economy continues to struggle. On the other hand, strong import growth suggests domestic demand remains fairly strong despite the RBA tightening.

Australia also reported March building permits. The number of total dwellings approved came in at 1.9% m/m vs. 3.4% expected and a revised -0.9% (was -1.9%) in February. Private sector houses came in at 3.8% m/m vs. a revised 12.4% (was 10.7%) in February, while the y/y rates for both fell significantly. The bigger picture shows building approvals remain in a firm downtrend, which will further constrain the supply of new dwellings and should push house prices higher.