• Weekly jobless claims data took some wind out of the dollar’s sails; Fed officials remain cautious about easing; Q2 growth remains robust; preliminary May University of Michigan consumer sentiment will be the highlight; Canada highlight will be April jobs data
  
• ECB releases the account of its April 11 meeting; BOE delivered a dovish hold; BOE also released its April DMP inflation survey; U.K. reported firm Q1 GDP data; Norway reported April CPI
  
• Japan reported March current account data; the widening surplus is unlikely to curtail JPY weakness

The dollar is steady ahead of the weekend. DXY is trading flat near 105.261 but is up on a weekly basis for the first time after two straight losing weeks. This week’s gains have been built mostly on developments elsewhere, but next week the focus will be purely on the U.S. as key data will be reported. GBP is trading firmer near $1.2530 despite the BOE’s dovish hold (see below), while the euro is trading flat near $1.0780. USD/JPY is edging higher near 155.75 but continues to meet stiff resistance near 156. We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, which the data next week is expected to underscore.

AMERICAS

Weekly jobless claims data took some wind out of the dollar’s sails. For the week ended May 4, initial claims came in at 231k vs. 212k expected and a revised 209k (was 208k) the previous week. While this was the highest since August 2023, we believe financial markets are overinterpreting the rise. The 4-week moving average rose to 215k, which was about where it stood for the April BLS survey week. Yes, the U.S. labor market appears to be softening but remains solid and moving towards better balance. The unemployment rate remains low at 3.8%, and the number of job openings relative to unemployed workers is still above its pre-pandemic level. In fact, San Francisco Fed President Daly highlighted yesterday that “I see a really healthy labor market where people who want a job can get one.”

Fed officials remain cautious about easing. Daly said, “We are restrictive, but it might take more time to just bring inflation down.” She added that “There’s considerable now uncertainty about what the next few months of inflation will be and what we should do in response.” Bostic said “It is going to take some time. For me the question, as opposed to how many this year, is when that first one will happen.” He stressed that he only sees one cut this year. Despite Powell’s dovish message last week, most Fed officials this week have taken a much more cautious approach to easing. The market sees September as the most likely for the Fed to start cutting rates, which seems about right to us.  Bowman, Logan, Goolsbee, and Barr speak today.

Q2 growth remains robust. The New York Fed’s Nowcast model is tracking 2.2% SAAR and will be updated today. Its initial read for Q3 growth will be released in early June. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q2 growth at 4.2% SAAR and will be updated next Wednesday after the data.

Preliminary May University of Michigan consumer sentiment will be the highlight. Headline is expected at 76.2 vs. 77.2 in April, which would be consistent with resilient household spending activity. Current conditions are expected to remain steady at 79.0 while expectations are expected to fall a point to 75.0. 1-year inflation expectations are expected to remain steady at 3.2%, while 5- to 10-year expectations are expected to remain steady at 3.0%. Both are well above the 2% target, which should keep the Fed cautious.

Canada highlight will be April jobs data. Consensus sees a 20.0k rise in jobs vs. -2.2k in March, with the unemployment rate seen rising a tick to 6.2% and hourly wages slowing three ticks to 4.7% y/y. If so, this would be the highest unemployment rate since January 2022. The March labor market readings were poor. As such, another soft print in April would solidify the case for a June rate cut. Market puts nearly 70% odds on a cut then, with July fully priced in.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank releases the account of its April 11 meeting. At that meeting, the bank kept rates steady and stuck to the script. It appeared more confident about the disinflationary process and reinforced the case for a June rate cut. The ECB noted that “incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook.” Recall that Lagarde admitted that a few members felt confident enough to back a rate cut then but added that a very large majority of members wanted to wait for June. Reports later emerged that a larger group initial favored cutting rates at the April meeting, with some then joining the majority that favored waiting until the June meeting. Cipollone and Elderson speak today.

Bank of England delivered a dovish hold. As was widely anticipated, the BoE left the policy rate at 5.25% but the vote split and updated inflation projections suggest a cut could come as soon as the next meeting June 20. The vote split to keep rates on hold shifted from 8-1 to 7-2 as Ramsden joined Dhingra in pressing for a rate cut. Inflation forecasts were lowered while growth forecasts were increased.

Several key points from Governor Bailey’s press conference stood out. First, he said that a June rate cut is “neither ruled out nor a fait accompli” with each meeting evidence based. Second, Bailey stressed that forthcoming data releases will guide the bank’s June policy rate decision. There are two CPI and labor market prints between now and the June 20 meeting. Lastly, Bailey warned that the BOE may need to cut bank rate “possibly more so than currently priced into market rates.” However, the statement was made in the context of inflation tracking the BOE’s forecasts of 1.9% in Q2 2026 and 1.6% in Q2 2027.

The swaps market raised the probability of a June 20 cut from roughly 50% before the decision to nearly 65% now. In our view, the BOE will likely wait until August 1 to start easing since it reiterated that “monetary policy needs to be restrictive for an extended period of time.” Chief Economist Pill and MPC member Dhingra speak today. Yesterday, Pill said “We’re growing more and more confident that we can begin to reduce the restriction that monetary policy is putting on the economy and start to cut interest rates. We’re not quite there yet.”

BOE also released its April Decision Maker Panel inflation survey. 1-year expectations fell to 2.9% vs. 3.1% expected and 3.2% in March, while 3-year expectations fell a tick to 2.6%. Both are the lowest since the survey began in May 2022. However, both short- and medium-term expectations remain above the 2% target, warranting caution on the part of the BOE.

U.K. reported firm Q1 GDP data. Growth came in at 0.6% q/q vs. 0.4% expected and -0.3% in Q4 and was the strongest since the end of 2021. GFCF was the major driver at 1.4% q/q, while private consumption and government spending grew 0.2% q/q and 0.3% q/q, respectively. Net exports also contributed to growth as imports contracted more quickly than exports. Looking at the monthly data, GDP, IP, and services came in higher than expected at 0.4% m/m, 0.2% m/m, and 0.5% m/m, respectively, while construction came in weaker than expected at -0.4% m/m.

Norway reported April CPI. Headline came in a tick higher than expected at 3.6% y/y vs. 3.9% in March, while underlying came in two ticks higher than expected at 4.4% y/y vs. 4.5% in March. Headline the lowest since September but still well above the 2% target, which will reinforce the commitment to tight policy. Last week, the Norges Bank kept rates steady at 4.5% and pointed out that “the data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged.” The swaps market has almost priced out odds of a cut this year but sees roughly 50 bp of cuts over the next 12 months. Bottom line: the relative monetary policy stances and resilient global economic activity suggest NOK can continue to outperform EUR, GBP, and SEK.

ASIA

Japan reported March current account data. The adjusted surplus came in at JPY2.011 trln vs. JPY2.044 trln expected and a revised JPY1.412 trln (was JPY1.369) in February. However, the investment flows will be of more interest. The March data showed that Japan investors stayed net buyers of U.S. bonds (JPY1.048 trln) for the fourth straight month and for seven of the past eight months. Japan investors stayed net sellers (-JPY188 bln) of Australian bonds for the third straight month and turned net buyers of Canadian bonds (JPY56 mln) for the first time after eight straight months of net selling. Investors remained net sellers of Italian bonds (-JPY115 bln) for the third straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY407 bln) for the seventh time in eight months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.

Japan’s widening current account surplus is unlikely to curtail JPY weakness. On an annual basis, the surplus totaled over JPY25 trln through March, or 4.2% of GDP. Regardless, rising US-Japan bond yield spreads continue to support the uptrend in USD/JPY.