The majors were mixed last week as the dollar mounted a comeback Friday. The Scandies and Swissie outperformed while JPY, NZD, and GBP underperformed. We believe data last week helped cement a 25 bp hike at the next FOMC meeting May 2-3. The market is still pricing in one cut by year-end and that needs to get priced out before the dollar can mount a sustainable recovery.
Markets remain volatile. Relentless dollar selling over much of this month was interrupted by a strong rebound Friday after the retail sales data and hawkish Fed comments. Sterling may be the canary in a coalmine as it recorded an outside down day Friday that points to further losses this week. A test of the April 10 low near $1.2345 is likely and a break below would set up a test of the April low near $1.2275. In turn, this may drag the other foreign currencies along for the ride. Stay tuned.
The Fed Beige Book for the May 2-3 FOMC meeting will be released Wednesday. Since the March 21-22 meeting, the data suggest that activity is slowing, the labor market is softening, and price pressures are easing. Notably, supply chains continue to improve. We believe the Beige Book will highlight these trends that support a pause after what is widely expected to be another 25 bp hike whilst leaving the door open for further tightening if needed. Between the May 2-3 and June 13-14 meetings, the Fed will have digested two more job reports, two CPI/PPI reports, and one retail sales report. At this point, a pause in June might just be the most likely outcome but it really will depend on how all that data come in. Bowman speaks Tuesday. Goolsbee and Williams speak Wednesday. Waller, Mester, Bowman, Bostic, and Harker all speak Thursday. Cook speaks Friday. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference May 3.
Fed tightening expectations have picked up bit. WIRP suggests over 80% odds of 25 bp hike at the May 2-3 meeting, up from 70% at the start of last week and 50% at the start of the week before that. After that, it’s all about the cuts. However, only one cut is priced in by year-end vs. two at the start of last week. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year.
S&P Global preliminary April PMI readings Friday will be a data highlight. Manufacturing is expected at 49.0 vs. 49.2 in March, services is expected at 51.5 vs. 52.6 in March, and the composite is expected at 51.2 vs. 52.3 in March. If so, this would suggest that the U.S. economy is still expanding as Q2 gets under way but at a slower pace than what was seen at the end of Q1. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR, up from 2.2% previously. Next model update will come Tuesday.
Regional Fed business surveys for April will start rolling out. Empire manufacturing survey kicks things off Monday and is expected at -18.0 vs. -24.6 in March. New York Fed services index will be reported Tuesday. Philly Fed reports Thursday and is expected at -19.7 vs. -23.2 in March.
Housing data are expected to show continued weakness. April NAHB housing market index will be reported Monday and is expected at 45 vs. 44 in March. March building permits and housing starts will be reported Tuesday and are expected at -6.5% m/m and -3.5% m/m, respectively. March existing home sales will be reported Thursday and are expected at -1.8% m/m vs. 14.5% in February.
Other minor data will be reported. February TIC data will be reported Monday. March leading index will be reported Thursday and is expected at -0.7% m/m vs. -0.3% in February. Weekly jobless claims Thursday will be important as initial claims will be for the BLS survey week containing the 12th of the month. Initial claims are expected at 240k vs. 239k last week. If so, the 4-week moving average would edge lower vs. 240k last week. Continuing claims are expected at 1.825 mln vs. 1.81 mln last week. The claims data have been trending higher in recent weeks and are the first real signs of softness in the labor market.
Canada reports key data. March CPI will be reported Tuesday. Headline is expected at 4.3% y/y vs. 5.2% in February. If so, this would be the lowest since August 2021 but still well above the 1-3% target range. Of note, core median is expected at 4.5% y/y s. 4.9% in February and core trim is expected at 4.4% y/y vs. 4.8% in February. Canada is one of the few countries to be experiencing disinflation in its core measures, which is a big factor that allowed it to pause the tightening cycle March 8 and follow up with another hold April 12. However, the bank last week pushed back against any notions of early easing by noting “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.” Next policy meeting is June 7 and another hold is expected. The market sees steady rates over the next six months followed by the start of an easing cycle over the subsequent six months. Macklem and Rogers appear before Parliament Tuesday.
February retail sales will be reported Friday. Headline is expected at -0.6% m/m vs. 1.4% in January and ex-autos is expected at -0.2% m/m vs. 0.9% in January. Other data to be reported include February wholesale trade sales Monday and March housing starts Wednesday.
The ECB releases the account of its March 16 meeting Thursday. At that meeting, the bank hiked rates 50 bp despite the banking sector turmoil but stressed that future moves would be data dependent. President Lagarde stressed then that were was no tradeoff between price and financial stability. However, the account could shed more light on just how concerned the ECB was about banking sector risks before deciding to hike. We believe this was a compromise move, with the hawks agreeing to leave out specific forward guidance in favor of a more data-dependent approach. We know from subsequent comments that the hawks and the doves continue to struggle to provide a unified message.
ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests nearly 30% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June followed by another one in September or October. There are 10% odds of one last 25 bp hike in Q4 and so the peak policy rate is now seen near 3.75%, up from3.50% at the start of last week and 3.25% during the height of the banking panic. Lagarde speaks Monday. Lane, Knot, de Cos, and Schnabel speak Wednesday. Visco, Holzmann, Schnabel, and Lagarde speak Thursday. Guindos, Vujcic, and Elderson speak Friday.
Eurozone preliminary April PMI readings Friday will be the data highlight. Headline manufacturing is expected at 48.0 vs.47.3 in March, services is expected at 54.5 vs. 55.0 in March, and the composite is expected to remain steady at 53.7. Looking at the country breakdown, the German composite is expected to rise a tick to 52.7 and the French composite is expected to rise three ticks to 53.0. Italy and Spain will report with the final readings in early May. Ahead of that, Germany reports April ZEW survey Tuesday, eurozone reports March new car registrations, February current account and construction output, and final March CPI data Wednesday.
The U.K. data dump continues. Labor market data will be reported Tuesday. Unemployment for the three months ending February is expected to remain steady at 3.7% while average hourly earnings are expected to slow to 5.1% y/y vs. 5.7% previously. CPI will be reported Wednesday. Headline is expected at 9.8% y/y vs. 10.4% in February, core is expected at 6.0% y/y vs. 62% in February, and CPIH is expected at 8.7% y/y vs. 9.2% in February. April GfK consumer confidence will be reported Thursday and is expected at -35 vs. -36 in March.
March retail sales will be reported Friday. Headline is expected at 0-0.5% m/m vs. 1.2% in February while sale ex-auto fuel is expected at -0.5% m/m vs. 1.5% in February.
Preliminary April PMI readings will be reported Friday. Manufacturing is expected at 48.5 vs.47.9 in March, services is expected at 53.0 vs. 52.9 in March, and the composite is expected at 52.5 vs. 52.2 in March.
BOE tightening expectations have picked up modestly. The next policy meeting is May 11 and WIRP suggests around 80% odds of a 25 bp hike, with another 25 bp hike price in for September 21. As a result, the peak policy rate is seen near 4.75% vs. between 4.50-4.75% at the start of last week. Cunliffe speaks Monday. Mann speaks Wednesday. Outgoing MPC member Tenreyro speaks Thursday. Her second three-year term ends in July but reports have recently emerged that the Treasury will soon announce her replacement. Tenreyro has become one of the leading doves on the MPC and so her replacement could lead to a shift in the hawk-dove balance. Stay tuned.
Japan highlight will be March national CPI Friday. Headline is expected at 3.2% y/y vs. 3.3% in February and core (ex-fresh food) is expected to remain steady at 3.1% y/y. Recent improvements have been due largely to energy subsidies as core ex-energy is expected at 3.6% y/y vs. 3.5%. This measure continues to accelerate and that should be concerning to the Bank of Japan.
Yet BOJ tightening expectations remain low. WIRP suggests no odds of liftoff April 28 or June 16 before rising to nearly 30% for July 28. A hike isn’t priced in until 2024 as the odds stand near 75% for December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.
Other key data will be reported. March trade data will be reported Wednesday. Exports are expected at 2.5% y/y vs. 6.5% in February while imports are expected at 11.8% y/y vs. 8.3% in February.
Preliminary April PMI readings will be reported Friday. Of note, the composite reading of 52.9 in March was the highest since June 2022.
RBA minutes will be released Tuesday. At the April 4 meeting, the bank kept rates steady at 3.60% and was the first pause in the tightening cycle since it began hiking rates back in May 2022. The bank noted that “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.” However, Governor Lowe was much more dovish as he acknowledged that “The board is prepared to have a slightly slower return of inflation to target than some other central banks” and that “Our judgment at the moment is that if we can get inflation back to 3% by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses.” WIRP suggests 20% odds of one last 25 bp hike in Q2. Furthermore, a rate cut is no longer priced in by year-end. We cannot rule out another hike this year, but we can certainly rule out a cut this year.
Preliminary April PMI readings will be reported Friday. Of note, the composite reading of 48.5 in March was the lowest since January and supports our view that China reopening has yet to significantly impact the regional economies.
New Zealand highlight will be Q1 CPI data Thursday. Headline is expected at 6.9% y/y vs. 7.2% in Q4. If so, it would be the lowest since Q1 2022 but still well above the 2% target. At the last policy meeting April 5, the RBNZ delivered a hawkish surprise and hiked rates 50 bp to 5.25% vs. 25 bp expected. It noted then that “The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.” The bank said it discussed recent global banking stresses and concluded that local banks are well placed to face any risks and basically followed ECB President Lagarde’s lead that there is no trade-off between price stability and financial stability. Updated macro forecasts won’t come until the next meeting May 24, but the RBNZ noted that “In aggregate, economic projections were little changed relative to the February statement.” Of note, the February forecasts see the policy rate peaking near 5.5% this year and staying there for much of next year. Looking ahead, WIRP suggests odds of one final 25 bp hike at around 70% May 24 and nearly priced in July 12 that would see the policy rate peak near 5.5%.