Inflation data and a hawkish Fed are likely to keep upward pressure on U.S. yields; the Fed releases its Beige Book report Wednesday for the upcoming May 3-4 FOMC meeting; Fed tightening expectations remain relatively robust; regional Fed manufacturing surveys for April will continue to roll out; Canada highlight is March CPI data Wednesday
Markets are still digesting the dovish surprise from the ECB last week; eurozone preliminary April PMI readings Friday will be the data highlight; U.K. highlight is March retail sales data Friday
Japan highlight will be March national CPI Friday; official concern with the weak yen is likely to intensify; New Zealand reports Q1 CPI data Thursday
Inflation data and a hawkish Fed are likely to keep upward pressure on U.S. yields. The U.S. Treasury market was closed Friday but should pick up where it left off last Thursday. US 10-year yield rose 13 bp to 2.83% Thursday, matching the high from earlier this week. The 2-year is lagging a bit but still rose 11 bp to 2.45% Thursday, not yet close to matching the 2.60% cycle high from earlier in week. That said, the price action in the rates markets Thursday supports the notion that the preceding 2-day bond rally was really all about short-covering and positioning. As a result, U.S. yields and USD should continue to move higher. With inflation expectations remaining fairly steady, the real 10-year yield has risen to -0.08%, the highest since March 2020 and poised to move into positive territory for the first time since the pandemic began.
The Fed releases its Beige Book report Wednesday for the upcoming May 3-4 FOMC meeting. Since the previous Beige Book report for March 15-16 FOMC meeting, data have continued to run hot. We expect this Beige Book report to highlight inflation readings that have picked up further, job growth that remains robust and wage pressures that continue to pick up. Supply chain issues remain an issue as well. All of these developments should lead to an upbeat outlook that sets the table for a 50 bp hike next month. Bullard speaks Monday. Evans speaks Tuesday. Daly, Evans, and Bostic speak Wednesday. Powell takes part in an IMF panel Thursday with ECB President Lagarde on the global economy. At midnight Friday, the media blackout ahead of the FOMC meeting takes effect and there will be no Fed speakers until Chair Powell’s post-decision press conference the afternoon of May 4.
Fed tightening expectations remain relatively robust. WIRP suggests a 50 bp hike at the May 3-4 meeting is fully priced in, while odds of another 50 bp hike at the June 14-15 FOMC meeting are above 80%. Looking ahead, swaps market is pricing in nearly 250 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%, down from 3.25% at the start of last week. We continue to see room for the expected terminal rate to move higher again if inflation proves to be even more stubborn than expected.
Regional Fed manufacturing surveys for April will continue to roll out. Philly Fed reports Thursday and is expected at 20.0 vs. 27.4 in March. Last week, Empire Survey came in at 24.6 vs. 1.0 in March. S&P Global (formerly Markit) preliminary April PMI readings will be reported Friday. Manufacturing is expected at 58.0 vs. 58.8 in March, services is expected at 58.1 vs. 58.0 in March, and the composite PMI is expected to remain steady at 57.7. ISM PMI readings will be reported the week after next. March IP rose 0.9% m/m vs. 0.4% expected and manufacturing output rose 0.9% m/m vs. 0.6% expected, which shows that the manufacturing sector had solid momentum is we moved into Q2.
Other minor data will be reported. March building permits (-1.9% m/m expected) and housing starts (-1.6% m/m expected) will be reported Tuesday. Existing home sales (-3.7% m/m expected) will be reported Wednesday. Leading index (0.3% m/m expected) and weekly jobless claims will be reported Thursday. Initial claims are expected at 180k vs. 185k last week and are for the BLS survey week containing the 12th of the month. Continuing claims are reported with a 1-week lag and so next week’s reading will be for the BLS survey week.
Canada highlight is March CPI data Wednesday. Headline is expected at 6.1% y/y vs. 5.7% in February, while core common is expected at 2.7% y/y vs. 2.6% in February. Ahead of that, Canada reports March housing starts and existing home sales Tuesday. February retail sales will be reported Friday. Headline is expected at -0.5% m/m, while sales ex-autos are expected at 0.1% m/m.
Last week, the Bank of Canada delivered the expected 50 bp hike and maintained an extremely hawkish tone. Governor Macklem said the bank is prepared to move as forcefully as needed, as it needs to normalize monetary policy relatively quickly. Macklem said he saw rates rising to neutral, which the bank estimates to be between 2-3%, but added that it’s also possible that rates may need to go above neutral. WIRP suggests a 50 bp hike at the next meeting June 1 is almost fully priced in. Looking ahead, swaps market now sees the policy rate peaking near 3.5% over the next 24 months, up from 3.0% at the start of last week.
Markets are still digesting the dovish surprise from the ECB last week. Here are the key takeaways from the dovish ECB narrative: 1) APP is likely to end in Q3 followed by likely liftoff in Q4; 2) the June 9 meeting will provide key forward guidance on the end of APP and potential liftoff but for now, the ECB appears to be in no hurry to hike rates; 3) the weak euro does not seem to be a concern; 4) inflation is still seen as an energy issue, with wage growth remaining muted; and 5) there will be no firm commitment yet on how soon rates will be hiked after APP ends.
ECB tightening expectations eased a bit after the ECB meeting. WIRP suggests odds of liftoff June 9 are only around 30% now vs. nearly 60% at the start of last week, but liftoff July 21 remains fully priced in. Swaps market is still pricing in 125 bp of tightening over the next 12 months, with another 75 bp of tightening priced in over the following 12 months. This still seems way too aggressive to us, especially in light of Lagarde’s dovish stance that was most likely driven by recent weakness in the real sector data. Rehn and Nagel speak Wednesday, while Lagarde speaks both Thursday and Friday. The dovish ECB decision has damaged the euro outlook as it made a new cycle low near $1.0760 Thursday. Despite the modest recovery back above $1.08, we look for a test of the March 2020 low near $1.0635.
Eurozone preliminary April PMI readings Friday will be the data highlight. Headline manufacturing is expected at 54.7 vs. 56.5 in March, services is expected at 55.0 vs. 55.6 in March, and the composite PMI is expected at 53.9 vs. 54.9 in March. Looking at the country breakdown, the German composite is expected at 54.1 vs. 55.1 in March and the French composite is expected at 55.0 vs. 56.3 in March. Final April PMI readings will be reported the week of May 2. Ahead of the PMIs, eurozone March February IP and trade data will be reported Wednesday. IP is expected at 0.7% m/m vs. flat in January. March new car registrations will also be reported Wednesday. France reports April business and manufacturing confidence Thursday, which are both expected to fall 2 points to 105 and 104, respectively.
U.K. highlight is March retail sales data Friday. Headline sales are expected at -0.3% m/m vs. -0.3% in February, while sales ex-auto fuel is expected at -0.4% m/m vs. -0.7% in February. Preliminary April PMI readings will also be reported Friday. Manufacturing is expected at 54.0 vs. 55.2 in March, services is expected at 60.0 vs. 62.6 in March, and the composite PMI is expected at 58.9 vs. 60.9 in March. While these readings remain relatively high, it’s clear that the economy was already slowing before we moved into Q2, which will bring even greater headwinds that include hikes in payroll taxes and the cap on household energy costs as well as higher interest rates.
Bank of England tightening expectations remain steady. WIRP suggests another 25 bp hike to 1.0% is fully priced in for the next meeting May 5, while swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 2.5%. Mann and Bailey both speak Thursday. Despite BOE tightening, sterling continues to sink and traded Friday at a new low for this move near $1.2975. Further losses are likely and we first target the November 2020 low near $1.2855.
Japan highlight will be March national CPI Friday. Headline is expected at 1.2% y/y vs. 0.9% in February, while core (ex-fresh food) is expected at 0.8% y/y vs. 0.6% in February. Reports suggest the Bank of Japan will probably raise its FY22 projection for core inflation to 1.5-1.9% vs. 1.1% seen in January. The BOJ will also probably cut its FY22 growth forecast from 3.8% seen in January. However, officials stressed that there is no need to tighten policy as the impact from high oil prices is seen as temporary. As these forecasts will be part of the Outlook Report for the upcoming April 27-28 meeting, the tone of these remarks suggest the bank will reaffirm its current policy stance. Preliminary April PMI readings will also be reported Friday. March trade data will be reported Wednesday, with exports expected at 17.6% y/y vs. 19.1% in February and imports expected at 28.8% y/y vs. 34.1% in February.
Official concern with the weak yen is likely to intensify. The relentless rise in USD/JPY continues as it is up eleven straight days through Friday as the pair traded at a new cycle high near 126.70. Looking ahead, there are no significant chart points until the 2002 high near 135.15. We see low risk of FX intervention. Until the BOJ changes its ultra-dovish stance, the monetary policy
New Zealand reports Q1 CPI data Thursday. Headline inflation is expected at 7.1% y/y vs. 5.9% in Q4. If so, it would be the highest since Q2 90 and further above the 1-3% target range. Last week, the RBNZ delivered the expected 50 bp hike and said it was comfortable with its expected rate path from the February meeting, which sees the policy rate at 2.5% by early 2023 before peaking near 3.5% in 2024. Updated macro forecasts and expected rate path won’t come until the next meeting May 25, where odds of a follow-up 50 bp move stand near 70%. Swaps market sees 200 bp of further tightening over the next 12 months and another 25 bp over the following 12 months that would see the policy rate peak near 3.75%, down from 4.0% at the start of last week.