Drivers for the Week of April 23, 2023

April 23, 2023
Here's a look at the main drivers in Developed Markets this week.

The majors were mostly weaker last week as the dollar mounted a broad recovery on the back of higher U.S. yields. SEK, CHF, and GBP outperformed while NOK, CAD, and NZD underperformed. U.S. data this week are expected to show a resilient economy and stubborn price pressures, which should keep upward pressure on yields. If so, the dollar should continue its recent ascent.


While there are no top tier U.S. data reports, we do get some important pieces of the puzzle. PCE and ECI data will tell us more about the inflation outlook, while Chicago PMI and NAI as well as GDP will tell us more about the real sector. Recent resilience in the U.S. economy helped push UST yields higher and we look for that process to continue. If so, the dollar should continue to gain as well. Of note, DXY is coming off of its first up week since early March, when the banking sector turmoil started. It has only retraced about a quarter of its losses since then; key retracement objectives from the move lower off the March 8 high are 102.734 (38%), 103.336 (50%), and 103.937 (62%). Clearly, the dollar has a lot of room to cover in the days and weeks ahead.

Fed tightening expectations have picked up bit. WIRP suggests over 90% odds of 25 bp hike at the May 2-3 meeting, up from 80% at the start of last week and 70% at the start of the week before that. A hike next week is a done deal. There are about 15% odds of another 25 bp hike in June. 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. After all that, one cut is still 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. We concur.

PCE data Friday will be the highlight. Headline is expected at 0.1% m/m and 4.1% y/y vs. 0.3% and 5.0% in February, while core PCE is expected at 0.3% m/m and 4.5% y/y vs. 0.3% and 4.6% in February. Of note, the Cleveland Fed’s inflation Nowcasting model has headline at 0.08% m/m and 4.10% y/y and core PCE at 0.35% m/m and 4.58% y/y, both very close to consensus. There are no estimates for so-called Super Core PCE, which stood at 4.6% y/y in February. While a headline reading of 4.1% y/y would be the lowest since May 2021, much of that improvement is due to energy as the core measures remain stubbornly high.

We get our first look at Q1 GDP Thursday. Consensus currently is at 2.0% SAAR vs. 2.6% in Q4. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR. Next and final model update for Q1 will come Wednesday. After that, the model will start tracking Q2. The mix of Q1 growth will be important. In Q4, the bulk of growth came from inventories while personal consumption and net exports slowed.

March Chicago Fed National Activity Index Monday will be important. Headline is expected at -0.20 vs. -0.19 in February. A zero reading means the economy is growing at around trend and so we are back at above trend growth for two straight months after three straight months below trend. If so, the 3-month moving average would improve to -0.05 vs. -0.13 in February and would be the highest since October. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth.

April Chicago PMI Friday will also be closely watched. Headline is expected at 43.5 vs. 43.8 in March. However, we see upside risks after S&P Global preliminary PMIs came in stronger than expected last week. Manufacturing came in 50.4 vs. 49.0 expected and 49.2 in March while services came in at 53.7 vs. 51.5 expected and 52.6 in March. As a result, the composite rose to 53.5 vs. 51.2 expected and 52.3 in March and was the highest since May 2022. Of note, April ISM PMIs won't be reported until next week.

Q1 Employment Cost Index Thursday will command more attention than usual. That is because markets are focused on the labor market and the Fed’s desired aim of cooling wage pressures. Consensus sees 1.1% q/q vs. 1.0% in Q4. If so, this would be the first pickup after three straight quarters of deceleration from the 1.4% q/q peak in Q1 2022. Of note, the y/y rate of 5.1% in Q4 was the highest on record dating back to 2001. Any further acceleration would of course be alarming.

Regional Fed surveys for April will continue to roll out. Dallas Fed manufacturing index will be reported Monday and is expected at -11.0 vs. -15.7 in March. Philadelphia Fed non-manufacturing, Richmond Fed manufacturing (-8 expected vs. -5 in March), and Dallas Fed services indices will be reported Tuesday. Kansas City Fed manufacturing index will be reported Thursday and is expected at -2 vs. 0 in March. Kansas City Fed services index will be reported Friday. So far, the manufacturing surveys have been mixed, with Philly Fed at -31.3 vs. -19.3 expected and -23.2 in March and Empire survey at 10.8 vs. -18.0 expected and -24.6 in March.

Housing data is expected to show ongoing weakness. February FHFA and S&P CoreLogic house price indices and March new homes sales (-1.6% m/m expected) will be reported Tuesday. Pending home sales will be reported Thursday and are expected at 1.0% m/m vs. 0.8% in February.

Other minor data will be reported. April Conference Board consumer confidence will be reported Tuesday and the headline is expected to fall two ticks to 104.0. March wholesale and retail inventories, advance goods trade, and durable goods orders will all be reported Wednesday. Weekly jobless claims will be reported Thursday. Final April University of Michigan consumer sentiment will be reported Friday.

Bank of Canada releases the summary of its March deliberations Wednesday. At the April 12 meeting, the bank kept rates steady at 4.5% for the second straight meeting but 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.” Recent data have come in solid, raising the possibility that this pause may turn out to be temporary. Like the Fed, it will really depend on the data going forward. Next BOC policy meeting is June 7 and another hold is expected while WIRP suggests 10% odds of a hike. Looking ahead, the market is pricing in cut at the December 6 meeting, which we believe is very unlikely.


Eurozone April CPI data will start trickling out. France, Spain, and Germany all report Friday. France’s EU Harmonised CPI is expected to remain steady at 6.7% y/y, Spain’s is expected to pick up to 3.9% y/y, and Germany’s is expected to remain steady at 7.8% y/y. If these readings come in as expected, it would underscore just how stubborn price pressures remain even with the recent drop in energy prices. Italy and eurozone-wide CPI will be reported next Tuesday.

ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests over 30% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June 15 followed by over 90% odds of another hike July 27. Odds of one final hike in in September or October top out near 40% and so the peak policy rate is now seen between 3.75-4.0%%, up from3.75% at the start of last week and 3.50% at the start of the week before that. Vujcic, Villeroy, and Panetta speak Monday. Guindos speaks Wednesday. Panetta speaks Thursday. Lagarde speaks Friday.

Eurozone Q1 GDP data will be reported Friday. Headline is expected at 0.2% q/q vs. 0.0% in Q4, while the y/y rate is expected at 1.4% vs. 1.8% in Q4. Looking at the country breakdown, France is expected at 0.2% q/q and 0.8% y/y, Spain is expected at 0.3% q/q and 3.1% y/y, Germany is expected at 0.2% q/q and 0.8% y/y, and Italy is expected at 0.2% q/q and 1.4% y/y. Many analysts are saying that the eurozone has avoided recession and yet we believe it’s too early to tell. The ECB only started hiking rates in July 2022 and so the full impact of the 350 bp of tightening so far has yet to be felt. On top of that, 75-100 bp more tightening is priced in. Furthermore, data so far suggest little positive impact for the rest of the world from China reopening.

Germany reports some key sentiment indicators. IFO business climate for April will be reported Monday. Headline is expected to rise a tick to 93.4 ,with current assessment expected to rise to 96.0 and expectations expected to fall to 91.1. May GfK consumer confidence will be reported Wednesday and is expected at -28.0 vs. -29.5 in April.

U.K. has a quiet week. March public sector net borrowing will be reported Tuesday. Ex-banking groups is expected at GBP22.8 bln vs. 16.7 bln in February. CBI releases the results of its April surveys. Industrial trends will be reported Tuesday and total orders are expected at -22 vs. -20 in March. Distributive trades will be reported Thursday.

BOE tightening expectations have picked up. The next policy meeting is May 11 and WIRP suggests a 25 bp hike is fully priced in, with very low odds of a larger move. Another 25 bp hike is around 85% priced in for June 22. Odds of a last 25 bp hike stand near 80% for September 21 and so the peak policy rate is seen near 5.0% vs. 4.75% at the start of last week and between 4.50-4.75% at the start of the week before that. Broadbent speaks Tuesday. Of note, U.S. economist Megan Greene was recently named to replace outgoing external MPC member Tenreyro starting July 5. Greene has a Master’s Degree from Oxford and brings a broad range of experience from academia, the buy side, and the sell side.

Riksbank meets Wednesday and is expected to hike rates 50 bp to 3.5%. At the last policy meeting February 9, the Riksbank hiked rates 50 bp to 3.0% and delivered several other hawkish measures whilst noting “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” Forward guidance shifted more hawkish as the policy rate was seen peaking at 3.33% in Q4 2024 and staying there through Q1 2026. Since then, March CPI data softened a bit as headline came in at 10.6% y/y vs. 11.0% expected and 12.0% in February, CPIF came in at 8.0% y/y vs. 8.3% expected and 9.4% in February, and CPIF ex-energy came in at 8.9% y/y vs. 9.1% expected and 9.3% in February. Targeted CPIF is the lowest since last July but remains well above the 2% target. Looking ahead, WIRP suggests odds of another 50 bp hike June 29 at nearly 50% and so the policy rate is seen peaking between 3.75-4.0%. Updated forecasts will be released and we expect a hawkish shift in the expected rate path from the February forecasts, which saw the policy rate peaking at a much lower level.


Two-day Bank of Japan meeting ends Friday. This is the first meeting under new Governor Ueda and no changes in policy are expected. However, new macro forecasts will be released and should send some strong signals in terms of forward guidance. Core inflation is running well above target but the February forecasts saw a drop back below target in both FY23 and FY24. If this benign outlook is maintained in the new forecasts, it would suggest the BOJ remains in no hurry to tighten. Of note, FY25 will be added for the first time and will also be an important piece of the puzzle. WIRP suggests no odds of liftoff April 28 or June 16 before rising to around 20% for July 28. A hike isn’t priced in until 2024 as the odds stand near 60% 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. Of note, recent reports suggest BOJ policymakers are concerned about tweaking YCC so soon after the banking sector turmoil.

Japan also has a busy data week. Highlight will be April Tokyo CPI data Friday. Headline is expected to remain steady at 3.3% y/y while core (ex-fresh food) is expected to remain steady at 3.2% y/y. However, much of the recent improvement has been due to energy subsidies as core ex-energy is expected to accelerate to 3.5% y/y vs. 3.4% in March. If so, it would be the highest since January 1990 and would be very concerning to policymakers.

March retail sales, IP, and labor market data will also be reported Friday. Sales are expected at 6.5% y/y vs. 7.3% in February while IP is expected at -1.2% y/y vs. -0.5% in February. Elsewhere, the unemployment rate is expected to fall a tick to 2.5% while the job-to-applicant ratio is expected to remain steady at 1.34. Ahead of that data dump, March department store sales will be reported Tuesday. March housing starts will be reported Friday and are expected at -3.8% y/y vs. -0.3% in February.

Australia highlight will be March and Q1 CPI data Wednesday. March headline is expected at 6.6% y/y vs. 6.8% in February. If so, it would be the lowest monthly reading since May 2022 but still well above the 2-3% target range. For Q1, headline is expected at 7.0% y/y vs. 7.8% in Q4 while trimmed mean is expected at 6.7% y/y vs. 6.9% in Q4. March private sector credit and Q1 PPI will be reported Friday. Next policy meeting is May 2 and WIRP suggests nearly 25% odds of a 25 bp hike. These odds have risen to nearly 75% for August 1 vs. zero chance after its pause in early April. Of course, it will all depend on the data but for now, the Australian economy has remained fairly robust despite the 350 bp of tightening seen so far since it began hiking in May 2022.

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