U.S. yields are edging lower as risk-off impulses carry over from last week; Fed tightening expectations remain relatively robust; March core PCE reading Friday will be important; three key indicators will give us insight on the state of the U.S. economy; Fed manufacturing surveys for April will continue to roll out
French President Macron won a second term handily; eurozone April inflation readings will be the highlight; ECB tightening expectations continue to pick up; U.K. has a quiet week but BOE tightening expectations have picked up; Riksbank meets Thursday and is expected to deliver a hawkish hold
Two-day BOJ meeting ends with a decision Thursday; ahead of the BOJ decision, Japan reports some key data; Australia reports Q1 CPI Wednesday; RBA tightening expectations are elevated but have lent AUD little support

AMERICAS

U.S. yields are edging lower as risk-off impulses carry over from last week. The U.S. 10-year yield traded at a new cycle high of 2.98% last week but has since fallen to 2.86% currently. Similarly, the 2-year traded at a new cycle high near 2.78% last week but has since fallen to 2.64% currently. Asian equity markets are starting the week off on their back foot and we expect this to carry over into the European and North American sessions later today. Yet the dollar continues to firm despite lower yields, which can be chalked up to the dollar smile theory that suggests the dollar will gain during periods of strong U.S. data as well as bouts of risk-off sentiment. DXY traded Friday at a new cycle high near 101.331 and we continue to target the March 2020 high near 103.

Fed tightening expectations remain relatively robust. WIRP suggests 50 bp hikes at the May 3-4 and June 14-15 meetings are fully priced in, with nearly 25% odds of a possible 75 bp move in June. Looking ahead, swaps market is pricing in over 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. While this almost meets our own call for a 3.5% terminal rate, we continue to see risks that the expected terminal rate moves even higher if inflation proves to be even more stubborn than expected. The media blackout ahead of the FOMC meeting is in effect and so there will be no Fed speakers until Chair Powell’s post-decision press conference the afternoon of May 4.

The March core PCE reading Friday will be important. It is expected to ease a tick to 5.3% y/y but we see upside risks given CPI and PPI data already reported for March. If so, expect another leg higher in U.S. rates. Personal income and spending will be reported at the same time and are expected at 0.4% m/m and 0.6% m/m, respectively.

Three key indicators will give us insight on the state of the U.S. economy. The first is the March Chicago Fed National Activity Index Monday, which is expected at 0.45 vs. 0.51 in February. If so, the 3-month average would rise to 0.52, the highest since May 2021 and further above the -0.7 level that signals imminent recession. The second is Q1 GDP data Thursday, where growth is expected at 1.0% SAAR vs. 6.9% in Q4. This is close the Atlanta Fed’s GDPNow model, which is currently tracking 1.3% SAAR for Q1. The initial estimate for Q2 will come out this Friday. Of note, Bloomberg consensus for Q2 is currently at 3.0% SAAR. The third is April Chicago PMI Friday, which is expected at 62.0 vs. 62.9 in March.

Fed manufacturing surveys for April will continue to roll out. Dallas reports Monday and is expected at 4.8 vs. 8.7 in March. Richmond reports Tuesday and is expected at 8 vs. 13 in March. Kansas City reports Thursday and is expected at 35 vs. 37 in March. So for, Empire came in at 24.6 vs. -11.8 in March and Philly Fed came in at 17.6 vs. 27.4 in March. Most signs point to continued strength in the manufacturing sector despite ongoing supply chain issues.

Other minor data round out the picture. March durable goods orders (1.0% m/m expected), February S&P CoreLogic house prices, March new homes sales (-0.3% m/m expected), and April Conference Board consumer confidence (108.5 expected) will be reported Tuesday. March advance goods trade (-$105.0 bln expected), wholesale (1.5% m/m expected) and retail (1.6% m/m expected) inventories, and pending home sales (-1.0% m/m expected) will be reported Wednesday. Weekly jobless claims Thursday will be of interest because continuing claims data will be for the BLS survey week containing the 12th of the month. They are expected at 1.393 mln vs. 1.417 mln the previous week, while initial claims are expected at 180k vs. 184k the previous week. Q1 Employment Cost Index and final April University of Michigan consumer sentiment will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

French President Macron won a second term handily. The margin of his victory over Le Pen was 58-42%, much narrower than his 30 point margin seen in the 2017 election. Macron becomes the first incumbent to win reelection since Chirac. However, parliamentary elections scheduled for June will be very important as Macron’s coalition works to preserve its working majority in order to help advance his legislative agenda. The euro saw a slight bounce after the election results were announced but has since given up those gains and further losses are likely (see below).

Eurozone April inflation readings will be the highlight. Germany and Spain report Thursday. Spain’s EU Harmonized headline inflation is expected at 9.0% y/y vs. 9.8% in March, while Germany’s is expected to remain steady at 7.6% y/y. France and Italy report Friday. France’s EU Harmonized headline inflation is expected to remain steady at 5.1% y/y, while Italy’s is expected at 7.0% y/y vs. 6.8% in March. Eurozone CPI will be reported later Friday. Headline is expected to pick up a tick to 7.5% y/y, while core is expected at 3.2% y/y vs. 2.9% in March. If the CPI data come in as expected, there will be less pressure on the ECB to tighten in June.

ECB tightening expectations continue to pick up. WIRP suggests odds of liftoff June 9 are now around 40% now vs. 30% at the start of last week, while liftoff July 21 remains fully priced in. The swaps market is now pricing in 150 bp of tightening over the next 12 months vs. 125 bp at the start of last week, with another 75 bp of tightening priced in over the following 12 months that would see the deposit rate peak near 1.75%. This still seems way too aggressive to us. Panetta speaks Monday, de Cos and Villeroy speak Tuesday, Lagarde speaks Wednesday, Guindos and Wunsch speak Thursday, and de Cos speaks again Friday. Despite the elevated ECB expectations, the euro remain heavy and should test the recent cycle low near $1.0760. Break below would set up a test of the March 2020 low near $1.0635.

Eurozone Q1 GDP data will also be reported. Belgium and Latvia report first Thursday. France, Spain, Italy, and Germany, report Friday. Eurozone GDP will be reported later Friday and is expected to grow 0.3% q/q and 5.1% y/y vs. 0.3% and 4.6% in Q4, respectively. The y/y gain will be boosted by a low base from 2021. Looking ahead, a high base from 2021 will likely lead to a much lower y/y rate in Q2.

There is a full slate of country data as well. April German IFO business climate will be reported Tuesday. Headline reading is expected at 89.0 vs. 90.8 in March, current assessment is expected at 95.9 vs. 97.0 I March, and expectations is expected at 83.5 vs. 85.1 in March. May German GfK consumer confidence will be reported Thursday and is expected at -16.0 vs. -15.5 in April. France reports April consumer confidence Thursday and is expected to remain steady at 91. France reports March consumer spending Friday and is expected at -0.2% m/m vs. 0.8% in February. Spain also reports retail sales and is expected at 1.4% y/y vs. 0.9% in February.

U.K. has a quiet week. CBI reports its April survey results. Industrial trends survey will be reported Monday, with total orders expected at 22 vs. 26 in March, selling prices seen steady at 80, and business optimism expected at -15 vs. -9 in March. Distributive trade survey will be reported Wednesday, with total reported sales expected at 11 vs. 20 in March and retailing reported sales expected at -5 vs. 9 in March. In between, the government reports its March public sector net borrowing Wednesday. Ex-banking groups is expected at GBP20 bln vs. GBP13.1 bln in February.

Bank of England tightening expectations have picked up. 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 200 bp of tightening over the next 12 months vs. 175 bp at the start of last week that would see the policy rate peak near 2.75%. There are no BOE speakers scheduled for this week. Despite heightened BOE tightening expectations, sterling continues to sink and has already traded today at the lowest level since September 2020 near $1.2805. Further losses are likely and we first target the September 2020 low near $1.2675. After that is the July 2020 low near $1.2480 and then the June 2020 low near $1.2250.

Riksbank meets Thursday and is expected to deliver a hawkish hold. However, there is a split between the analysts and the swaps market as WIRP suggests liftoff this week is fully priced in. The bank pivoted to a hawkish stance in mid-March, when Governor Ingves surprised markets by saying the bank is likely to hike rates before its forward guidance for H2 24 liftoff that came with the last meeting February 10. When asked about possible 2022 liftoff, he said “we cannot rule anything out.” We side with analysts and look for no change in rates this week, but markets should be prepared for a hawkish shift in the bank’s expected rate path that sets up potential liftoff at the June 30 meeting. Looking ahead, the swaps market is pricing in nearly 200 bp of tightening over the next 12 months followed by another 75 bp over the subsequent 12 months that would see the policy rate peak near 2.75%, which strikes us as much too aggressive.

Ahead of the Riksbank, Sweden reports a slew of data. March PPI, trade, and unemployment data will be reported Wednesday. Q1 GDP and March retail sales data will be reported Thursday. The y/y growth rate is expected at 3.8% vs. 6.2% in Q4, while the q/q rate is expected at -0.6% vs. 1.4% in Q4. With the economic recovery continuing and price pressures still rising, Riksbank tightening expectations have picked up significantly.

ASIA

Two-day Bank of Japan meeting ends with a decision Thursday. Another dovish hold is expected after the bank defended its Yield Curve Control again last week. Reports suggest the Bank of Japan will probably raise its FY22 projection for core inflation to 1.5-1.9% vs. 1.1% in January and will probably cut its FY22 growth forecast from 3.8% in January. However, officials stressed that there is no need to tighten policy as the inflationary impact from high oil prices is seen as temporary. This supports our view that Governor Kuroda is likely to maintain current policy through the end of his term in 2023, leaving it to his successor to tighten if conditions warrant.

Ahead of the BOJ decision, Japan reports some key data. March department store sales will be reported Monday. Labor market data will be reported Tuesday, with the unemployment rate expected to remain steady at 2.7% and the job-to-applicant ratio to rise a tick to 1.22. Retail sales and IP will be reported Thursday. Sales are expected at 1.0% m/m vs. -0.9% in February, while IP is expected at -1.3% m/m vs. 0.5% in February.

Australia reports Q1 CPI Wednesday. Headline inflation is expected at 4.6% y/y vs. 3.5% in Q4, while trimmed mean inflation is expected at 3.4% y/y vs. 2.6% in Q4. If so, headline would be the highest since Q3 2008 and further above the 2-3% target range. Q1 PPI and March private sector credit data will be reported Friday. The recent acceleration in PPI suggests upside risks to CPI in the coming quarters.

RBA tightening expectations are elevated. Odds of liftoff at the next meeting May 3 are over 35% vs. less than 20% at the start of last week,. Liftoff at the June 7 meeting is fully priced in, with nearly 80% odds of a 50 bp move then. Looking ahead, swaps market is pricing in 300 bp of tightening over the next 12 months vs. 250 bp at the start of last week, followed by another 75 bp over the subsequent 12 months that would see the policy rate peak near 3.75%. Yet this hawkish RBA outlook has lent AUD little support as it approaches the mid-March low near .7165. After that is the late February low near .7095 but charts point to an eventual test of the January low near .6970.