The dollar put in an uneven performance last week. BRL, ZAR, and CZK outperformed while PEN, ARS, and MXN underperformed. The dollar started off soft but recovered ground at the end of the week on higher-than-expected PCE readings that underscored the “higher for longer” theme for the Fed. The FOMC meeting and key data this week should be supportive of this theme and so we expect EM to remain under pressure.

AMERICAS

The two-day FOMC ends Wednesday with an expected hold. The tone of the policy statement and Fed Chair Jay Powell’s post-meeting press conference will most likely be on the hawkish side. Before the media blackout, virtually all key Fed officials have signaled patience before easing and a couple have even floated the possibility of rate hikes. As such, the bar for a hawkish surprise is high. There are no updated macroeconomic projections until the June meeting.

The Fed may confirm plans to begin slowing the pace of its balance sheet runoff in June. Earlier this month, the New York Fed came up with two scenarios for ending QT. The current pace of QT via balance sheet runoff is $95 ln per month ($60 bln in UST and $35 bln in MBS). Under the “lower reserves” scenario, QT would slow in H1 2025 and end mid-2025, with bank reserves falling to around $2.5 trln by mid-2026 and the balance sheet falling to $6.0 trln. Under the “higher reserves” scenario, QT would slow in H1 2024 and end early 2025 with bank reserves falling to around $3.0 trln by early 2026 and the balance sheet falling to $6.5 trln. Slowing down the pace of balance sheet reduction reduces the probability that money markets experience undue stress and has no implications for the stance of monetary policy.

Yields remain elevated and Fed easing expectations have been pushed out even further. We expect yields to continue rising, thereby supporting further dollar gains. Odds of a June cut have fallen to around 10%, while July odds have fallen to 33% and September odds have fallen below 75%. Even a November cut is not fully priced in, with odds around 95%. Last week’s heavy supply of UST was absorbed rather easily, albeit at higher yields.

Data highlight will be the jobs report Friday. Consensus sees 250k jobs added vs. 303k in March, while the unemployment rate is expected to remain steady at 3.8%. The pace of wage growth, a key driver of core services CPI inflation, will also draw plenty of attention. Average hourly earnings are expected to slow a tick to 4.0% y/y. Ahead of that, ADP reports its private sector job estimate Wednesday and is expected at 180k vs. 184k in March. Of note, NFP has outperformed ADP for eight straight months.

April ISM PMI readings will also be important. Manufacturing will be reported Wednesday, and headline is expected to fall two ticks to 50.1. Of note, the S&P Global manufacturing PMI dipped to a four-month low of 49.9 in April vs. 51.9 in March. Services will be reported Friday and headline is expected at 52.0 vs. 51.4 in March. Of note, the S&P Global services PMI fell to a five-month low of 50.9 in April vs. 51.7 in March. Ahead of that, Dallas Fed manufacturing index will be reported Monday and is expected at -11.3 vs. -14.4 in March. Chicago PMI will be reported Tuesday and is expected at 45.0 vs. 41.4 in March.

The U.S. growth outlook remains solid. The Atlanta Fed GDPNow model released its initial Q2 estimate at 3.9% SAAR and will be updated Wednesday after the data. These early reads are often revised significantly in both directions, but this estimate suggests momentum remains fairly strong. The New York Fed GDP nowcast model sees Q2 growth at 2.7% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June.

Other labor market indicators will be reported. Q1 Employment Cost Index will be reported Tuesday and is expected at 1.0% q/q vs. 0.9% in Q4. March JOLTS job openings will be reported Wednesday. Openings are expected at 8.680 mln vs. 8.756 mln in February. April Challenger job cuts and weekly jobless claims will be reported Thursday.

Q1 unit labor costs and nonfarm productivity will also be reported Thursday. Productivity (GDP/hours worked) is expected at 0.8% q/q vs. 3.2% in Q4, while ULC is expected at 3.3% q/q vs. 0.4% in Q4. Importantly, annual productivity growth has improved significantly in the last year and is running above its post-war average of 2.1%. Rising productivity leads to low inflationary economic growth which translates to higher real interest rate and an appreciation in the currency over the longer term.

Conference Board reports April consumer confidence Tuesday. Headline is expected at 104.0 vs. 104.7 in March. The focus will be on the expectations index, which slipped in March to the lowest level since October 2023.

Canada highlight will be February GDP Tuesday. Canada’s economy is expected at 0.3% m/m vs. 0.6% in January, while the y/y rate is expected to pick up two ticks to 1.1%. However, the -0.3% monthly decline in retail sales volumes in February points to downside risk to growth. The Bank of Canada projects Q1 GDP growth of 2.8% SAAR, driven largely by exports and consumption.

Canada also reports April PMI readings. S&P Global reports its manufacturing PMI Wednesday, followed by services and composite PMIs Friday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be April CPI data. Spain and Germany report first Monday. Spain’s EU Harmonised inflation is expected to pick up a tick to 3.4% y/y, while Germany’s is expected to pick up a tick to 2.4% y/y. France and Italy report Tuesday. France’s EU Harmonised inflation is expected to fall two ticks to 2.2% y/y, while Italy’s is expected to fall two ticks to 1.0% y/y. Eurozone also reports Tuesday. Headline is expected to remain steady at 2.4% y/y and core is expected at 2.6% y/y vs. 2.9% in March.

European Central Bank expectations remain steady. Overall, the eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June.

Eurozone reports Q1 GDP data Tuesday. Headline growth is expected at 0.1% q/q vs. -0.1% in both Q3 and Q4. Forward-looking survey indicators point to upside risk to growth. Looking at the country breakdown, Germany is expected at 0.1% q/q vs. -0.3% in Q4, France is expected at 0.1% q/q vs. 0.1% in Q4, Italy is expected at 0.1% q/q vs. 0.2% in Q4, and Spain is expected at 0.4% q/q vs. 0.6% in Q4.

U.K. has a light data week. March money and credit data comes out Tuesday. Net mortgage approvals for house purchases (an indicator of future borrowing) are expected to remain consistent with a further recovery in house prices. Net mortgage approvals are projected to rise to 61.5k vs. 60.4k in February.

Swiss highlight will be April CPI Thursday. Headline is expected to pick up a tick to 1.1% y/y, while core is expected to fall a tick to 0.9% y/y. At the last meeting March 21, the Swiss National Bank delivered a dovish surprise and cut rates by 25 bp to 1.50%. The SNB noted that “the easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective.” The market is pricing in 75% odds of another cut June 20.

Norges Bank meets Friday and is expected to keep rates steady at 4.5%. We also expect the bank to maintain its guidance that the policy rate will remain at 4.50% until Q3 before gradually moving down. The market sees only 35% odds of a 25 bp cut in September. There are no updated macroeconomic projections at this meeting. At the last meeting March 21, “the Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then weaken.”

Sweden reports Q1 GDP Monday. GDP is expected at 0.2% q/q vs. 0.1% in Q4. The Riksbank forecasts no growth in Q1 and 0.4% q/q in Q2. The Q1 GDP print is unlikely to move the rate expectations needle too much because the policy relevant CPIF inflation is near the 2% target. Recall that the Riksbank indicated in March “that the policy rate can be cut in May or June if inflation prospects remain favorable.” The market sees 45% odds of a rate cut in May, while a June cut is fully priced in.

ASIA

The market is testing the BOJ by taking USD/JPY higher. Given the lack of action so far, we think it's more about the pace than any particular level. So far, the pace has been fairly restrained, but it could get messy as we approach 160 and so intervention risks are still high and rising. The BOJ can always intervene during our time zone. That said, by delivering such a dovish hold last week, the BOJ invited yen weakness and any intervention would be throwing good money after bad, as they say.

Bank of Japan releases the summary of opinions for last week’s meeting Thursday. The BOJ said it expected financial conditions to remain easy for the time being, suggesting little urgency to hike again. Governor Kazuo Ueda struck a cautious tone during his post-meeting press conference. Between the forecasts and the statement, we believe the BOJ tightening cycle will remain very modest. The market agrees and is still pricing in only 20 bp of tightening in 2024 and 50 bp total easing over the next two years. Such a modest cycle would likely keep upward pressure on USD/JPY.

Bank of Japan also releases the minutes for the March meeting Thursday. At that meeting, the BOJ raised the policy rate and ended yield curve control but tempered expectations that an aggressive tightening cycle was underway. Governor Ueda also delivered dovish guidance. He said that “There is still some distance to 2%, if we look at it from the perspective of the expected inflation rate. Considering the gap, I think we will conduct normal policy as I mentioned earlier, keeping the importance of maintaining an accommodative environment in mind.”

Japan reports key March real sector data Tuesday. Labor market data, retail sales, IP, and housing starts will all be reported. The unemployment rate is expected to fall a tick to 2.5%, while the job-to-applicant ratio is expected to remain steady at 1.26. Elsewhere, sales are expected at 2.5% y/y vs. 4.7% in February, IP is expected at -6.2% y/y vs. -3.9% in February, and starts are expected at -7.5% y/y vs. -8.2% in February.

Australia data highlight will be March private sector credit and retail sales Tuesday. Sales are expected at 0.2% m/m vs. 0.3% in February, while credit is expected at 0.4% m/m vs. 0.5% in February. A major reason the RBA dropped its tightening bias in March was because of concerns that “household consumption growth remains particularly weak.” As such, the March private sector credit and retail sales will offer a fresh glimpse at the state of household spending activity. Of note, the recent decline in the Westpac Melbourne Institute Consumer Sentiment Index points to sluggish consumer spending growth.

New Zealand highlight will be Q1 labor market data Wednesday. Employment is expected at 0.3% q/q vs. 0.4% in Q4, whereas the RBNZ has penciled in a 0.1% rise. The unemployment rate is expected at 4.3% vs. 4.0% in Q4, which is a tick higher than the RBNZ forecast of 4.2%. Finally, private wages are expected at 0.8% q/q vs. 1.0% in Q4 and is in line with RBNZ forecasts. Overall, labor market pressures are gradually easing but not enough to force a dovish RBNZ pivot anytime soon. The market is pricing in just one rate cut this year, starting in November. The RBNZ also releases its Financial Stability Report Wednesday.