The dollar was mostly weaker against the majors last week, although it recouped some of its losses after Friday’s blockbuster jobs report. AUD, CAD, and GBP outperformed while CHF, EUR, and NZD underperformed. Recent Fed talk of a skip in June was responsible for the dollar weakness but the 339k gain in NFP puts that skip in doubt. The dollar could see some near-term weakness this week given the dearth of any top tier data or Fed speakers. Next weeks brings CPI and PPI and that’s when things could get interesting. The Cleveland Fed Nowcast is pointing to a 0.5% m/m gain for core CPI, with little relief seen in June. Can the Fed really skip in June? We continue to believe that the dollar uptrend remains intact.
AMERICAS
The Fed outlook remains as cloudy as ever. After priming the markets for a skip this month, Fed officials have painted themselves into a corner after Friday’s blockbuster jobs report. Sure, some of the details (higher unemployment rate, lower average hourly earnings) showed some cooling in the labor market. But with a headline gain of 339k and revisions that added 93k to the previous two months, can the Fed really justify a hold in June? It’s going to be a tough call for the Fed. We still have CPI and PPI data to come before the June 14 decision but what's making things even more complicated for the markets is the Fed media blackout started at midnight Friday and so there is no way for any Fed officials to walk back the skip ahead of the meeting. The Fed may feel compelled to stick to the skip in an effort to maintain its credibility but if it does, it would lose credibility by veering from its purported data-dependent approach.
Fed tightening expectations have edged higher. WIRP suggests odds of a hike this month around 30% vs. 20% before the data, and those odds rise to around 80% in July vs. 65% before the data. More importantly, WIRP suggests less than 35% odds of a rate cut by year-end vs. over 90% before the data. There has been quite a bit of Fed repricing in recent weeks but more needs to be done.
U.S. data highlight this week will be ISM services PMI Monday. Consensus sees headline at 52.4 vs. 51.9 in April. If so, it would be the second straight month of improvement but still shy of this year’s peak reading of 55.2 in January. Keep an eye on employment and prices paid, which stood at 50.8 and 59.6 in April, respectively.
Otherwise, it’s a very quiet data week. Minor data include April factory orders Monday, which are expected at 0.8% m/m vs. 0.4% in March. April trade data and consumer credit will be reported Wednesday. Weekly jobless claims, April wholesale trade sales and inventories, and Q1 change in household net worth will be reported Thursday. Initial claims are expected at 237k vs. 232k last week, while continuing claims are expected at 1.802 mln vs. 1.795 mln last week. For now, most indicators suggest the labor market remains quite robust and so we expect another solid jobs reports for June.
Bank of Canada meets Wednesday and is expected to keep rates steady at 4.5%. Nearly a sixth of the analysts polled by Bloomberg look for a 25 bp hike, while WIRP suggests over 40% odds of a hike. Looking ahead, that hike is nearly priced in for July 12, followed by nearly 35% odds of a second hike September 6 that rise to nearly 50% December 6. Similar to what we’ve seen for Fed expectations, a BOC rate cut by year-end is now totally priced out. Updated macro forecasts won’t be released until the July meeting.
Canada reports May jobs data Friday. Consensus sees 25.0k jobs added vs. 41.4k in April, with the unemployment rate expected to rise a tick to 5.1%. If so, it would be the first increase in the unemployment rate since August 2022 and suggests that the labor market remains very tight. Ahead of that, May Ivey PMI will be reported Tuesday and April trade data will be reported Wednesday.
EUROPE/MIDDLE EAST/AFRICA
ECB tightening is nearing an end. WIRP suggests a 25 hike is priced in June 15, followed by another 25 bp hike in either September or October that would see the deposit rate peak near 3.75%. Eurozone reports April PPI Monday and is expected at 1.5% y/y vs. 5.9% in March. If so, it would be another sign that price pressures are quickly fading. ECB speakers are plentiful this week. Lagarde and Nagel speak Monday. Guindos and Panetta speak Wednesday. Guindos, de Cos, and Centeno speak Friday.
Eurozone reports final May services and composite PMIs Monday. Italy and Spain report for the first time and their composite PMIs are expected at 54.5 and 55.1, respectively, and both are down significantly from April. Last week, final manufacturing PMIs saw Italy and Spain fall to 45.9 and 48.4, respectively, and both down from April. These two have been big drivers of eurozone growth even as Germany and France struggle and so weakness in the south would be most unwelcome. Eurozone April retail sales will be reported Tuesday and are expected at 0.2% m/m vs. -1.2% in March.
The major eurozone countries report key April data. Germany will be in focus. Trade data will be reported Monday, with exports expected at -2.5% m/m vs. -5.9% in March and imports expected at -1.0% m/m vs. -5.3% in March. Factory orders will be reported Tuesday and are expected at 2.8% m/m vs. -10.7% in March. IP will be reported Wednesday and is expected at 0.6% m/m vs. -3.4% in March. Spain reports April IP Tuesday and is expected at -0.4% m/m vs. 1.5% in March. Italy reports April retail sales Wednesday and is expected at 0.3% m/m vs. flat in March. Italy then reports April IP Friday and is expected at 0.2% m/m vs. -0.6% in March.
The U.K. has a very quiet week. The only major data release is final May services and composite PMIs Monday. Construction PMI will be reported Tuesday. Bank of England tightening expectations remain elevated, with 100 bp of tightening priced by year-end.
Switzerland reports May CPI Monday. Headline is expected at 2.2% y/y vs. 2.6% in April, while core is expected at 2.0% y/y vs. 2.2% in April. If so, headline would be the lowest since February 2022 and nearing the 2% target. At the last meeting March 23, the Swiss National Bank hiked rates 50 bp to 1.5% and flagged more hikes ahead as Governor Jordan said “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” Next policy meeting is June 22 and the market is pricing in a 25 bp hike to 1.75%, with nearly 25% odds of a larger 50 bp hike. Looking ahead, a 25 bp hike is largely priced in for September 21, with around 15% odds of another 25 bp hike December 14.
Norway reports May CPI Friday. Headline is expected at 6.3% y/y vs. 6.4% in April, while underlying is expected to remain steady at 6.3% y/y. If so, headline would be the lowest since February 2022 but still well above the 2% target. At the last policy meeting May 4, Norges Bank hiked rates 25 bp to 3.25% and said that “Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.” It noted that “Inflation is high and markedly above the target of 2%” and added that “Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead.” New forecasts will be released at the June 22 meeting, when another 25 bp hike to 3.5% is likely. If the hawkish tone is maintained, the expected rate path may see a hawkish shift then as markets see some odds of another 25 bp hike to 3.75% in H2. Much will depend on how the krone and inflation behave.
ASIA
Japan data highlight will be April cash earnings data Tuesday. Nominal earnings are expected at 1.8% y/y vs. 1.3% in March, while real earnings are expected at -1.7% y/y vs. -2.3% in March. Despite some highly anticipated wage increases in the annual negotiations, nominal wages have not kept pace with higher inflation and so real wages remain in the red. Household spending will also be reported Tuesday and is expected at -2.2% y/y vs. -1.9% in March. Final Q1 GDP data will be reported Thursday, with growth expected to be revised up a tick to 0.5% q/q and due largely to increased business spending and investment.
April current account data will be reported Thursday. An adjusted surplus of JPY1.4 trln ln is expected vs. JPY1.0 trln in March. However, the investment flows will be of most interest. The March data showed that Japan investors remained net buyers of U.S. bonds (JPY4.2 trln) for the third straight month after being net sellers four straight months and for thirteen of the past fifteen. Japan investors turned net buyers (JPY189 bln) of Australian bonds for the first time after eight straight months of selling and remained net sellers of Canadian bonds (-JPY118 bln) for the third straight month and for thirteen of the past fourteen months. Investors turned net buyers of Italian bonds (JPY112 bln) again. Overall, Japan investors were total net buyers of foreign bonds (JPY4.7 trln) for the third straight month in March after four straight months of net selling, and was the largest net buying since November 2020. With signs growing that the BOJ is on hold for now, it appears that investors are back to chasing higher yields abroad and that’s yen-negative.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 3.85%. However, last week’s announcement that the minimum wage will be boosted 5.75% in the FY beginning July 1 has impacted market expectations, as nearly a third of the analysts polled by Bloomberg look for a 25 bp hike to 4.10%. Elsewhere, WIRP suggests nearly 40% odds of a hike this week and those odds rise to nearly 80% July 4 and fully priced in for August 1. Odds of a second hike top out around 25% October 3. Updated macro forecasts were just released at the last meeting May 2 and won’t be updated until the August meeting. Governor Lowe and Deputy Governor Bullock both speak Wednesday.
Australia also reports some key data. Final May services and composite PMIs will be reported Monday. Q1 current account data will be reported Tuesday and the surplus is expected at AUD15.0 bln vs. AUD14.1 bln in Q4. Q1 GDP data will be reported Wednesday. Growth is expected at 0.3% q/q vs. 0.5% in Q4, while the y/y rate is expected at 2.4% vs. 2.7% in Q4. April trade data will be reported Thursday.
