U.S. yields are moving higher as risk off sentiment ebbs; Fed tightening expectations remain steady for now; Fed speakers are plentiful this week; April retail sales data Tuesday will be the highlight; regional Fed manufacturing surveys for May will start rolling out; Canada highlight will be April CPI data Wednesday; BOC tightening expectations remain elevated
Key U.K. data will be reported; BOE tightening expectations have stalled; it’s a fairly quiet data week for the eurozone; ECB releases its account of the April meeting Thursday; ECB tightening expectations remain subdued
Japan has a fairly busy week; April national CPI data Friday will be key; Australia reports April jobs data Thursday; RBA minutes will be released Tuesday
We look for continued dollar strength. DXY traded last week at the highest since December 2002 near 104.529 and we continue to target the November 2002 high near 107. The euro remains heavy near $1.04 and we continue target the January 2017 near $1.0340. If that level breaks, we have to start talking about parity and below. USD/JPY is finding some traction above 129 and we continue to target the January 2002 high near 135.15 as risk sentiment improves. Sterling traded last week at the lowest since May 2020 near $1.2155 and we continue to target that month’s low near $1.2075. If that level breaks, then we would target the March 2020 low near $1.1410.
U.S. yields are moving higher as risk off sentiment ebbs. The 10-year yield is trading near 2.95% after it ended the week near 2.92%, up from Thursday’s low near 2.81% but still below the cycle high near 3.20% from last Monday. The 10-year breakeven inflation rate fell as low as 2.59% Thursday but recovered to end the week near 2.74%. It is currently trading near 2.75% so as a result, the real 10-year yield has fallen to 0.18% from the 0.34% cycle high last week. Similarly, the 2-year UST yield is trading near 2.60% after it ended the week near 2.58%, up from Thursday’s low near 2.51% but still below the peak near 2.85% from May 4. As risk off impulses ebb, U.S. yields should continue to rise. With the dollar smile clearly in play, the greenback should continue to gain.
Fed tightening expectations remain steady for now. WIPR suggests 50 bp hikes in June, July, and September will be followed by 25 bp hike in November and December, which would see the Fed Funds rate peak near 3.0%. The swaps market still sees a terminal Fed Funds rate near 3.0%, right where it started last week. That said, last week’s CPI and PPI data suggest prices are likely to prove much sticker than anticipated. Bloomberg consensus sees core PCE at 4.7% in 2022, 2.8% in 2023, and 2.2% in 2024. This is similar to the Fed forecasts of 4.6%, 2.9%, and 2.2%, respectively. Given recent readings, we see greater risks that core PCE overshoots these forecasts. If this proves true, markets will have to reprice Fed tightening expectations to reflect rates staying higher for longer. That would push US yields and the dollar higher.
Fed speakers are plentiful. Williams speaks Monday. Bullard, Harker, Kashkari, Powell, Mester, and Evans all speak Tuesday. Harker speaks Wednesday. Kashkari speaks Thursday. Last week, Fed officials were uniformly hawkish and we expect a similar tone this week, especially in light of the April inflation data.
April retail sales data Tuesday will be the highlight. Headline is expected at 1.0% m/m vs. 0.7% in March, while ex-auto is expected at 0.4% m/m vs. 1.4% in March. The so-called control group used for GDP calculations is expected at 0.8% m/m vs. 0.7% in March. Can consumption hold up in the face of rising inflation? We note that the retail sales data are not adjust for inflation and so will be boosted in part by the 0.3% m/m gain in CPI last month.
Regional Fed manufacturing surveys for May will start rolling out. Empire survey will be reported Monday and is expected at 15.0 vs. 24.6 in April. Philly Fed will be reported Thursday and is expected at 16.5 vs. 17.6 in April. March IP will be reported Tuesday and is expected at 0.5% m/ vs. 0.9% in February. The manufacturing sector continues to struggle with supply chain issues but we see underlying strength being maintained as we move towards H2.
Other minor data round out the week. March TIC data will be reported Monday. March business inventories (1.9% m/m expected) will be reported Tuesday. April building permits (-3.1% m/m expected) and housing starts (-1.8% m/m expected) will be reported Wednesday. Weekly jobless claims, April existing homes sales (-2.5% m/m expected), and leading index (flat m/m expected) will be reported Thursday. The initial claims data will be of interest as they will be for the BLS survey week containing the 12th of the month. Consensus sees 200k vs. 203k the previous week.
Canada highlight will be April CPI data Wednesday. Headline is expected to fall a tick to 6.6% y/y while core common is expected to pick up a tick to 2.9% y/y. If so, this would be the first deceleration in headline since June 2021. However it would remain well above the 1-3% target range and so the Bank of Canada is likely to continue hiking rates for the time being. Ahead of CPI, April housing starts, existing home sales, and March manufacturing and wholesale trade sales will be reported Monday.
Bank of Canada tightening expectations remain elevated. WIPR suggests a 50 bp hike June 1 is fully priced in. Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months followed by another 25 bp the subsequent12 months that would see the policy rate peaking near 3.25%. Last week, Deputy Governor Gravelle said rates need to rise quickly to more normal levels to lower inflation and that the current policy rate of 1% is “too stimulative” and added that “We are taking actions to normalize our policy rate quickly and are prepared to be as forceful as needed,” Gravelle said, according to prepared remarks. Gravelle reiterated that rates need to move into the neutral range of 2-3% but that the bank is prepared to move even higher if needed.
Key U.K. data will be reported. Labor market data will be reported Tuesday. Both unemployment and average weekly earnings are seen steady at 3.8% and 5.4% y/y, respectively. April CPI data will be reported Wednesday. Headline is expected at 9.1% y/y vs. 7.0% in March, core is expected at 6.2% y/y vs. 5.7% in March, and CPIH is expected at 7.9% y/y vs. 6.2% in March. Last week’s real sector data were largely weaker than expected and underscore a loss of momentum as we moved into Q2. The April hikes in payroll taxes and household energy caps will simply add to the headwinds.
Bank of England tightening expectations have stalled. WIRP suggests another 25 bp hike is priced in for the next meeting June 16. Looking ahead, the swaps market is pricing in 150 bp of total tightening over the next 12 months that would see the policy rate peak near 2.50%, steady from the start of last week. Bailey, Ramsden, Haskel, and Saunders speak Monday. Cunliffe speaks Tuesday, followed by Pill Friday. With the economy sliding into recession and the BOE sending mixed messages, sterling should continue to weaken. The May 2020 low near $1.2075 should soon be tested and a break below would set up a test of the March 2020 low near $1.1410.
It’s a fairly quiet data week for the eurozone. March eurozone trade data will be reported Monday, followed by current account and construction output data Thursday. Eurozone consumer confidence will be reported Friday and is expected at -21.5 vs. -22.0 in April. France reports Q1 unemployment Tuesday, which is expected to fall a tick to 7.1%. Overall, the data are clearly softening as we move through Q2.
The ECB releases its account of the April meeting Thursday. The bank delivered a dovish surprise at the April 14 meeting but has since pivoted more hawkish as consensus seems to be building for July liftoff. Villeroy, Panetta, and Lane speak Monday. Centeno and Lagarde speak Tuesday, followed by Guindos, Verstager, and Holzmann Thursday. Expect ECB officials to maintain the hawkish tone that’s been established this month.
Yet ECB tightening expectations remain subdued. Liftoff July 21 remains fully priced in. However, the swaps market is now pricing in only 125 bp of tightening over the next 12 months followed by another 50 bp of tightening priced in over the following 12 months that would see the deposit rate peak near 1.25% vs. 1.75% at the start of last week. This repricing clearly reflects the worsening economic outlook and is likely to continue weighing on the euro, which should break below the January 2017 low near $1.0340 and move towards parity.
Japan has a fairly busy week. April PPI and machine tool orders will be reported Monday. PPI is expected to fall a tick to 9.4% y/y. Q1 GDP will be reported Wednesday. The q/q rate is expected at -0.4% vs. 1.1% in Q4, while the annualized rate is expected at -1.8% vs. 4.6% in Q4. April trade will be reported Thursday, with exports expected at 13.9% y/y vs. 14.7% in March and imports expected at 35.0% y/y vs. 31.2% in March. March core machine orders will also be reported Thursday and are expected at 3.8% m/m vs. -9.8% in February.
April national CPI Friday will be key. Headline is expected at 2.5% y/y vs. 1.2% in March, while core (ex-fresh food) is expected at 2.0% y/y vs. 0.8% in March. To illustrate the outsized impact of oil prices, core ex-energy is expected at only 0.7% y/y vs. -0.7% in March. The April Bank of Japan meeting showed that policymakers remain unconcerned about inflation, which it views as transitory. We maintain our view that policy will be kept steady through the end of Governor Kuroda’s term next spring. It will be up to his successor to change policy. This supports our view that USD/JPY is likely to head higher and eventually test the January 2002 high near 135.15 as risk off impulses ebb.
Australia reports April jobs data Thursday. Consensus sees 30.0k jobs added vs. 17.9k in March, with the unemployment rate expected to fall a tick to 3.9%. Ahead of that, Q1 wage price index will be reported Wednesday and is expected to pick up a tick to 2.4% y/y. The RBA has warned that wage pressures are likely when unemployment falls below 4% and so markets will be on heighted alert.
RBA minutes will be released Tuesday. At the May 3 meeting, the bank delivered a hawkish surprise with a 25 bp hike to 0.35% vs. 15 bp expected. WIRP suggests a 25 bp hike is fully priced in for the next meeting June 7. Looking ahead, the swaps market is pricing in 300 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. After trading at a new cycle low near .6830 last week, AUD saw a slight bounce and is trading near .6935 as the new week begins. Next major chart point is .6760, which represents the 50% retracement objective of the 2020-2021 rally off of the .5510 low.