With U.S. recession fears growing , this week’s U.S. data will be very important; U.S. yields remain depressed as a result of the growing pessimism; interest rate differentials have moved against the dollar; May jobs data Friday is the main event; the Fed releases its Beige Book report Wednesday for the June 14-15 FOMC meeting; BOC meets Wednesday and is expected to hike rates 50 bp to 1.50%

Eurozone May CPI data will be a major focus; the public ECB policy debate is likely to continue; important eurozone real sector data will be reported; U.K. has a quiet week; Switzerland has a fairly busy week

Japan has a fairly busy week; Australia reports some key data

AMERICAS

With U.S. recession fears growing , this week’s U.S. data will be very important.  We get the first major indicators for May and markets will be looking for larger cracks in the U.S. economic outlook.  We acknowledge that some survey data have softened, but real sector data such as employment and retail sales have remained strong so far in Q2.  For now, the pendulum of market sentiment has swung against the U.S. in terms of the economic outlook and by extension against the dollar.  We believe it is only a matter of time before it swings back in favor of both.  Some strong data this week would certainly help.

For now, U.S. yields remain depressed as a result of the growing pessimism.  The 10-year yield is currently trading near 2.74% vs. the May 9 peak near 3.20%.  A break below the mid-April low near 2.65% would set up a test of the March 31 low near 2.31%.  Given what’s going on in the economy, we find such a low yield very hard to justify and yet stranger things have happened.  Elsewhere, the 2-year yield is trading near 2.48% vs. the May 4 peak near 2.85%.  The next major chart point here is the mid-April low near 2.27%.  Again, that would be very hard to justify but impossible to rule out.   

Interest rate differentials have moved against the dollar.  The 2-year differential with Germany traded near 210 bp last week, the lowest since March.  Similarly, the differential with Japan traded near 253 bp, the lowest since late April, while the differential with the U.K. traded near 102 bp last week, the lowest since early May.  We believe these moves will not be sustained and expect a rebound in short-term U.S. rates. 

Fed tightening expectations continue to adjust.  WIRP suggests 50 bp is fully priced in for June and July.  However, a third 50 bp that was fully priced in for September is now only about 35% priced in.  After that, two more 25 bp hikes are fully priced in and a third is partially priced in that would take the Fed Funds ceiling to near 3.0%.  What’s really changed is that rates are now seen peaking in mid-2023 before falling in H2 23 and beyond.  This would only happen if the U.S. were to fall into recession next year and while it is possible, it is not our base case.  

May jobs data Friday is the main event.  Consensus sees 325k jobs created vs. 428k in April, while the unemployment rate is expected to fall a tick to 3.5%, a new cycle low that matches the pre-pandemic low.  Average hourly earnings are expected to ease to 5.2% y/y vs. 5.5% in April, while average weekly hours  are expected to remain steady at 34.6.  ADP private sector jobs data will be reported Thursday and is expected at 300k vs. 247k in April.  

Ahead of the jobs report, important survey data will be reported.  Chicago PMI will be reported Tuesday and is expected at 55.1 vs. 56.4 in April.  May ISM manufacturing PMI will be reported Wednesday and is expected at 54.5 vs. 55.4 in April.  Keep an eye on the prices paid component, which is expected at 80.5 vs. 84.6 in April.  ISM services PMI will be reported Friday after the jobs report and is expected at 56.5 vs. 57.1 in April.  Regional Fed manufacturing survey wrap up with Dallas Tuesday, which is expected at 1.5 vs. 1.1 in April.  So far, most have been significantly weaker with the exception of Kansas City.  Yet as we’ve point out before, S&P Global manufacturing PMI came in at 57.5 and so the regional Fed manufacturing surveys appear to be overstating weakness. 

The Fed releases its Beige Book report Wednesday for the June 14-15 FOMC meeting.  Since the last meeting May 3-4, most of the manufacturing surveys have weakened.  On the other hand, the labor market remains strong and hiring remains constrained by lack of supply, not demand.  The Fed so far is looking through the Q1 weakness in the economy and we suspect they will maintain this view.  Lastly, most measures of inflation have started to turn lower but remain at elevated levels.  With the Fed signaling that it intends to hike rates 50 bp in both June and July, the Beige Book is likely to accentuate the conditions supporting those moves.  Waller speaks Monday, while Williams and Bullard speak Wednesday.  Logan and Mester speak Thursday, followed by Brainard Friday.  As of midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference June 15.

Other data will round out the picture of the U.S. economy.  March S&P CoreLogic house prices and May Conference Board consumer confidence will be reported Tuesday.  Housing market data will be taking on greater importance as concerns about recession rise.  Here, prices are expected at 19.8% y/y vs. the 20.2% cycle peak in February.  Headline confidence is expected at 103.8 vs. 107.3 in April.  If so, it would be the lowest since February 2021 and yet it’s hard to put much weight on this reading when consumption remains strong.  April construction spending (0.6% m/m expected), JOLTS job openings (11.4 mln expected), and May vehicle sales (14.3 mln SAAR expected) will be reported Wednesday.  May Challenger job cuts, weekly jobless claims, and April factory orders (0.7% m/m expected) will be reported Thursday.  

Bank of Canada meets Wednesday and is expected to hike rates 50 bp to 1.50%.  At the last meeting April 13, the bank picked up the pace of tightening to 50 bp and announced an end to QE that month.  Governor Macklem said the bank is prepared to move as forcefully as needed, as it needs to normalize monetary policy relatively quickly.  Macklem said he sees rates rising to neutral, which the bank estimates to be between 2-3%, but added that it’s also  possible that rates may need to go above neutral.  WIRP suggests 50 bp hikes are fully priced in for June and July followed by about 85% for September.  Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.  

Besides the decision, quite a lot of Canadian data will be reported.  Q1 current account data will be reported Monday and a surplus of CAD3.25 bln is expected vs. a deficit of -CAD800 mln in Q4.  Q1 GDP data will be reported Tuesday.  Growth is expected at 5.2% SAAR vs. 6.7% in Q4.  S&P Global manufacturing PMI will be reported Wednesday.  April building permits will be reported Thursday and are expected to rise 0.5% m/m vs. -9.3% in March.  Here in Canada, concerns about the housing sector are also rising.  Of note, April existing home sales came in at -12.6% m/m vs. -5.4% in March,  Q1 labor productivity will be reported Friday.  

EUROPE/MIDDLE EAST/AFRICA

Eurozone May CPI data will be a major focus. Spain and Germany report Monday.  For these two, EU Harmonized CPI is expected at 8.3% and 8.1%, respectively.  France and Italy report Tuesday.  For these two, EU Harmonized CPI is expected at 5.7% and 6.7%, respectively.  Eurozone also reports Tuesday, with headline CPI expected at 7.8% vs. 7.4% in April and core expected at 3.6% vs. 3.5% in April.  Eurozone April PPI will be reported Thursday and is expected at 38.6% y/y vs. 36.8% in April.  April eurozone retail sales will be reported Friday and are expected at 0.2% m/m vs. -0.4% in March. 

The public ECB policy debate is likely to continue.  If eurozone CPI readings come in as expected, the hawks will see greater urgency to tighten more aggressively.  There will be plenty of ECB speakers this week.  Centeno and Nagel speak Monday.  Villeroy, Visco, and Makhlouf speak Tuesday.  Knot, Lagarde, Villeroy, Panetta, and Lane speak Wednesday.  Villeroy and do Cos speak Thursday.  Holzmann speaks Friday.  All are expected to flag July liftoff, while the hawks are likely to play up risks of a 50 bp move.  We think such a move is unlikely, at least for now.  ECB tightening expectations have softened a bit.  WIRP suggests liftoff July 21 remains fully priced in.  So are follow up hikes in September and October, but a fourth hike in December is no longer priced in and so the deposit rate would be at 0.25% by year-end vs. 0.5% last week.  

Important real sector data will be reported.  Final May eurozone manufacturing PMI will be reported Wednesday.  Italy and Spain will be reported for the first time and are expected at 53.6 and 52.2, respectively.  Both would be down around a full point from April.  Final May eurozone services and composite PMIs will be reported Friday.  Here too, Italy and Spain will be reported for the first time and their composite PMIs are expected at 53.8 and 54.5, respectively.  Both would also be down around a full point from April.  While the eurozone economy has been more resilient than we expected, downside risks remain. 

Germany reports some key data.  April retail sales will be reported early in the week and are expected at -0.5% m/m vs. -0.1% in March.  May unemployment will be reported Tuesday and is expected at -15k vs. -13k in April.  April trade data will be reported Friday, with exports expected at 1.3% m/m vs. -3.3% in March and imports expected at -1.8% m/m vs. 3.4% in March.  Germany is the engine of the eurozone and recent data have come in on the soft side.

U.K. has a quiet week.  April consumer credit and money supply data will be reported Tuesday.  May nationwide house prices and final May manufacturing PMI will be reported Wednesday.  Final services and composite PMIs won’t be reported until next Tuesday.  Recent weakness in the economy is likely to continue as headwinds are still building.  Bank of England tightening expectations remain stalled as a result of soft data.  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.  

Switzerland has a fairly busy week.  Market attention will be focused on May CPI due out Thursday, with headline expected to pick up a tick to 2.6% y/y.  SNB officials have turned more hawkish in recent weeks, just ahead of the next policy meeting June 16.  SNB President Jordan said ““We will, of course, analyze and take into account the effects of the rapidly rising global inflation on Switzerland.”  Governing Board member Maechler said that “we are ready to use the instruments at our disposal to curb inflationary pressure that has become too strong,”  The swaps market is pricing in 125 bp of tightening over the next 12 months and another 50 bp over the subsequent 24 months that would see the policy rate peak near 1.0%.  Ahead of the CPI data, April trade, real retail sales, and Q1 GDP data will be reported Tuesday.  May manufacturing PMI will be reported Wednesday.  

ASIA

Japan has a fairly busy week.  April labor market, IP, retail sales, housing starts, and May consumer confidence will all be reported Tuesday.  Unemployment is expected to remain steady ad 2.6% while the job-to-applicant ratio is expected to rise a tick to 1.23.  IP is expected at -0.1% m/m vs. 0.3% in March, while sales are expected at 0.9% m/m vs. 2.0% in March.  Final May manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday.  For now, the Bank of Japan is going nowhere.  We continue to believe Governor Kuroda will maintain current loose policy through the end of his term in spring 2023, leaving it to Prime Minister Kishida to appoint a more hawkish successor to start the tightening cycle. 

Australia reports some key data.  Q1 current account, April private sector credit, and building approvals will be reported Tuesday.  Q1 GDP data and final May manufacturing PMI will be reported Wednesday.  Growth is expected at 0.6% q/q and 2.9% y/y vs. 3.4% and 4.2% in Q4, respectively.  April trade data will be reported Thursday, with exports expected at 1% m/m vs. flat in March and imports expected at 1% m/m vs. -5% in March.  Final May services and composite PMIs will be reported Friday.  Recent weakness in the PMI readings is likely China-related and bears watching.  For now, the economy remains robust and so the RBA will continue tightening.  WIRP suggests a 25 bp hike June 7 is priced in.  Looking ahead, the swaps market is pricing in nearly 300 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%.