The majors were largely firmer last week, taking advantage of broad-based dollar weakness. The dollar bloc outperformed while EUR, CHF, and GBP underperformed. While the Fed seemed to suggest a pause after hiking rates 25 bp last week, the jobs data will make that pause much more difficult to justify. CPI and PPI data this week are expected to show stubbornly high price pressures and so markets will have to rethink the Fed pause and pivot story. If and when the three rate cuts by year-end are priced out, that is likely to lead to renewed dollar strength as well as further volatility across all markets.
AMERICAS
Markets are still digesting last week’s developments. While Powell was widely regarded as signaling a pause, the strong jobs report Friday has seemingly upended the pivot. Or has it? At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months. Now, it's seen in the 3.75-4.0% range in 12 months with three cuts are still priced in by year-end. Fed officials are likely to continue pushing back against this dovish take. Kashkari speaks Monday. Jefferson and Williams speak Tuesday. Waller speaks Thursday. Daly, Bullard, and Jefferson speak Friday. Cook speaks Saturday. All are expected to push back against the notion of any pre-ordained pause or pivot, but it will really be up to the data to do the talking.
The Fed releases its Senior Loan Officer Survey and its Financial Stability Report Monday. Both are extremely important in light of recent developments in the banking sector. Markets will be braced for any signs of a credit crunch in the first one. That said, it may be too soon for any credit tightening to show up just yet. We think markets have a good idea of what the second one will say; for two straight meeting, the Fed has stressed that the banking system remains strong. However, we expect the Fed to highlight lapses in regulation and their enforcement as areas for improvement in order to preserve financial stability in the coming months.
Inflation data will come into focus this week. April CPI will be reported Wednesday. Headline is expected to rise 0.4% m/m vs. 0.1% in March, while the y/y rate is expected to remain steady at 5.0%. Core is expected to rise 0.3% m/m vs. 0.4% in March, while the y/y rate is expected to fall a tick to 5.5%. Of note, the Cleveland Fed’s Nowcast model estimates headline at 0.61% m/m and 5.19% y/y and core at 0.46% m/m and 5.56% y/y. Both estimates are higher than consensus. After that, PPI will be reported Thursday. Headline is expected to rise 0.3% m/m vs.- 0.5% in March, while the y/y rate is expected to fall two ticks to 2.5%. Core is expected to rise 0.2% m/m vs. -0.1% in March, while the y/y rate is expected to fall a tick to 3.3%.
Other minor data will be reported. March wholesale trade sales and inventories will be reported Monday. April budget statement will be reported Wednesday. Weekly jobless claims will be reported Thursday. April import/export prices will be reported Friday. The preliminary May University of Michigan consumer sentiment Friday will hold some interest. Headline is expected to fall half a point to 63.0, driven by a drop in current conditions that outweighs a small rise in expectations. Of note, 1-year inflation expectations are expected to drop four ticks to 4.2% while 5- to 10-year expectations are expected to fall a tick to 2.9%.
EUROPE/MIDDLE EAST/AFRICA
ECB tightening expectations have fallen a bit. WIRP suggests another 25 bp hike is priced in for June 15. However, the odds of one last 25 bp hike September 14 have fallen to around 80% October 26 vs. fully priced in before the ECB meeting. Lane speaks Monday. Rehn, Centeno, Lane, Vasle, Vujcic, and Schnabel all speak Tuesday. Centeno speaks Wednesday. De Cos, Schnabel, and Guindos speak Thursday, while Guindos speaks again Friday. The split between the hawk and the doves clearly remains in place but it feels like the doves have taken control of the narrative, at least for now.
Eurozone has a very quiet week in terms of data. Germany reports March IP Monday and is expected at -1.5% m/m vs. 2.0% in February. Italy reports IP Wednesday and is expected at 0.3% m/m vs. -0.2% in February. Eurozone IP won’t be reported until May 15. Recent weakness in the German data has led us to downgrade our expectations for eurozone growth this year, as China reopening has had little impact on the European exporters so far.
Bank of England meets Thursday and is expected to hike rates 25 bp to 4.5%. WIRP suggests no odds of a larger 50 bp move. Looking ahead, another 25 bp hike is nearly 65% priced in for June 22 and fully priced I for August 3. However, the odds of one last hike top out near 60% for November 2. Inflation remains stubbornly high and so more may need to be done. New macro forecasts will be released at this meeting. In light of recent trends in the U.K. economy, we expect both growth and inflation forecasts to be revised higher and unemployment revised lower. Sterling tends to weaken on BOE decision days. It has done so on 4 of the past 5. Chief Economist Pill speaks Friday.
The monthly U.K. data dump begins Friday. March GDP, IP, services index, construction output, and trade will all be reported. GDP is expected flat m/m vs. flat in February, IP is expected flat vs. -0.2% in February, services is expected flat m/m vs. -0.1% in February, and construction is expected at -0.2% m/m vs. 2.4% in February. Q1 GDP will also be reported Friday and is expected at 0.1% q/q and 0.2% y/y vs. 0.1% q/q and 0.6% y/y in Q4. Despite the fact that a contraction may have been avoided again, the U.K. growth outlook remains quite week.
Norway reports April CPI Wednesday. Headline is expected at 6.2% y/y vs. 6.5% in March, while underlying is expected at 6.1% y/y vs. 6.2% in March. Last week, 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.” With regards to the exchange rate, Governor Bache noted that “The krone has been weaker than forecast, and krone weakness means prices of imports rise which in isolation can mean that a higher rate than presumed earlier may be needed.” New forecasts won’t come until the June 22 meeting but what happens then will depend largely on how the krone and inflation behave in the interim.
Minutes from the April Riksbank meeting will be released Tuesday. At the April 26 meeting, it hiked rates 50 bp to 3.5% but there were two dissents in favor of a smaller 25 bp move. The bank noted that “It is important for confidence in the inflation target that inflation falls clearly this year. To ensure that this happens, the policy rate needs to be raised further.” Forward guidance shifted more hawkish as the policy rate is seen peaking at 3.65% in Q2 2024 vs. 3.33% in Q4 2024 in the February forecasts and staying there through Q2 2025 before falling by Q2 2026. However, that path suggests only one more 25 bp hike and that has been taken by the markets as too dovish. Regarding the exchange rate, the Riksbank said “The krona has not been a decisive factor behind the substantial rise in inflation, but it has contributed to somewhat higher inflation. A stronger krona would be desirable.” Looking ahead, WIRP suggests odds of a 25 bp hike June 29 at nearly 80%. Riksbank speakers are plentiful this week. Floden speaks Monday and Tuesday. Bunge speaks Wednesday. Floden speaks again Thursday, followed by Jansson Friday.
ASIA
Minutes of the March 9-10 Bank of Japan meeting will be released Monday. After that, the summary of opinions for the April 27-28 meeting will be released Thursday. At both meetings, the bank stood pat but the April one will be of more interest at that was the first under Governor Ueda. So far, he has taken a very cautious approach that tilts quite dovish. That said, WIRP suggests odds of liftoff near 40% June 16, rising to over 50% July 28 and fully priced in December 19. However, the tightening path is expected to be quite shallow, with 15 bp of tightening over the next 12 months followed by another 15 bp over the subsequent 12 months.
Japan data highlight will be March cash earnings and household spending Tuesday. Nominal earnings are expected at 1.0% y/y vs. 1.1% in February, while real earning s are expected at -2.4% y/y vs. -2.6% in February. Despite some well-publicized wage agreements between the unions and firms, wage growth remains quite restrained. Robust wage growth appears to be a prerequisite to BOJ tightening and so far, there has been no wage pressures to speak of. No wonder spending is expected to weaken to 0.8% y/y vs. 1.6% in February. Ahead of that, final April services and composite PMIs will be reported Monday.
March current account data Thursday will be of interest. The adjusted surplus is expected at JPY1.4 trln vs. JPY1.1 trln in February. However, the investment flows will be of most interest. February data showed that Japan investors remained net buyers of U.S. bonds (JPY4.5 trln) for the second straight month after being net sellers four straight months and for thirteen of the past fifteen. It was also the largest monthly net buying since March 2020. Japan investors remained net sellers (-JPY38 bln) of Australian bonds for the eighth straight month and remained net sellers of Canadian bonds (-JPY5 bln) for the second straight month and for twelve of the past thirteen months. Investors turned net sellers of Italian bonds (-JPY31 bln) again. Overall, Japan investors were total net buyers of foreign bonds (JPY4.3 trln) for the second straight month in February after four straight months of net selling.
