- We look for continued dollar strength; markets are still digesting the Fed’s hike and forward guidance; in several ways, the bond market is signaling that all is well; with the FOMC meeting out of the way, Fed speakers will spread the word this week; April U.S. inflation data take center stage this week; there is a heavy slate of UST issuance due to the quarterly refunding
- Eurozone has a quiet data week; ECB tightening expectations remain subdued; U.K. monthly data dump will come Thursday; BOE tightening expectations have stalled; Norway reports April CPI Tuesday; Sweden reports April CPI Thursday
- BOJ may shed more light on the April 27-28 meeting; March cash earnings Monday will be the data highlight for Japan; March current account data Thursday will be of interest
We look for continued dollar strength. DXY traded last week at the highest since December 2002 near 104.061 and we continue to target the November 2002 high near 107. The euro remains heavy near $1.05 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 130 and we continue to target the January 2002 high near 135.15. If that level breaks, the August 1998 high near 147.65 would come into view. Sterling traded last week at the lowest since June 2020 near $1.2275 and we continue to target that month’s low near $1.2250 and then the May 2020 low near $1.2075. If those levels break, then we would target the March 2020 low near $1.1410.
Markets are still digesting the Fed’s hike and forward guidance. The swaps market is now pricing in a terminal Fed Funds rate of 3.5%, up from 3.25% pre-FOMC. Yes, Powell took 75 bp off the table but signaled that 50 bp is the new normal for the next several meetings. When he invoked the name of Paul Volcker and talked about pain ahead, that means Powell is talking about going restrictive on policy to the point that growth slows. Perhaps the pain was also in reference to people’s 401k accounts, as both bonds and equities are taking a big hit from the aggressive Fed messaging.
Yet in several ways, the bond market is signaling that all is well. The U.S. 10-year yield traded Friday at a new cycle high near 3.14% and is approaching the October 2018 high near 3.26%. After that is the February 2011 high near 3.77%. Some are claiming that rising 10-year yields means the market has lost confidence in the Fed, but we note that the 10-year breakeven inflation rate remains stuck near 2.86%, which we think shows the market has confidence in the Fed that it will limit inflation. As a result, the real 10-year yield has climbed to 0.26%, the highest since July 2019. Elsewhere, the 3-month to 10-year yield curve has steepened to 231 bp, the steepest since July 2015. If the bond market were worried about recession, this curve would be much flatter and heading towards inversion.
With the FOMC meeting out of the way, Fed speakers will spread the word this week. Williams, Barkin, Waller, Kashkari, Mester, and Bostic all speak Tuesday. Bostic speaks again Wednesday, while Daly speaks Thursday. Kashkari and Mester speak Friday. Last week, Barkin did his job and put 75 bp back on the table, adding that he want to hike rates “as fast as feasible.” Expect other Fed officials to fall in line with this more hawkish stance this week. We believe Powell erred in giving up the bazooka in his pocket so easily and now the Fed is working to get it back.
April U.S. inflation data take center stage this week. CPI will be reported Wednesday. Headline is expected at 8.1% y/y vs. 8.5% in March, while core is expected at 6.0% y/y vs. 6.5% in March. Keep an eye on the m/m gains to slow from 1.2% and 0.3% in March, respectively. PPI will be reported Thursday. Headline is expected at 10.7% y/y vs. 11.2% in March, while core is expected at 8.9% y/y vs. 9.2% in March. Here too, keep an eye on the m/m gains to slow from 1.4% and 1.0% in March, respectively. While an improvement in these inflation numbers would be welcome, we are a long ways off from the 2% target for core PCE and so would do nothing to deter the Fed from hiking rates aggressively in the coming meetings.
There is a heavy slate of UST issuance due to the quarterly refunding. Treasury cut its planned sales of long-term debt for a third straight quarter to $103 bln, down from $110 bln in February. $45 bln of 3-year notes will be sold Tuesday, $36 bln of 10-year notes will be sold Wednesday, and $22 bln of 30-year bonds will be sold Thursday. At the last auctions, indirect bidders took up 53.4%, 64.3%, and 65.2%, respectively, while the bid/cover ratios were 2.48, 2.43, and 2.30, respectively. Will investors be lured by higher yields or will they wait for even higher yields before buying? Stay tuned.
Other minor data will fill out the week. March wholesale inventories and trade sales will be reported Monday. April budget statement will come out Wednesday. Weekly jobless claims will be reported Thursday. April import/export prices and preliminary May University of Michigan consumer sentiment will be reported Friday. Headline is expected at 64.0 vs. 65.2 in April, driven mostly by an expected one point drop in the expectations component to 61.5 as current conditions are expected to rise a bit to 70.0.
Eurozone has a quiet data week. German ZEW for May will be reported Tuesday, with expectations expected at -43.0 and current assessment at -35.0. Germany is coming off of an awful week of data, where March retail sales came in at -0.1% m/m and was followed by -4.7% m/m for factory orders -3.9% m/m for IP. Germany is the locomotive for the eurozone economy and this weakness is likely carrying over into Q2. Italy reports March IP Tuesday (-1.5% m/m expected), followed by March eurozone IP (-2.0% m/m expected) Friday.
ECB tightening expectations remain subdued. WIRP suggests odds of liftoff June 9 are now nearly 50% vs. 30% at the start of last week, while liftoff July 21 remains fully priced in. The swaps market is now pricing in 165 bp of tightening over the next 12 months followed by another 60 bp of tightening priced in over the following 12 months that would see the deposit rate peak near 1.75% vs. 1.50% at the start of last week. There is a full slate of ECB speakers and most are expected to tilt hawkish. Nagel and Guindos speak Tuesday. Nagel, Lagarde, Vasle, Knot, Centeno, Buch, Muller, and Schnabel all speak Wednesday. De Cos speaks Thursday. Centeno speaks Friday.
U.K. monthly data dump will come Thursday. With the Bank of England warning of recession risks, the data have taken on more importance. March GDP is expected flat m/m vs. 0.1% in February, while Q1 GDP is expected at 1.0% q/q vs. 1.3% in Q4. IP is expected flat vs. -0.6% in February, construction output is expected at 0.2% m/m vs. -0.1% in February, index of services is expected at 0.1% m/m vs. 0.2% in February, and the trade balance is expected at -GBP7.9 bln vs. -GBP9.26 bln in February. Recent data suggest the U.K. economy ended Q1 on a weak note and the loss of momentum is likely carrying over into Q2, as payroll tax and household energy caps were hiked in April.
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%. There are no BOE speakers this week and given last week’s communications disaster, that might not be a bad thing.
Norway reports April CPI Tuesday. Headline is expected at 4.7% vs. 4.5% in March, while underlying is expected at 2.4% y/y vs. 2.1% in March. If so, headline would accelerate for the second straight month and further above the 2% target. Norges Bank kept rates on hold last week but reaffirmed its March rate path and signaled a hike at the next meeting June 23. Looking ahead, the swaps market is pricing in 150 bp of total tightening over the next 12 months followed by another 50 bp over the subsequent 12 months that sees the policy rate peak near 2.75%, up from 2.5% at the start of last week. March IP will be reported Monday, while Q1 GDP will be reported Friday.
Sweden reports April CPI Thursday. Headline is expected at 6.2% y/y vs. 6.0% in March, while CPIF is expected at 6.3% y/y vs. 6.1% in March. If so, CPIF would be the highest since and December 1991 and further above the 2% target. No wonder the Riksbank delivered a hawkish surprise last month and started liftoff. The bank said then that it expects another two or three more hikes this year and also announced a slower pace of asset purchases in H2. The bank raised its inflation forecasts significantly and adjusted its expected rate path upward and sees the policy rates “somewhat below 2%” in three years’ time. Contrast this rather modest path with the swaps market, which is pricing in 200 bp of tightening over the next 12 months followed by another 75 bp over the subsequent 12 months that would see the policy rate peak near 3.0%, up from 2.5% right after the April hike.
Bank of Japan may shed more light on the April 27-28 meeting. Minutes will be released Monday, while the summary of opinions will be released Thursday. At that meeting, all policy settings were kept unchanged and the bank said that rates will remain at present or lower levels. It underscored its commitment to Yield Curve Control by announcing it would carry out unlimited fixed rates 10-year JGB purchases every business day at the upper target limit of 0.25%. Updated forecasts suggested no need to tighten for several years. Next policy meeting is June 16-17 and all signs point to continued dovishness from the BOJ.
March cash earnings Monday will be the data highlight for Japan. Nominal earnings are expected at 0.9% y/y vs. 1.2% in February, while real earnings are expected at -0.6% y/y vs. flat in February. Several BOJ policymakers have said that they would like to see wage significant wage growth as well as inflation at the 2% target before they would consider tightening policy and so the earnings data have taken on greater importance. As things stand, it’s clear that wage growth remains modest. Household spending will be reported Tuesday and is expected at -3.3% y/y vs. 1.1% in February.
March current account data Thursday will be of interest. An adjusted surplus of JPY628 bln is expected vs. JPY517 bln in January. However, the investment flows will be of most interest. February data showed that Japan investors were net sellers of U.S. bonds for the fourth straight month and the -JPY3.13 trln sold was the biggest since April 2020. Japan investors were net buyers (JPY186 bln) of Australian bonds in February but were net sellers of Canadian bonds (-JPY66 bln) for the first time since August. They were small net buyers of Italian bonds (JPY37 bln) for the second straight month.