Growth Traction Shifts

April 24, 2024

Growth Traction Shifts

  • Growth momentum going into Q2 is moving away from the US in favour other major economies.
  • Australia inflation cools less than expected reinforcing the case for the RBA to stand pat.
  • Bank Indonesia is expected to keep rates steady at 6.0% today. The risk is they hike.

USD is drifting lower against most major currencies. In the short-term, the USD correction may have more legs because growth momentum going into Q2 is moving away from the US in favour other major economies. In April, the US composite PMI dropped to a 4-month low of 50.9 while the EU and UK composite PMIs improved to an 11-month high of 51.4 and 54.0, respectively.

Beyond the short term, the cyclical USD uptrend started earlier this year is intact. The encouraging US economic growth outlook and sticky underlying inflation mean there is plenty of room for a further reassessment in Fed funds rate expectations in support of a firmer USD and Treasury yields. Fed funds futures are pricing 50bps of cuts by January 2025.

The final Atlanta Fed GDPNow model forecast is released shortly after today’s US March durable goods orders data (1:30pm London). Headline durable goods orders is projected to increase 2.5% m/m in March which could help lift the final GDPNow model Q1 growth estimate (currently at 2.9% SAAR).

Demand for US Treasuries is rock solid indicating no immediate concerns over US fiscal profligacy. The US Treasury sold a record US$69bn of two-year notes at 4.898% with a bid/cover of 2.66. The Treasury will auction off another hefty US$70bn of five-year notes today.

EUR/USD is holding on to yesterday’s gains triggered in part by improving Eurozone economic activity. The Eurozone April PMIs beat expectations driven by faster services sector growth momentum. Today, the German IFO business climate index is projected to rise to a 10-month high of 88.8 in April from 87.8 in March (9:00am London). The recovery in Eurozone leading economic indicators will likely temper expectations that the ECB is about to embark on an aggressive easing cycle and offer EUR near-term support.

GBP/USD is holding on to yesterday’s gains triggered in part by improving UK economic activity. The UK April PMIs beat expectations driven by faster services sector growth momentum. The risk is the BOE delays easing if UK consumer spending recovers as we expect. Indeed, BOE Chief Economist Huw Pill emphasised on Tuesday that the time for cutting rate is some way off because there was “still a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilized.” The UK CBI April industrial Trends Survey is up next (11:00am London).

AUD outperformed and Australian bonds sold-off sharply as Australia inflation cools less than expected. For Q1, headline CPI rose 1% q/q (consensus: 0.8%, prior: 0.6%) to be 3.6% y/y (consensus: 3.5%, prior: 4.1%). Education, health, Housing, and Food and non-alcoholic beverages made the most significant upside contribution to Q1 CPI. The policy-relevant trimmed mean CPI also increased 1% q/q (consensus: 0.8%, prior: 0.8%) to be 4% y/y (consensus: 3.8%, prior: 4.2%).

Bottom line: the RBA will not be in a rush to loosen policy anytime soon which is AUD supportive. Australia inflation is still above the 2-3% target range and tracking higher than the RBA’s projection. RBA projects annual headline and trimmed mean inflation to average 3.3% and 3.6% by end-June, respectively. Interest rate futures have virtually priced-out odds of an RBA policy rate cut this year.

CAD will take its cue today from Canada’s February retail sales (1:30pm London) and the Bank of Canada (BOC) Summary of Deliberations of the April policy meeting (6:30pm London). Statistics Canada advanced retail indicator suggests sales rose 0.1% in February following a 0.4% decline in January. Going forward, the Bank of Canada (BOC) projects population growth to boost consumer spending in the first half of 2024.

The BOC Summary of Deliberations will offer more details behind the neutral hold. Recall, the BOC left the policy rate at 5.00% in April, as was widely expected. It was a neutral hold because: (i) The BOC is still concerned that lowering policy interest rate too early or cut too fast, could jeopardize the progress on inflation. (ii) The BOC continues to project inflation to reach 2% by Q4 2025. (iii) The BOC boosted Q1 GDP growth forecast. (iv) The BOC raised its estimate of the nominal neutral interest rate by 25bps to a range of 2.25% to 3.25% in its annual April assessment.

Bank Indonesia is expected to keep rates steady at 6.0% (8:20am London). The risk is BI raises rates 25bps to 6.25% to support IDR. BI was forced to intervene last week to curtail the sharp decline in IDR. However, the depreciation in IDR is largely a reflection of broad USD strength and rising US Treasury yields. As such, a BI interest rate hike will slow rather than reverse the uptrend in USD/IDR.

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