Waxing and Waning

May 14, 2024

Waxing and Waning

  • USD and Treasury yields will take their cue today from the US April PPI report. Fed Chair Jay Powell speaks later today.
  • The UK March labour market report keeps odds of a June Bank of England rate cut live.
  • Australia’s government is expected to deliver another budget surplus later this morning.

USD and Treasury yields are directionless within a multi-day range. Relatively high US yields and delayed expectations for Fed easing continue to support USD. Futures pricing for a first Fed funds rate cut is waxing and waning between September and November.

The pick-up in survey measures of US consumers’ short-term inflation expectations will keep the Fed cautious from easing too early. The New York Fed’s 1-year inflation expectations survey rose to a five-month high at 3.3% in April and year-ahead inflation expectations from the University of Michigan consumer survey increased to a six-month high at 3.5% in May.

Tomorrow’s US April CPI and retail sales prints will be key drivers of interest expectations. In the meantime, today’s April NFIB small business optimism index (11:00am London) and PPI report (1:30pm London) can generate volatility. Headline PPI is expected at 2.2% y/y vs. 2.1% in March on moderately higher energy prices while core PPI (ex-food and energy) is projected at 2.3% y/y vs. 2.4% in March. Watch-out for PPI ex-trade, transportation, and warehousing because it feeds into the core PCE calculations. Another sticky print above 4% y/y is an upside risk to inflation.

Fed Governor Lisa Cook and Fed Chair Jay Powell speak later today (2:10pm and 3:00pm London, respectively). Recall, Powell tempered hawkish bets on the Fed’s policy outlook earlier this month pointing out “I think it’s unlikely that the next policy rate move will be a hike”. Instead, Powell highlighted paths that would cause the Fed to want to consider rate cuts. According to Powell “two of those paths would be that we do gain greater confidence…[that] inflation is moving sustainably down to 2%...Another path could be an unexpected weakening in the labor market”. Powell will most likely stick to that script which is a headwind for USD.

GBP/USD is trading in a tight range around 1.2560. The UK March labour market report keeps odds of a June Bank of England (BOE) rate cut live which is a headwind for GBP. Regular average weekly earnings (excluding bonuses) printed a tick higher than expected at 6% y/y same as in February. But the policy-relevant private sector regular weekly earnings growth was softer at 5.9% y/y, the lowest since May 2022 and a tick lower than the BOE pencilled-in for Q1.

In line with consensus and BOE projection, the UK unemployment rate rose 0.1pts to 4.3% in the three-month to March. Nonetheless, the labour market remains historically tight suggesting in our view the BOE can afford to wait for August before easing. The unemployment rate is around the BOE’s medium-term equilibrium level of around 4½% and the claimant count rate has been steady at 4.1% since October 2023.

EUR/USD is struggling to sustain a move above 1.0800. The May ZEW survey of financial market experts’ sentiment concerning the German growth outlook can offer EUR some intra-day support (10:00am London). The expectations component is anticipated to improve to a 46.4, the highest since February 2022. ECB Executive Board member Isabel Schnabel gives a keynote speech today (1:45pm London).

USD/JPY continues to grind higher largely reflecting USD strength. 10-year JGB yields made fresh highs above 0.97% on expectations the Bank of Japan (BOJ) further trims JGB purchases. In our view, the uptrend in USD/JPY is intact because we doubt the BOJ will tighten more than is currently priced-in (30bps of hikes in 2024). Underlying inflation in Japan is in a firm downtrend and negative real wages is an ongoing drag to consumer spending.

AUD/USD is trading on the defensive near 0.6600. Australia Treasurer Jim Chalmers delivers the budget today (10:30am London). The Treasury already announced that the underlying cash surplus will be A$9.3 billion or 0.4% of GDP. Chalmers said it will be an inflation-fighting and future-making budget, emphasising “this is not the time for scorched-earth austerity”. Looser fiscal policy could raise the likelihood the RBA raises rates again. In our view, the RBA’s next move is a cut and not a hike because household spending is sluggish. Moreover, wages growth appears to have peaked. Nominal wages growth is expected to print at 4.2% y/y for a second consecutive quarter in Q1 (tomorrow, 2:30am London).

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