Drivers for the Week of June 6, 2021

Here's a look at the main drivers in Developed Markets this week.
  • Markets are still digesting the weaker than expected jobs report; with the media embargo in place for the June 15-16 FOMC meeting, there are no Fed speakers this week; Treasury Secretary Janet Yellen weighed in on the need for greater spending; May CPI data Thursday will be the highlight this week; BOC meets Wednesday and is expected to keep policy steady
  • ECB meets Thursday and is expected to extend its accelerated asset purchases into Q3; ECB asset purchases for the week ending June 4 will be reported Monday; Germany has a busy week; U.K. has its monthly data dump Friday; BOE tightening expectations remain elevated as a result of the strong recovery
  • Japan has a busy week; Japan April current account data Tuesday will be of interest

The dollar is likely to struggle near term after the soft jobs data. After trading Friday at the higher level since May 14 near 90.627, DXY ended the day just above 90. The euro is trading back near $1.22 after testing support near $1.21 Friday, while sterling is trading near $1.4150 after trading below $1.41 Friday. USD/JPY is trading just above 109.50 after being unable to make a clean break above 110 Friday. While we believe the fundamental story favors the dollar, there is a lot of ground to recover in the coming days. Until we see a bigger move higher U.S. rates (both real and nominal), the greenback is likely to remain vulnerable to further bouts of selling. The 10-year yield ended last week near 1.55%, while the breakeven inflation rate edged lower to around 2.42%, pulling the real rate lower to around -0.87% from a cycle high of -0.79% Friday, the highest since late April.

AMERICAS

Markets are still digesting the weaker than expected jobs report. Obviously, there was great disappointment but a glass half full viewpoint sees 559k jobs added in May as an acceleration from the revised low of 278k in April. By most accounts, the weak hiring is being caused by a lack of labor supply and not labor demand. Yet we do not believe that tapering discussions have been derailed. Consensus sees Fed tapering in 2021 and rate hikes in 2022, which are ultimately dollar-supportive. In a piece due out this week, we will show that global liquidity is approaching an inflection point, after which it is no longer as supportive for EM and other risk assets as it was at peak liquidity.

With the media embargo in place for the June 15-16 FOMC meeting, there are no Fed speakers this week. The next Fed speaker will be Chair Powell’s post-decision press conference on June 16. We do not think the softish May jobs report will deter the Fed from discussing tapering at this meeting and the official statement and minutes should confirm this. That said, the Fed is likely to remain in the early stages of such discussions and will refrain from setting out any sort of timetable until later this year. Key dates to watch for ahead are FOMC meetings July 27-28 and September 21-22, along with the Jackson Hole Symposium August 26-28.

The other big unknown right now is fiscal policy. The two parties remain at odds about the size of the infrastructure package. A Republican group led by Senator Capito last week offered a compromise offer of $928 bln over eight years that President Biden quickly rejected. The two sides remain far apart even after Biden lowered his number to $1.7 trln from $2.3 trln, as estimates suggest the Republican offer contains only $257 bln of net new spending. Talks will continue this week and Commerce Secretary Raimondo said there is no hard deadline.

Treasury Secretary Janet Yellen weighed in on the need for greater spending. She said President Biden should push forward with his plans for aggressive spending even if they trigger inflation that persists into next year that leads to higher interest rates. She noted that “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view. We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade.” She said that the U.S. needs to move back to a more normal interest rate environment, adding that “if [stimulus] helps a little bit to alleviate things then that’s not a bad thing -- that’s a good thing.” She is very likely correct, though it is always unusual for Treasury Secretaries or Ministers of Finance to call for higher rates.

The U.S. growth outlook for Q2 remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 10.3% SAAR vs. 9.3% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 4.4% SAAR vs. 4.2% previously. The New York Fed model just started estimating Q3 and it currently stands at 5.4% SAAR. Of note, Bloomberg consensus sees 9.2% growth in Q2, easing to 6.8% in Q3 and 4.8% in Q4, all in SAAR terms. With more fiscal stimulus in the pipeline, the U.S. economic outlook remains strong.

May CPI data Thursday will be the highlight this week. Headline inflation is expected to rise to 4.7% y/y from 4.2% in April, while core is expected to rise to 3.4% y/y from 3.0% in April. For headline, this would be the highest since September 2008 and for core, this would be the highest since May 1993. Of note, the Fed’s preferred measure of core PCE came in at 3.1% y/y in April, the highest since July 1992 and above the 2% target. The Fed continues to say this inflation is transitory. However, food and energy prices are soaring and are already feeding into higher core inflation. We suspect PPI data out next week will show that pipeline price pressures remain high.

Weekly jobless claims data will be reported Thursday. Initial claims are expected at 370k vs. 385k the previous week, while continuing claims are expected at 3.700 mln vs. 3.771 mln the previous week. Claims data continue to edge lower and that points to continued healing of the labor market.

Otherwise, it’s a quiet week for the U.S. April consumer credit ($20.5 bln expected)will be reported Monday, trade data (-$68.5 bln expected) and JOLTS job openings will be reported Tuesday, and wholesale inventories and trade sales will be reported Wednesday. The May budget statement (-$160 bln expected) will be reported Thursday while preliminary June University of Michigan consumer sentiment (84.2 expected) will be reported Friday.

Bank of Canada meets Wednesday and is expected to keep policy steady. At the last meeting April 21, the bank delivered a hawkish hold as it tapered its asset purchases to CAD3 bln from CAD4 bln previously while keeping rates unchanged at 0.25%. More importantly, the bank said it sees slack in the economy absorbed and inflation at the 2% target in 2022. It then added that its projections show the commitment to keep rates steady runs to H2 2022. Previously, the guidance suggested no hikes until "into 2023" so this was a very hawkish signal from the BOC. Since then, the labor market has posted two straight months of job losses and so we see no need for the bank to change anything now. There will be no updated macro forecasts until the next meeting July 14.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meets Thursday and is expected to extend its accelerated asset purchases into Q3. New macro forecasts will be released, and growth and inflation projections are likely to be revised higher. Yet the doves should have no problem maintaining its dovish stance at this meeting. Since the ECB announced accelerated asset purchases at the March 11 meeting, eurozone yields have still risen. The 10-year Italian yield traded as low as 0.57% that day, rose to a high of 1.16% May 19, and remains elevated at 0.87% currently. Similarly, the 10-year French yield traded as low as -0.13% that day, rose to a high of 0.32% May 19, and remains elevated at 0.15% currently.

ECB asset purchases for the week ending June 4 will be reported Monday. Net purchases were EUR20.0 bln for the week ending May 28 vs. EUR21.7 bln for the week ending May 21 while gross purchases were EUR25.0 bln for the week ending May 28 vs. EUR23.7 bln for the week ending May 21. Both net and gross purchases have picked up noticeably over the last few weeks, and yet eurozone yields are still higher.

Germany has a busy week. It reports April factory orders Monday and are expected to rise 0.5% m/m vs. 3.0% in March. April IP and June ZEW business survey will be reported Tuesday, with IP expected to rise 0.4% m/m vs. 2.5% in March. April trade and current account data will be reported Wednesday. Exports are expected to rise 0.5% m/m vs. 1.3% in March, while imports are expected to fall -1.1% m/m vs. a 7.1% gain in March. Elsewhere, Spain reports IP (0.5% m/m expected) Monday, while Italy (0.3% m/m expected) and France (0.6% m/m expected) report IP Thursday. The eurozone reading won’t be reported until June 14.

The U.K. has its monthly data dump Friday. April GDP, IP, services, construction output, and trade will all be reported. GDP is expected to rise 2.3% m/m, IP by 1.2% m/m, services by 2.8% m/m, and construction by 1.0% m/m. A trade deficit of -GBP2.25 bln is expected. The U.K. economy continues to rebound strongly from the vaccination rollout and the subsequent reopening.

Bank of England tightening expectations remain elevated as a result of the strong recovery. The short sterling futures strip suggests some odds of the first hike in Q4 2021, rising significantly in Q1 and fully priced in by Q2 2022. Next decision is June 24 and no change is expected then. At the last decision May 6, the bank delivered a hawkish hold as rates were kept steady but tapering was started. The bank reduced the weekly pace of asset to GBP3.4 bln, down GBP1 bln from the current pace of GBP4.4 bln. Bank officials insisted this was an “operational decision” that shouldn’t be interpreted as a shift in their policy stance. Either way, it’s too soon for another change in policy this week. Of note, by our calculations, the new pace would still see QE hit the $875 bln limit my mid-October. Given the bank’s intent to have QE run to year-end, this suggests another tapering is in the cards, either at the August 5 or September 23 meeting.

ASIA

Japan has a busy week. April leading index will be reported Monday. April real cash earnings (1.4% y/y expected) and final Q1 GDP data (-5.0% SAAR) will be reported Tuesday. May machine tool orders will be reported Wednesday. May PPI (4.5% y/y expected) will be reported Thursday. Next Bank of Japan meeting is June 17-18 and no change is expected then. There won’t be any updated macro forecasts until the next meeting July 15-16. With the economy potentially contracting in Q2 as well, we fully expect another fiscal package over the summer to help boost growth and Prime Minister Suga’s popularity.

Japan April current account data Tuesday will be of interest. An adjusted surplus of JPY1.6 trln is expected vs. JPY1.7 trln in March. However, the investment flows will be of most interest as April will be the first clean read for several months as activity in February and March came ahead of the end of the fiscal year and amidst a deepening global sell-off in bonds that culminated in late March. For the entire FY2020-21, data showed that of the 13 sovereign markets tracked by MOF, the U.S. saw the largest net buying , totaling JPY3.69 trln yen trln ($33.7 bln). Japanese investors bought a net JPY2.75 trln ($25.1 bln) of Australian sovereign bonds and a net JPY1.81 trln ($16.5 bln) of Italian bonds in FY2020-21, while net purchases of Canadian sovereign bonds came in at JPY1.71 trln ($15.6 bln).  

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