BOC meeting, inflation and consumption from the US along with employment data from Australia and trade data from China will grab investors’ attention in the week ahead of us. Majority of markets will be closed on Monday for Easter Monday so liquidity will be thinner than usual.
USD
OPEC has made announcement over the weekend about unexpected production cut of 1.16mb/day that will go on from May 1 until the end of the year. With Russia already announcing 500kb/day cut this will lower supply by 1.66mb/day. Oil prices have gaped to $81 on the market open, an increase of 7%. Increase in oil prices will be inflationary and should cause central banks around the world to reconsider their decision to pause. Additionally, it will present major difficulties for the current Biden administration to refill SPR. JOLTS job openings have printed 9.931m in February for the first drop below 10m since May of 2021.
ISM Manufacturing PMI for March slipped further into contraction and came in at 46.3 vs 47.7 in February. This is now fifth consecutive month that index is below 50. New orders, new export orders and employment fell further while production remained unchanged at a low level of 47.3. One positive is that prices paid component fell into contraction indicating ease of price pressures.
ISM services for March came in at 51.2, down from 55.4 in February. The reading has fallen to the low levels seen during the pandemic of 2020. New orders and new export orders showed huge declines with latter even falling into contraction while employment index also declined. With inventories increasing we have a deadly combination of falling new orders and rising inventories. A small positive in otherwise weak report is that prices paid continued to decline.
NFP employment in March came in at 236k vs 230k as expected. The unemployment rate ticked down to 3.5% while participation rate ticked up to 62.6%. Average wages rose 0.3% m/m and 4.2% y/y vs 0.2% m/m and 4.5% y/y the previous month. Leisure and hospitality added 72k jobs while government added 47k jobs. Employment in professional and business services added 39k while health care added 34k jobs. Fed may take comfort in average wages slowly coming down but labour market is still very tight. Odds of a 25bp Fed rate hike surged post NFP.
The yield on a 10y Treasury started the week and year at around 3.52%, fell below a strong support of 3.30% and finished the week at around the 3.4% level. The yield on 2y Treasury reached at around 4.14%. Spread between 2y and 10y Treasuries started the week at -59bp then tightened to -52bp. FedWatchTool sees the probability of no change in May at 30.7% while probability of a 25bp hike is at 69.3%.
This week we will have inflation and consumption data as well as minutes from the latest FOMC meeting.
Important news for USD:
Wednesday:
CPI
FOMC Minutes
Friday:
EUR
Final manufacturing PMI for the month of March was revised up to 47.3 from 47.1 as preliminary reported. Upside revision to German and stronger than expected Spanish reading managed to improve overall Eurozone reading despite downward revision to the French reading. The report shows improvement in supplier delivery times but warns that production will weaken in coming months. Lower demand and energy prices contributed to lower input costs which lead to lower selling prices and thus lower inflation.
Final services PMI was revised down to 55 from 55.6 as preliminary reported due to a big revision down in French reading. It is still a very healthy number, a ten-month high, and great improvement from February. Spain services were astonishing, coming in at 59.4 vs 57.5 as expected. There was additionally a big beat in expectations for Italy. Composite was revised down as well, 53.7 from 54.1 and it also represents a ten-month high.
GBP
March final manufacturing PMI was revised down to 47.9 from 48. Same as in Europe input prices are falling which is contributing to lower selling prices and pushes inflation down. Services were revised slightly up to 52.9 from 52.8 while composite remained unchanged at 52.2. The report notes sustained improvement in new orders as well as business and consumer confidence. Additionally, new export orders also attributed to stronger services reading while prices paid component continues declining.
AUD
RBA has decided to leave the cash rate target at 3.60% as majority of market participants expected. Monetary policy works with a lag and this pause will give board more time to assess the impact of higher interest rates on economic outlook. With monthly inflation reading coming down there are signs that inflation is peaking and base case remains for it to fall this and next year and print around mid-3% in 2025. The bank seems like it is preparing to pause with rate hikes as their statement says: “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”
In his speech Governor Lowe stated that this pause does not mean that the bank is done with rate hikes. At the next meeting there will be a review of monetary policy with updated forecasts. He added that “Board prepared to have slightly slower return to inflation target than some other central banks” which can be interpreted as a very dovish comment and should weigh in on AUD.
Caixin manufacturing PMI in March came in at 50 vs 51.6 in February. It was expected to rise to 51.7. The report shows that weak external demand caused a huge drop in new export orders which fell into contraction territory. Employment worsened as well. The report concludes “The foundation for economic recovery is not yet solid. Looking forward, economic growth will still rely on a boost in domestic demand, especially an improvement in household consumption. Only by working hard to stabilize employment, increase household income, and improve market expectations, can the government reach its goal of restoring and expanding consumption”. Caixin services smashed expectations and came in at 57.8, highest since November 2020, vs 55 as expected and in February which pushed composite to 54.5. The report shows that production, demand and employment showed increases with business optimism increasing while input prices reached a new seven-month high.
This week we will have employment data from Australia as well as inflation and trade data from China.
Important news for AUD:
Tuesday:
CPI (China)
Thursday:
Employment Change
Unemployment Rate
Trade Balance (China)
NZD
Over the weekend Fonterra cut Farmgate Milk Price to $8.30/kgMS from $8.50/kgMS. They have cited weak short-term demand and increase in production in the US and the EU. Milk and dairy products are major export for New Zealand so this could lead to lower revenues and lower demand for NZD.
RBNZ has delivered a surprise rate hike of 50bp and thus lifted the Official Cash Rate to 5.25%. Markets were expecting a 25bp rate hike and minutes of the meeting showed that the Committee debated whether to go for a 25bp or a 50bp rate hike. Inflation is described as still being too high and the rate hike was necessary in order to bring it down to bank’s 1-3% target. They see demand still outpacing supply which puts upward pressure on prices. GDP is expected to slow down throughout the year as lower global demand and effects of tighter monetary policy take its toll on economic growth. Decline in global demand will affect demand for New Zealand’s key exports, we saw that Fonterra cut prices, while it is expected that tourism services will partially offset the loss of lower exports revenues.
CAD
Employment report for March show another beat on expectations as employment change came in at 34.7k vs 12k as expected. The unemployment rate stayed unchanged at 5% while participation rate ticked down to 65.6%. Average weekly wages rose 5.2% y/y vs 5.4% y/y in February. Full-time employment rose by 18.8k while part-time employment rose by 15.9k. BOC is on the pause and this report that shows healthy labour market and easing wages will keep them firm on that path.
This week we will have a BOC meeting where no change to monetary policy is expected.
Important news for CAD:
Wednesday:
BOC Interest Rate Decision
JPY
BOJ Tankan survey of large manufacturing and non-manufacturing firms in Q1 showed a stark divergence between sectors. Non-Manufacturing showed improvements in both outlook and index while manufacturing fell in both categories. Manufacturing index fell for five straight quarters. Increases in raw material and energy prices as well as weak external demand are main causes for decline in manufacturing while ease of Covid 19 restrictions and government tourism subsidies propelled non-manufacturing sector. The survey also showed that inflation expectations for one year ahead ticked up to 2.8% from 2.7% as seen in the previous quarter. Final PMIs saw very nice improvements to preliminary readings as manufacturing drew close to expansion with 49.2 while services moved away further in expansion with 55 thus lifting composite to a new nine-month high of 52.9.
CHF
Inflation print in March saw headline inflation decline to 2.9% y/y from 3.4% y/y in February. This is mainly due to base effects as sudden energy price increase that happened due to Russia invasion of Ukraine drops out of calculation. SNB will be satisfied that core inflation declined to 2.2% y/y from 2.4% y/y the previous month. SNB total sight deposits for the week ending March 31 came in at CHF563.6bn vs CHF567bn the previous week. Seasonally adjusted unemployment rate remained at 1.9% in March.
