Inflation and consumption data from the US will take the center stage followed by employment data from Australia, activity data from China and preliminary Q1 GDP from Japan.
USD
Minneapolis Fed President Kashkari stated that he would not rule out a hike though the bar for it is high adding that multiple positive inflation readings would be necessary before a cut. He also acknowledged that a weakening situation in the labour market could also spur cuts. He put two rate cuts at the March SEP and he may lower that to zero or one. Kashkari is one of the biggest hawks on the FOMC committee. Initial jobless claims jumped to 231k from 209k the previous week. The market took this as a big sign of weakness in the labour market and USD lost ground.
The yield on a 10y Treasury started the week at 4.50%, rose to 4.52% and finished the week unchanged at around 4.50%. The yield on 2y Treasury started the week at 4.83% and reached the high of 4.83%. Spread between 2y and 10y Treasuries started the week at -31bp then widened to -37bp as curve inverted further. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at June meeting at 92% while probability of a rate cut is around 18. Probability of a July rate cut sits at around 37%.
This week we will have inflation and consumption reports. Headline inflation number is expected to remain unchanged at 3.5% with core inflation ticking down to 3.5% while retail sales are expected to decline compared to March report.
Important news for USD:
Wednesday:
CPI
Retail Sales
EUR
Final Eurozone services PMI for the month of April was revised up to 53.3 from 52.9 as preliminary reported on the back of strong readings across all countries with Spain being the notable outperformer (56.2). The print shows heightened optimism as shown by business expectations and that businesses managed to successfully pass their costs onto consumers. Composite has risen to 51.7 from 51.4 as preliminary reported and 50.3 in March indicating that Eurozone economy is moving further into expansion. French composite PMI reading jumped into expansion with 50.5 reading for the first time since May of 2023. A strong start to the second quarter as indicated by the PMIs.
ECB Chief Economist Lane prepared the terrain for June cut by saying that their confidence on getting inflation lower is improving based on the preliminary data. He added that they are remaining data dependent and that will act in accordance with the incoming data. ECB policymaker De Cos stated that June will most likely deliver a cut but there was no commitment to a rate cut path beyond that. The Bundesbank Governor Nagel talked about structural factors that may keep inflation elevate in the coming years.
GBP
BoE has left the rate unchanged at 5.25% as was widely expected but the result of the vote was 7-2 opposed to 8-1 as was expected. Dhingra, as expected, voted for a rate cut, but this time he was joined by Ramsden. The statement shows that inflation will increase slightly in the H2 of 2024 due to the unwinding of base effects but it will return to close to 2% in the near-term. Members noted upside risks to the near-term inflation outlook from geopolitics. Services inflation has come down but it remains elevated. Monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates. “UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2”. The statement concludes with “Will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.” New projections saw lower inflation with CPI for at 2.6% in one year’s time vs 2.8% in February, 1.9% in two year’s time vs 2.3% in February and 1.6% in three year’s time vs 1.9% in February. Additional member voting for a rate cut and lower inflation projections give the statement dovish tone and GBP weakened.
BoE Governor Bailey stated during the press conference that June rate cut cannot be ruled out and that it is actually possible to cut more than the markets are pricing in. He added that restrictive monetary policy is working and that they are on a path to reducing inflation to 2%. He clarified that they are evidence based, data-dependent, that every new meeting will represent a new decision and that when they cut once monetary policy will remain restrictive. BoE Chief Economist Pill stated that they are more confident they can start to reduce rates but they are not there yet. He reiterated that decision to cut rates will be data-dependent and added that persistent parts of inflation are declining.
Preliminary Q1 GDP reading came in at 0.6% q/q vs 0.4% q/q as expected and up from -0.3% q/q in the Q4 of 2023. Services grew by 0.7% q/q, the production sector grew by 0.8% q/q while the construction sector fell by 0.9% q/q. Real household spending rose 0.2% q/q, real government consumption rose by 0.3% q/q while business investment rose by 0.9% q/q. Exports were down 1% while imports fell by 2.3%.
AUD
RBA has left the cash rate unchanged at 4.35% as was widely expected. Inflation remains a concern as it is moderating at a slower than expected pace. Persistence of services inflation remains a key uncertainty. As stated “The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.”The statement shows concerns around weakness of household consumption and Q1 retail sales data confirms this concern as it printed -0.4% q/q. RBA is still not ruling rate cuts or rate hikes.
RBA Governor Bullock stated at the press conference that rates are at necessary levels to bring inflation down to target. She commented that the bank has to remain vigilant on inflation risks and added that raising interest rates is not the base case but that they are prepared to do it if the need to. She clarified that board did discuss option of raising rates at the meeting but that at this moment it is more appropriate to observe how economy functions before making decisions.
April Caixin services came in at 52.5 as expected, slightly down from 52.7 in March. Composite, on the other hand, ticked up to 52.8 from 52.7 the previous month. The data shows economy expanding at a solid pace. April trade balance data showed widening of surplus to $72.35bn as exports rose by 1.5% y/y while imports rose 8.4% y/y. Auto exports were the biggest exports while high tech product category had biggest impact on imports. Exports growth to ASEAN countries continued to increase while exports to US and EU continued to struggle.
This week we will have employment data from Australia as well as production and consumption data from China.
Important news for AUD:
Thursday:
Employment Change
Unemployment Rate
Friday:
Industrial Production (China)
Retail Sales (China)
NZD
GDT index at the first auction of May saw increase of 1.8%. This makes it a third consecutive auction of raising dairy prices and it was led by the increase in Cheddar prices. Kiwi has managed to regain some ground against its neighbour AUD but the pair is still technically bullish.
CAD
April employment report was a stellar one. The economy added 90.4 jobs vs 18k jobs as expected. The unemployment rate stayed at 6.1% while a tick to 6.2% was expected and participation rate ticked higher to 65.4% from 65.3% in March. Wages rose 4.8% y/y, easing from 5% y/y increase the previous month. Full-time employment rose by 40.1k while part-time employment rose by 50.3k. Professional, scientific and technical services added the most jobs (26k). This report will make BoC reconsider their path and markets are pricing out rate cuts near-term which led to strengthening of CAD.
JPY
Cash earnings in the month of March rose by 0.6% y/y vs 1.8% y/y in February. When we take inflation into account, real wages have fallen by 2.5% y/y making it two years of falling real wages. Household spending has risen 1.2% m/m vs -0.3% m/m as expected. BoJ Summary of Opinions showed more members turning hawkish and advocating rate hikes to secure against the risks of inflation overshooting.
This week we will have preliminary Q1 GDP reading.
Important news for JPY:
Thursday:
GDP
CHF
SNB total sight deposits for the week ending May 3 came in at CHF473.2bn vs CHF475.7bn the previous week. A small drop but within well-established range. Seasonally adjusted unemployment rate stayed at 2.3% in April as was expected.
