BoE and RBA meetings coupled with employment data from Canada and trade data from China will highlight the week ahead of us.
USD
Employment Cost Index (ECI) for Q1 showed growth of 1.2% q/q vs 1% q/q as expected and up from 0.9% q/q in the Q4 of 2023. The number came in at 4.2% y/y, down from 4.8% y/y in Q1 of 2023, but it is still highly elevated. Fed is considering ECI to be one of the best indicators of overall wage pressures and as it is seen going up it will spark debates of much stickier inflation.
Treasury funding announcement for the Q2 saw a $41bn larger borrowing than stated in January of 2024. The reason was lower cash receipts. Treasury expects to borrow, issue Treasuries, in the amount of $243bn with end TGA balance of $750bn. Expectations for Q3 are for a $847bn borrowing with a TGA balance of $850bn at the end of the quarter.
ISM manufacturing PMI for the month of April returned to contraction after briefly moving to expansion in March and printed 49.2 vs 50 as expected. The details show drops in new orders and production while prices paid jumped above the 60 level indicating growing inflation pressures. ISM services PMI also dropped into contraction and printed 49.4 vs 50 as expected and down from 51.4 the previous month. This is the first time since December of 2022 that the reading dipped below the 50 level. New orders dropped but remained in expansion while new export orders dropped into contraction. Employment index fell deeper into contraction while prices paid component rebounded heavily after dropping in March which will bring up concerns about inflation pressures boiling.
Fed has left Fed funds rate unchanged in 5.25 – 5.50% range as was widely expected. The statement showed that economy continued to expand at a solid pace but “there has been a lack of further progress toward the Committee’s 2 percent inflation objective.” Regarding inflation the statement showed that “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” There will be a reduction in QT “…monthly redemption cap on Treasury securities from $60 billion to $25 billion.” Expectations were for a reduction to $30bn. Fed remains data dependent and Inflation remains the most important data point that Fed will monitor.
At the press conference Powell has stated that Fed is not satisfied with 3% inflation adding that it is unlikely that the next move in rates will be a hike, he repeatedly pushed against the rate hike. When pressed about rate cuts he stated that there would have to be significant weakening of labor market and added that couple of tenths in the unemployment rate probably wouldn’t do it. He thinks that monetary policy is restrictive and he will need “persuasive evidence” to prove to him that it is not tight enough.
March jobs report was the first in a long time that missed expectations. Headline NFP number showed 175k jobs added vs 243k as expected. The unemployment rate ticked up to 3.9% while participation rate remained the same at 65.7%. Underemployment, U6, also ticked higher and printed 7.4%. Wages rose 0.2% m/m compared to 0.3% m/m the previous month and 3.9% y/y vs 4.1% y/y in March. Private education and healthcare services continues to be the biggest contributors adding 95k of the 175k total, but leisure & hospitality and government are much weaker than has usually been the case over the past 18 months. Private jobs added 16k while government jobs added 8k. Powell has noted that significant weakening of labor market is needed for rate cuts and this report could mark the beginning of that weakening.
The yield on a 10y Treasury started the week at 4.67%, rose to 4.69% and finished the week at around 4.50%. The yield on 2y Treasury started the week at 5% and reached the high of 5.05%. Spread between 2y and 10y Treasuries started the week at -33bp then tightened to -31bp as curve proceeded to bear steepen. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at June meeting at 86% while probability of a rate cut is around 14%. Probability of a July rate cut sits at around 42%.
EUR
Preliminary Eurozone CPI for the month of April saw headline number unchanged at 2.4% y/y as expected but core CPI fell by less than expected as it printed 2.7% y/y, down from 2.9% y/y in March while a drop to 2.6% y/y was expected. Monthly reading saw increase of 0.6% which makes it a fourh consecutive year of 0.6% m/m inflation increases in April. German CPI came in unchanged at 2.2% y/y vs 2.3% y/y as expected with French CPI also printing 2.2% y/y. These numbers indicate that bringing inflation all the way to the 2% target will go slower than expected. However, this will not deter ECB from cutting in June. Preliminary Eurozone GDP for the Q1 came in at 0.3% q/q and 0.4% y/y vs 0.1% q/q and 0.2% y/y as expected. All of the four major economies (Germany, France, Italy and Spain) beat expectations and had Q1 GDP surprised to the upside.
GBP
Final manufacturing PMI for the month of April was revised up to 49.1. Services and composite PMI readings were slightly upgraded to 55 and 54.1 respectively, up from 53.1 and 52.8 in March. The report shows improvements in business and consumer spending which led to increases in activity and new orders. Business expectations for the next year are upbeat.
This week we will have BoE meeting and preliminary Q1 GDP data. With inflation staying high but projected to decline much faster than in other countries we could see BoE to start to prepare the terrain for a June cut, although August is what markets are pricing as we will get more data points by then. Sticky services inflation may prove to be the reason why they opt for an August as the first rate cut date.
Important news for GBP:
Thursday:
BoE Interest Rate Decision
Friday:
GDP
AUD
Official April PMIs saw manufacturing come in at 50.4 as expected, down from 50.8 in March while services recorded a big drop to 51.2 from 53 the previous month while expectations were for a 52.2 reading. For the manufacturing sector new orders and new export orders remained above 50 while employment index remained in contraction. Production index made a decent jump and there was a surge in prices paid index indicating inflation pressures. For the services sector employment and new business components remained below 50 and business expectations index declined. Composite was thus dragged to 51.7 from 52.7 in March. Caixin manufacturing increased to 51.4 in April from 51.1 in March.
This week we will have RBA meeting as well as trade and inflation data from China. With inflation staying stubbornly high and labor market still holding tight RBA will not make any moves at this meeting.
Important news for AUD:
Tuesday:
RBA Interest Rate Decision
Thursday:
Trade Balance (China)
Saturday:
CPI (China)
NZD
Business confidence continued to deteriorate as April printed 14.9, down from 22.9 in March. The biggest drops were seen in overall activity, all sectors declined as well as in employment category. Residential construction and profit expectations also posted big drops. Pricing intentions component grew but slight positive is that inflation expectations inched lower.
Q1 employment report showed growing weakness in the labor market. Employment change was -0.2% q/q vs 0.3% q/q as expected. The unemployment rate rose to 4.3% from 4% in Q4, higher than 4.2% as expected, while participation rate dropped to 71.5% from 71.9% in the previous quarter. Wages have declined a bit but are still very elevated with Labor cost index at 0.8% q/q and 3.8% y/y. The impact of high interest rates is weighing down on the labor market.
CAD
February GDP reading printed an increase of 0.2% m/m vs 0.3% m/m as expected. Manufacturing growth was negative while service industries posted a 0.2% increase. Advanced March reading sees GDP coming in flat.
BoC Governor Macklem stated that there is a limit on how much rates between US and Canada can diverging adding that it is unlikely that rates will go down to the pre-pandemic levels. He added that core inflation is expected to ease gradually and that cut in rates will signal that inflation is moving towards the 2% target.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
Early hours of Monday saw USDJPY jump to the 160 level and then finally intervention happened. The pair was pushed down below the 155 level. It has bounced after that but as the London session started it was pushed back below to the 155 level. Ultimately the pair crossed the 158 level. After the FOMC meeting that weakened the USD, BoJ took advantage and again intervened in the market pushing the pair below the 152 level.
Final manufacturing PMI for the month of April was revised down to 49.6 from 49.9 as preliminary reported, but still a good jump from 48.2 in March. The report showed slower decline in output and new orders, they are still below 50. New export orders also declined due to weak foreign demand while input prices increased as weak JPY pushed up prices.
CHF
SNB total sight deposits for the week ending April 26 came in at CHF475.7bn vs CHF481.3bn the previous week. April inflation data saw headline CPI come in at 1.4% y/y vs 1.1% y/y as expected and up from 1% y/y in March. Core CPI also rose as it printed 1.2% y/y vs 1% the previous month. The numbers are still well below the 2% target so SNB will not be phased by these data points. CHF has gained strength after the inflation report.
