BOE meeting with expected final hike, inflation from the US and China as well as GDP from the UK will be the highlights of the week.
USD
ISM Manufacturing PMI for April came in at 47.1 vs 46.8 as expected and up from 46.3 in March. Manufacturing sector spends sixth consecutive month below 50 and now prices paid index is increasing indicating mounting pressures from prices of raw materials. New orders, new export orders and production all showed increases but are still below 50 while employment index managed to return into expansion territory with a 50.2 print.
ISM Non-Manufacturing printed 51.9 in April, up from 51.2 in March. Prices paid index nudged a bit higher but there was a monumental jump in new export orders and imports with former printing above 60. Additionally, new orders index also rose substantially. Employment index declined but it is still in the expansion territory.
Fed has delivered a 25bp rate hike as was widely expected, lifting the rate into the 5-5.25% range. The statement and the accompanying press conference seem to lean toward the scenario that this will be the last rate hike and that long pause ensues from June. Markets are still not convinced and are pricing in rate cuts from September. Chairman Powell has reiterated that Fed will be data dependent. He strongly emphasized that banking sector is sound and resilient. They seem to expect that credit tightening conditions exacerbated by recent bank issues will help bring demand and inflation down. Mike McGee from Bloomberg asked him whether there will be rate cuts this year and Powell completely dismissed the question, again pointing to their data dependence.
NFP for April printed 253k vs 180k as expected. March reading was revised down to 165k from 236k as preliminary reported for a big revision. Professional and business services and health care saw biggest job increases, The unemployment rate slipped to 3.4% while participation rate remained at 62.6%. An unpleasant surprise for Fed came from average wages which rose 0.5% m/m and 4.4% y/y. Fed will not be satisfied how things are going on in the labour market. They are hinting at a pause, but such a tight labour market, with NFP report beating estimates for thirteenth consecutive month, is not what they want to see.
The yield on a 10y Treasury started the week and year at around 3.46%, fell to 3.34% and finished the week at around the 3.46% level. The yield on 2y Treasury reached at around 4.16%. Spread between 2y and 10y Treasuries started the week at -60bp then tightened to -42bp. FedWatchTool sees the probability of a 25bp hike at 2% while probability of no change in June is at 98%.
This week we will have inflation data.
Important news for USD:
Wednesday:
CPI
EUR
Preliminary inflation data for the month of April saw headline number tick higher to 7% y/y, as expected, from 6.9% y/y in March. The increase was due to rising energy and services prices. On the other hand, core CPI ticked down to 5.6% y/y from 5.7% y/y the previous month. Inflation increased 0.7% m/m which is still way above the trend needed to bring it down to targeted 2%.
ECB delivered a 25bp as widely expected and main refinancing rate is now at 3.75%. The statement opened with talk about inflation outlook being too high for too long. ECB will remain data dependent in deciding about future hikes with inflation outlook and incoming economic and financial data as most important. APP will continue to shrink by €15bn until June 2023 and reinvestments will stop from July of 2023. PEPP reinvestments are planned to go on at least until the end of 2024. At the press conference The statement is suggesting that ECB is getting near to the rate hike peak. President Lagarde was adamant that the bank is not pausing as there is more ground to cover. She was delivering a more hawkish message, leaving door open for future rate hikes. She added that stopping of APP reinvestments from July will amount to €25bn reduction on average on a monthly basis. This move opens the door for another rate hike in June and then pause from there.
GBP
Final manufacturing PMI for the month of April was revised up to 47.8 and now it is just a tick down from 47.9 printed in March. S&P Global notes that new orders and output continued to contract. Improvements are seen in supply chains as lead times are now shortened which in turn led to pushing down of input prices. Services PMI showed even bigger improvement on the back of increase in demand and it printed 55.9 vs 54.9 as preliminary reported. This has in turn lifted composite to 54.9 from 53.9 as preliminary reported and, as stated in report, it means that UK economy started Q2 with a bang as new orders rose at the fastest pace in 13 months.
This week we will have preliminary Q1 GDP reading and BOE meeting. Expectations are for a final 25bp rate hike.
Important news for GBP:
Thursday:
BOE Interest Rate Decision
Friday:
GDP
AUD
RBA has surprised markets and delivered a 25bp rate hike, thus moving the cash rate to 3.85%. There was an overwhelming consensus for no change. The statement shows that although inflation is coming down, it is still too high and that is why the Board decided to proceed with a rate hike. The central forecast on inflation remains unchanged, 4.5% in 2023 and 3% in mid-2025. The central forecast is for GDP to rise at a below-trend pace and to increase by 1.25% in 2023 and “around 2 per cent over the year to mid-2025”. “The unemployment rate is forecast to increase gradually to be around 4½ per cent in mid-2025.“ The statement concludes with another modification to forward guidance stating “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.“
Statement of Monetary Policy, a document that is published quarterly, showed that RBA is willing to hike further, it may be required, in order to bring inflation down in the reasonable time frame. New forecasts show inflation at 4.5% by the end of 2023, 3.2% by the end of 2024 and at 3$ by mid-2025. GDP growth has been revised down and it now shows 1.2% by the end of 2023, 1.7% by the end of 2024 and 2.1% by mid-2025. The unemployment rate is expected to go up to 4% by the end of 2023, 4.4% by the end of 2024 and 4.5% by mid-2025. Wage growth is seen declining but still rising at a healthy 4% by the end of 2023, 3.8% by the end of 2024 and 3.7% by mid-2025. All of the projections were made with peak interest rate at 3.75% and falling to 3% by mid-2025.
Over the weekend official Chinese PMI for April were published and they showed signs of slowdown. Manufacturing PMI returned to contraction with a 49.2 reading vs 51.9 in March. NBS has commented on weak reading “A lack of market demand and the high-base effect from the quick manufacturing recovery in the first quarter”. Non-Manufacturing held much better as it slid to still very elevated 56.4 from 58.2 the previous month. Composite has declined to 54.4 from 57 in March. Caixin manufacturing PMI also dipped into contraction with 49.5 from 50 in March due to slowing demand. Caixin services also slipped to 56.4 from 57.3 thus dragging composite to 53.6 from 54.5 the previous month, but the numbers are still elevated and healthy growth in new orders and activity is seen.
This week we will have trade balance and inflation data from China.
Important news for AUD:
Tuesday:
Trade Balance (China)
Thursday:
CPI (China)
NZD
Employment data for the first quarter showed a very strong labour market. Employment change came in at 0.8% q/q vs 0.4% q/q as expected for a huge beat. The unemployment rate was unchanged at 3.4% while participation rate increased to 72% from 71.7% as expected and as in Q4. Wages rose 4.5% y/y vs 4.6% y/y as expected. Prior to the report Governor Orr stated that financial system was well positioned to support the economy and sustain higher interest rates. In combination these two are opening doors for more rate hikes coming from RBNZ.
CAD
Employment report for April showed very tight market. Employment change came in at 41.4k vs 20k as expected. The unemployment rate slipped to new low of 5% while participation rate remained unchanged at 65.6%. Average hourly wages also remained at very strong 5.2% y/y. One of the stains on this report is that all of the jobs created were part-time (47.6k) while full-time jobs declined (-6.2k). A strong report should not derail BOC from their current stance, a pause.
JPY
Final Manufacturing PMI in April was unchanged at 49.5. The report shows that new orders printed slowest reduction since July of 2022 and that supply chains are improving. Inflationary pressures remain elevated and firms have passed costs to consumers, thus increasing their profit margins and accelerating the rate of change of inflation.
CHF
SNB total sight deposits for the week ending April 28 came in at CHF523.9bn vs CHF538.4 the previous week. Deposits continue to decline as SNB sells EUR and USD. Seasonally adjusted unemployment rate for April stayed at 1.9% for the fifth consecutive month. Inflation data for the same month were very encouraging as it saw headline inflation print 2.6% y/y vs 2.8% y/y as expected and down from 2.9% y/y in March and it was flat on a monthly basis. Core inflation was unchanged at 2.2% y/y.
