Drivers for the Week Ahead

  • Last week’s data did not provide much clarity on the state of the US economy; it is a fairly busy US data week
  • Atlanta Fed’s GDPNow model is now tracking 2.1% SAAR for Q1
  • President Trump continues his efforts to affect Fed policy, both directly and indirectly
  • ECB meets Wednesday and is expected to keep policy unchanged
  • EU holds an emergency summit Wednesday ahead of the Brexit deadline Friday
  • In EM, the central banks of Israel, Peru, and Singapore meet this week

The dollar is mostly weaker against the majors in narrow ranges as the new week begins.  Nokkie and yen are outperforming, while Aussie and Loonie are underperforming.  EM currencies are broadly weaker.  The CEE currencies are outperforming, while TRY and KRW are underperforming.  MSCI Asia Pacific was up 0.1%, with the Nikkei falling 0.2%.  MSCI EM is up 0.1% so far today, while the Shanghai Composite down 0.1% after China markets reopened from holiday.  Euro Stoxx 600 is flat near midday, while US futures are pointing to a lower open.  10-year UST yields are flat at 2.50%, while the 3-month to 10-year spread steepened 1 bp to stand at 8 bp.  Commodity prices are mostly higher, with Brent oil up 0.7%, copper up 0.9%, and gold up 0.5%.

Last week’s data did not provide much clarity on the state of the US economy.  February retail sales readings were mixed, as were the March jobs data.  Yet we think the takeaway is that the US economy is in better shape this year than what many anticipated.  That leaves markets waiting for more data to crystallize their views.

In that regard, the US has a fairly busy data week.  The major releases are March CPI and FOMC minutes Wednesday, followed by PPI Thursday.  Headline CPI is seen picking up to 1.8% y/y from 1.5% in February, while core CPI is seen steady at 2.1% y/y.  Headline PPI is seen steady at 1.9% y/y, while core PPI is seen falling a tick to 2.4% y/y.

The Atlanta Fed’s GDPNow model is now tracking 2.1% SAAR for Q1.  Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 1.9% for Q2.  Both models have seen their forecasts rise in recent weeks.  Final US Q4 growth was revised down to 2.2% SAAR from 2.6% previously, while preliminary Q1 data will be out April 26.  For now, it appears that growth is still slowing sequentially from the 4.2% peak in Q2 2018.  However, this is far from pointing to recession this year.

Fed Vice Chair Clarida speaks Tuesday and Thursday.  Also on Thursday, Bullard, Quarles, Kashkari, and Bowman all speak.  Fed officials have been pushing back forcefully against ideas of a rate cut this year, but the market has not yet come around.   Yes, the yield curve (3-month to 10-year) has turned back positive after brief inversion, but the Fed Funds futures strip still shows that the market is still pricing in solid odds of a rate cut in 2019 followed by another one in 2020.

President Trump continues his efforts to affect Fed policy, both directly and indirectly.  On Friday, he again called for rate cuts and a resumption of QE.  Trump has also nominated Herman Cain for the other Fed vacancy (Moore was picked for the other one).  Both are viewed as partisan picks that would likely help further Trump’s efforts to engineer a more dovish Fed.

The ECB meets Wednesday and is expected to keep policy unchanged.  We may get some more details about the TLTRO that is planned for September, but not much else of substance is likely after the ECB already changed its forward guidance at the March meeting.  Indeed, given that Draghi’s term ends in October, it will likely fall on his successor to provide any further changes in forward guidance.  We expect more questions about the impact of negative interest rates.  Given the downside risks facing the eurozone, we cannot imagine anything emerging from this meeting that is remotely hawkish.

The EU holds an emergency summit Wednesday ahead of the Brexit deadline Friday.  May has asked for an extension until June 30.  Reports suggest the EU does not want to give a short extension, since the UK simply risks running out of time again.  Instead, the EU reportedly wants to grant a longer extension of one year with an option of the UK leaving earlier if an agreement is passed by Parliament.  We think a long delay is the current base case for the market.

Despite early optimism, cross-party talks with Labour have yielded nothing for May.  No direct talks were held over the weekend and none are planned for today.  This is not a good sign, to state the obvious.  While May was likely hoping for some sort of breakthrough before heading to the EU summit, this seems unlikely now.

The UK reports February trade, IP, construction output, and monthly GDP Wednesday.  The trade deficit is expected at -GBP3.9 bln, while IP is expected to rise 0.1% m/m.  Construction output is seen falling -0.3% m/m, while GDP is expected to be flat m/m.  Another year of Brexit uncertainty would surely take a greater toll on the UK economy.

Japan reported February current account data earlier today.  The adjusted surplus was JPY1.96 trln, larger than the expected JPY1.92 trln.  February core machine orders, PPI, and March machine tool orders will be reported Wednesday.  Meanwhile, the ruling LDP won local elections this weekend.  For now, it’s steady as she goes in terms of Japan policymaking.

Norway reports March CPI Wednesday and Sweden reports the same data Thursday.  Norway headline inflation is expected to decelerate to 2.8% y/y from 3.0% in February, while Sweden’s is expected to decelerate to 1.8% y/y from 1.9% in February.  Both central banks have started modest tightening cycles, and this CPI data support the slow pace of rate hikes.  Riksbank meets April 25 and Norges Bank May 9, and neither are expected to change policy.

In EM, the central banks of Israel, Peru, and Singapore meet this week.  None are expected to adjust policy, not with the growing global uncertainties.  Israel holds elections Tuesday, while India’s multi-stage elections will begin Thursday and run through May 19.  Results are due out May 23.