Drivers for the Week Ahead

  • The dollar remains under pressure; the US data highlight is March retail sales Thursday
  • The Atlanta Fed’s GDPNow model is now tracking 2.3% SAAR for Q1, up from 2.1% previously
  • There is a full slate of Fed speakers this week; the US yield curve continues to steepen
  • Eurozone flash PMI readings for April will be reported Thursday
  • The UK has a busy data week; so does Canada
  • China reports March IP and retail sales and Q1 GDP Wednesday

The dollar is mostly weaker against the majors as the new week begins. Stockie and sterling are outperforming, while Nokkie and Loonie are underperforming. EM currencies are mixed. KRW and IDR are outperforming, while INR and TRY are underperforming. MSCI Asia Pacific was up 0.6%, with the Nikkei rising 1.4%. MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open. 10-year UST yields are down 1 bp at 2.56%, while the 3-month to 10-year spread is steady at 14 bp. Commodity prices are mostly lower, with Brent oil down 0.8%, copper down 0.4%, and gold down 0.3%.

The dollar remains under pressure. DXY has fallen five out of the past six sessions, but the losses have been limited and it has only retraced about a third of its March-April rally. The euro continues to lead this move, having retraced about half that rally. Sterling is lagging, while the yen is making new lows. Until we break out of the well-worn ranges, we believe the dollar rally remains intact.

The US data highlight this week is March retail sales Thursday. Headline sales are expected to rise 1.0% m/m, ex-auto by 0.7%, and the so-called control by 0.5%. Recall that February sales data was very weak, and so consensus sees a nice little payback.

There is quite a bit of minor US data out this week. February TIC data will also be reported Monday. March IP (0.2% m/m expected) will be reported Tuesday, followed by February trade (-$53.5 bln expected) and wholesale inventories (0.3% m/m expected) Wednesday. Weekly jobless claims (205k expected) Thursday will be of interest since it will be for the BLS survey week. Lastly, March housing starts (5.9% m/m expected) and building permits (0.7% m/m expected) will be reported Friday.

Elsewhere, the regional Fed surveys for April start coming out. Empire manufacturing (8.0 expected) starts the ball rolling Monday, followed by Philly Fed (10.5 expected) Thursday. Markit releases its preliminary April PMI Thursday too, with manufacturing seen rising to 52.8 and services seen falling to 55.0.

The Atlanta Fed’s GDPNow model is now tracking 2.3% SAAR for Q1, up from 2.1% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 2.0% for Q2. Both models have seen their forecasts rise in recent weeks. To us, it is becoming clear that the soft patch in early Q1 was indeed temporary.

Advance Q1 GDP data will be reported April 26. Currently, the consensus sees growth of 1.6% SAAR, which is closer to the New York Fed’s estimation than it is to the Atlanta Fed’s. Recall that final US Q4 growth was revised down to 2.2% SAAR from 2.6% previously. For now, the data is far from pointing to recession this year.

There is a full slate of Fed speakers this week. Evans and Rosengren (both voters) speak Monday, followed by Kaplan (non-voter) Tuesday. The Fed releases its Beige Book report for the upcoming FOMC meeting May 1 on Wednesday, while Harker (non-voter), Bullard (voter), and Logan (non-voter) speak the same day. Lastly, Bostic (non-voter) speaks Thursday.

The US yield curve continues to steepen. At 14 bp today, the 3-month to 10-year curve is the steepest since March 19 and signals lower perceived recession risks. We concur and look for further steepening ahead. But even though Fed officials have pushed back hard against any notion of easing this year, the Fed Funds futures strip continues to show good odds of one cut this year and another one next year.

We believe shifting market expectations, especially with regards to the Fed, will be the next driver in the dollar rally. We remain upbeat on the US economic outlook this year and believe expectations of easing are overdone. When (if?) markets come around to this view, the greenback should benefit. Until then, we fear that the dollar will have trouble getting much traction.

Eurozone flash PMI readings for April will be reported Thursday. Manufacturing PMI is seen rising to 48.0 while services PMI is seen falling to 53.2, while the composite is expected to rise to 51.8. Looking at the country breakdown, Germany’s composite is expected to rise to 51.7, as a higher manufacturing PMI would offset a weaker services PMI. France’s composite is expected to rise to 49.7, with both components seen rising from March.

The ECB took a dovish stance at last week’s meeting. Yet despite the gloomy outlook, it was too soon for the ECB to make any more changes to policy after it just added stimulus and extended its forward guidance at the March meeting. ECB next meets June 6, when new staff projections will be released. Note that the IMF just cut its growth forecasts for the eurozone to 1.3% this year and 1.5% next year, with the bulk of that coming from Germany and Italy.

The UK has a busy data week. It reports labor market data Tuesday, followed by March CPI data Wednesday. Headline inflation is expected to rise a tick to 2.0% y/y, while CPIH is expected to rise a tick to 1.9% y/y. March retail sales will be reported Thursday, with both headline and ex-auto fuel expected to fall -0.3% m/m.

The longer the Brexit uncertainty continues, the more damage is done to the UK economy. The IMF just cut its growth forecasts for the UK to 1.2% this year and 1.4% next year. BOE has no choice but to stand pat until after the new Brexit deadline of October 31. BOE next meets May 2, no change is expected then.

Japan reports March trade data Wednesday, where an adjusted deficit of -JPY297 bln is expected. The timing of the trade data couldn’t be any better. Japan Economy Minister Motegi will be in the US from Monday-Thursday for trade talks.

Japan reports March national CPI Friday. Headline inflation is expected to pick up to 0.5% y/y from 0.2% in February, while ex-fresh food is expected to remain steady at 0.7% y/y. BOJ next meets April 25, no change is expected then. Press reports suggest that the BOJ will forecast inflation of 1.5-2.0% in FY2021 in its quarterly outlook report out at this month’s policy meeting.

Canada has a busy data week. It reports February manufacturing sales (-0.1% m/m expected) Tuesday, followed by March CPI and February trade data Wednesday. Headline inflation is expected to rise to 1.9% y/y from 1.5% in February, while common core is seen steady at 1.8% y/y. February retail sales will be reported Thursday and are expected to rise 0.4% m/m (0.2% ex-autos). BOC next meets April 24, no change is expected then.

RBA minutes will be released Tuesday. Australia reports March jobs data Thursday. Employment is expected to rise 15k, while the unemployment rate is expected to tick up to 5.0%. If press reports of significant job cuts at a major Aussie bank prove true, the labor market will take a big hit. RBA next meets May 7, no change is expected then.

In other news Down Under, New Zealand reports Q1 CPI Wednesday and is expected to rise 1.7% y/y vs. 1.9% in Q4. RBNZ next meets May 8, no change is expected then.

China reports March IP and retail sales and Q1 GDP Wednesday. IP is expected to rise 6.0% y/y, retail sales by 8.4% y/y, and GDP by 6.3% y/y. The larger than expected rise in new loans and aggregate financing reported last week suggests that previous stimulus is working its way through the system. As such, we should start to see some improvement in the economic data too.