Drivers for the Week Ahead

  • The FOMC holds a two-day meeting that ends Wednesday; April jobs data will be reported Friday; a final word about Q1 GDP
  • The eurozone reports April CPI and Q1 GDP this week; Spain’s weekend elections are worth discussing
  • Bank of England meets Thursday
  • US and China will resume trade talks Tuesday in Beijing
  • Japan is closed this entire week for Super Golden Week
  • China reports official PMI readings for April Tuesday

The dollar is mixed against the majors at the start of a very eventful week. Aussie and sterling are outperforming, while yen and Loonie are underperforming. EM currencies are mostly firmer. ZAR and KRW are outperforming, while IDR and CNY are underperforming. MSCI Asia Pacific e-Japan was up 0.5%, with Japan closed until May 7 for Super Golden Week. MSCI EM is up 0.5% so far today, with the Shanghai Composite falling 0.8%. Euro Stoxx 600 is down 0.3% near midday, while DJIA futures are pointing to a lower open. 10-year UST yields are up 1 bp at 2.51%, while the 3-month to 10-year spread has steepened 1 bp to 10 bp. Commodity prices are mostly lower, with Brent oil down 0.9%, copper down 0.5%, and gold down 0.3%.

It will be a very busy week for the US. Highlights will be the FOMC meeting Wednesday and April jobs data Friday. These two events will be very important in terms of keeping the divergence narrative going. Last week, events outside the US drove the divergence theme and this week, the focus will be on what happens inside the US. We remain bullish on the dollar but acknowledge scope for some corrective moves in the coming days.

A final word about Q1 GDP. The 3.2% SAAR rate was obviously a very strong headline number but there are doubts about Q2 since the upside miss was driven by net exports and inventories. Yes, that will be hard to sustain in Q2 but the big takeaway from the data is simply that US recession fears are overblown. Let’s leave it at that.

The New York Fed’s Nowcast model now shows Q2 growth at 2.1% SAAR. However, it’s worth noting that its forecast of 1.4% SAAR for Q1 undershot the actual reading by quite a bit. The Atlanta Fed’s GDPNow model forecast was much closer at 2.7% SAAR. It will provide its first GDPNow estimate for Q2 Monday.

The FOMC holds a two-day meeting starting Tuesday, with a decision and press conference Wednesday. There will not be any updates to the Fed forecasts or Dot Plots. We would be very surprised if anything dovish emerged from this meeting. The Fed should acknowledge the economy’s strong turnaround from the early soft patch. Of course, they will balance that with the need to see how Q2 develops.

Ahead of the FOMC, the US reports March personal income and spending and core PCE as well as Dallas Fed manufacturing index Monday. On Tuesday, Q1 Employment Cost Index, S&P CoreLogic housing prices for February, April Chicago PMI, and March pending home sales will be reported. Besides the FOMC decision, Wednesday also sees April ADP private sector job estimate, ISM manufacturing PMI, April auto sales, and March construction spending. Thursday sees April Challenger job cuts, weekly jobless claims, Q1 Unit Labor Costs, and March factory orders.

Of course, US jobs data Friday will be the highlight. Consensus sees +185k jobs vs. + in March. The ADP and ISM reports will be two more pieces of the labor market puzzle out ahead of the NFP, while weekly jobless claims for the survey week suggest another solid report. Average hourly earnings will be important, and are expected to tick up to 3.3% y/y.

Besides the jobs data, Friday will see March advance goods trade, wholesale and retail inventories, and April ISM non-manufacturing. The first two reports will help crystallize the revision to Q1 GDP growth that is due out May 30.

The eurozone reports April CPI and Q1 GDP this week. GDP comes out Tuesday and consensus sees growth accelerating to 0.3% q/q from 0.2% in Q4. Yet this would not jibe with monthly indicators like the PMIs, which are more consistent with 0.2% growth. As such, we see downside risks to the GDP data.

Final eurozone manufacturing PMI readings will be reported Thursday. Spain and Italy are expected to improve from March, but not be enough to move the needle on the headline flash eurozone reading of 47.8. Final eurozone services and composite PMIs will be reported Monday.

Eurozone inflation may pick up modestly. Germany reports preliminary April CPI Tuesday, with headline inflation expected to pick up to 1.5% y/y from 1.3% in March. Eurozone preliminary CPI will be reported Friday, which is expected to pick up to 1.6% y/y from 1.4% in March. Germany reports April unemployment (-6k expected) and March retail sales data Thursday (-0.5% m/m expected).

Spain’s weekend elections are worth discussing. Look for our longer MarketView piece later today. The Socialist victory (which still requires a coalition partner) means status quo and that’s not a bad thing. The rise of the far-right Vox was expected and warrants a note of caution for the upcoming European Parliament elections.

Bank of England meets Thursday. With the Brexit saga likely extended until October 31, the BOE remains in an extended “wait and see” period. It should note the resilience of the UK economy, whilst also stressing the downside risks of actual Brexit as well as the extended period of uncertainty. The bank will update its forecasts for the Quarterly Inflation Report.

Ahead of the BOE decision, UK April manufacturing PMI will be reported Wednesday. It is expected at 53.1 vs. 55.1 in March. Construction PMI (50.3 expected) will be reported Thursday, and services (50.2 expected) and composite (50.6 expected) PMIs will be reported Friday. Some of the recent improvement in the PMI readings were due to stockpiling ahead of the original March Article 50 deadline. There may be some payback in April after that deadline was extended.

US and China will resume trade talks Tuesday in Beijing. USTR Lighthizer and Treasury Secretary Mnuchin will represent the US. According to the US, the talks “will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement.” After this round, China officials led by Vice Premier Liu will head by to Washington DC for the next round starting May 8.

Japan is closed this entire week for Super Golden Week.   What is normally a three-day holiday will be stretched to six this year, and markets will not reopen until Tuesday May 7. Many market participants are already fretting about the thin market conditions and the possibility of another dollar/yen flash crash. The one seen earlier this year took place on January 3, a bank holiday that followed a three-day holiday period from December 31-January 2.

Oil prices have fallen back a bit after spiking due to last week’s announcement on Iran waivers. The pullback seems to have been driven partly by President Trump’s efforts to jawbone OPEC. Supply disruptions from contaminated Russian oil may also be limited.

China reports official PMI readings for April Tuesday. Manufacturing PMI is expected at 50.6 vs. 50.5 in March, while non-manufacturing PMI is expected at 55.0 vs. 54.8 in March. Caixin reports its China April manufacturing PMI Thursday and is expected at 51.0 vs. 50.8 in March.

Data from other countries in the region (Korea and Taiwan) so far do not corroborate the firm Chinese data reported for March. Korea reports final April trade data Wednesday, with exports expected to contract -6.0% y/y and imports by -1.3% y/y. This may be a truer read on regional activity than the Chinese PMI readings.