Drivers for the Week Ahead

  • The week is starting off with a bout of risk-off sentiment from several triggers
  • China officials had been scheduled to arrive in Washington this Wednesday to continue trade talks
  • Markets are still digesting Powell’s less dovish than expected comments; Fed officials are out in full force this week
  • The main US data focus this week will be April PPI Thursday and April CPI Friday
  • Final eurozone services and composite PMI readings will be reported Monday; UK reports Q1 GDP Friday
  • Japan reopens Tuesday after the extended Super Golden Week holiday; Canada highlight will be April jobs data Friday
  • RBA meets Tuesday; RBNZ meets Wednesday; Norges Bank meets Thursday
  • In EM, the central banks of Malaysia, the Philippines, Chile, Thailand, Brazil, and Peru all meet this week

The week is starting off with a bout of risk-off sentiment from several triggers. First, North Korea ran live-fire military exercises Saturday that likely included the launch of a short-range ballistic missile. Then, President Trump threatened to increase tariffs on $200 bln of imports from China from 10% to 25% and to extend that 25% duty on another $325 bln of Chinese goods. This will likely derail any trade deal between the two nations, as we simply cannot see China giving into this sort of threat.

China officials had been scheduled to arrive in Washington this Wednesday to continue trade talks. Vice Premier Liu was to lead the Chinese delegation for what many had thought could be the final round of talks before a final deal was announced. That no longer seems doable, as reports suggest China may delay this trip after the tariff threats. Markets have been pricing in a deal in May or June, and so these developments suggest a major repricing will be seen.

Markets are still digesting Powell’s less dovish than expected comments. Given the conflicting tone with the more dovish Fed statement, markets will be particularly keen to listen to what Fed officials are saying now that the media embargo has ended.

We continue to think that Powell made a point of pushing back against market notions of a likely rate cut. Rightfully so, we might add. Given how smartly the US economy has bounced back from the soft patch at the start of the year, it seems that Powell did not want the market to get too one-sided with regards to monetary policy expectations.

Fed officials are out in full force this week. Harker speaks Monday, while Kaplan and Quarles speak Tuesday. Brainard speaks Wednesday at a “Fed Listens” event. Thursday sees Powell, Bostic, and Evans speak, followed by Brainard, Bostic, and Williams Friday.

Yet if anyone was expecting any clarity from the Fed post-FOMC, they will surely be disappointed. Last Friday, Bullard and Evans both laid out a case for a rate cut if inflation were to remain abnormally low. In some ways, this doesn’t contradict Powell, who simply said that the recent low inflation was transitory. Bullard and Evans took the debate a step farther by asking what if it isn’t transitory? And so, we are back to waiting for the data.

In that regard, the main US data focus this week will be April PPI Thursday and April CPI Friday. Headline PPI is expected to pick up a tick to 2.3% y/y, while core is expected to pick up a tick to 2.5% y/y. Elsewhere, headline CPI is expected to pick up a couple ticks to 2.1% y/y, while core is expected to pick up a tick to 2.1% y/y.

The US releases a host of other data points. March JOLTS job openings (7350 expected) and consumer credit data will be reported Tuesday. March trade (-$50.3 bln expected) and final wholesale inventories data out Thursday should help round out the Q1 GDP revisions. Friday will see April budget data.

Final eurozone services and composite PMI readings will be reported Monday. Spain and Italy composite readings are expected to worsen from March to 54.5 and 50.6, respectively. Deterioration in the services PMIs are expected to more than offset the improved manufacturing PMIs for these two. Elsewhere, French and German composite readings are seen steady from the flash readings at 50.0 and 52.1, respectively.

UK reports Q1 GDP Friday. Growth is expected at 1.8% y/y vs. 1.4% in Q4. March IP (0.1% m/m expected), construction output (-0.9% m/m expected), and trade (-GBP4.6 bln expected) will also be reported Friday. Despite the Bank of England’s efforts at a hawkish hold last week, implied rates on short sterling futures have hardly budged. The short sterling strip continues to price in the next hike by mid-2020, and the next one isn’t priced in until end-2021 vs. mid-2022 pre-BOE.

Japan reopens Tuesday after the extended Super Golden Week holiday. April services and composite PMI readings will be reported Wednesday. March household spending and cash earnings will be reported Friday. Next BOJ meeting is June 20. While we expect the bank to add more stimulus this year, we think it will revolve around the impact of the October consumption tax hike.

Canada highlight will be April jobs data Friday. A gain of 15k jobs is expected vs. -7.2k in April, while the unemployment rate is seen steady at 5.8%. Ahead of the jobs data, Ivey PMI for April will be reported Tuesday. April housing starts will be reported Wednesday, followed by March trade Thursday. March building permits will be out Friday too. Next BOC meeting is May 29. After moving to a neutral bias at its April meeting, we see no change this month.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 1.5%. However, WIRP is showing a 47% chance of a cut then. That same day, Australia reports March trade and retail sales. A cut this week seems too soon, and we lean towards a cut coming in Q3.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 1.75%. However, WIRP is showing a 49% chance of a cut then. A cut this week seems too soon, and we lean towards a cut coming in Q3. The Antipodeans are particularly vulnerable to another flareup in US-China trade tensions, which in turn will likely push both central banks more dovish due to the negative growth impact.

Norges Bank meets Thursday and is expected to keep rates steady at 1.0%. It just hiked rates 25 bp in March and signaled its intent to hike again as soon as June and then again in H2. However, it said rates would likely peak at 1.75%, which implies one last hike in 2020. Two more hikes this year seems aggressive, and we believe the Norges Bank may adjust its expected rate path down slightly at this meeting in light of sinking oil prices.

Ahead of the Norges Bank meeting, Norway reports March IP Wednesday (0.3%m/m expected. After that meeting, it reports April CPI. Headline inflation is seen remaining steady at 2.9% y/y, while underlying inflation is seen easing to 2.5% y/y from 2.7% in March.

In EM, the central banks of Malaysia, the Philippines, Chile, Thailand, Brazil, and Peru all meet this week. All are expected to deliver dovish holds, with the Philippines expected to deliver the first rate cut of a new easing cycle. The divergence theme holds not only in DM, but in EM as well and so we remain negative on EM FX. South Africa elections will be held Wednesday, but results are not likely to be known until Friday.