Drivers for the Week Ahead

  • We believe the dollar rally remains on track
  • FOMC minutes will be released Wednesday; there is a full slate of Fed speakers this week
  • Eurozone flash PMIs will be reported Thursday; UK reports April CPI Wednesday
  • Japan has a heavy data week; RBA minutes will be released Tuesday
  • In EM, the central banks of Israel and South Africa meet

We believe the dollar rally remains on track. DXY is trading at the highest level since May 3 and appears to be on track to test the cycle high near 98.33 from April 26. The euro continues to be weighed down by political concerns. So too for sterling.

FOMC minutes will be released Wednesday. The Fed delivered a dovish statement at the May 1 meeting but was followed up by a much less dovish Powell press conference. As such, these minutes will take on added significance as markets try to figure out the Fed’s true message.

Next FOMC meeting is June 19 and WIRP shows a 10% chance of a cut then. More importantly, the Fed will update its staff projections and Dot Plots at that meeting. Given the truly mixed nature of the US data persisting into Q2, the Fed’s “patient” and “flexible” approach still suits and so rates should be kept steady in June.

Yet the rates markets believe otherwise. US yields are near cycle lows, while the Fed Funds futures strip is leaning even more dovish than simply one cut this year and one next year. The implied yield on the January 2020 contract is 2.10%, which is starting to price in a second cut this year. Furthermore, the implied yield on the January 2021 contract is 1.81%, which is starting to price in a second cut next year.

There is a full slate of Fed speakers this week. Harker and Powell speak Monday, while Clarida and Williams take part in a “Fed Listens” event that same day. Evans and Rosengren then speak Tuesday. Bullard, Williams, and Bostic speak Wednesday. Kaplan, Daly, Bostic, and Barkin all speak on a panel Thursday.

Press reports suggest the White House is considering Derek Kan for the Fed’s Board of Governors. And so, another trial balloon goes up. Kan was already confirmed by the Senate for his current post as Undersecretary of Transportation so he appears to not have the sort of baggage as Cain and Moore. However, he is missing any sort of expertise in banking or monetary policy.

The Atlanta Fed’s GDPNow model is now tracking 1.2% SAAR for Q2, up from 1.1% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.8% SAAR for Q2 vs. 2.2% the previous week. April data have been on the soft side, but we note that Q1 also started off on a soft note before rebounding to 3.2% SAAR growth in the advance report.

Eurozone flash PMIs will be reported Thursday. Both manufacturing and services PMI readings are expected to improve a couple of ticks, as consensus see composite PMI at 51.7 vs. 51.5 in April. If so, it would reverse a two-month slump from the recent high of 51.9 in February. Final manufacturing PMI will be reported June 3 and final services and composite PMIs will be reported June 5.

UK reports April CPI Wednesday. Headline inflation is seen picking up to 2.2% y/y from 1.9% in March, while CPIH is seen rising 2.1% y/y vs. 1.8% in March. April retail sales will be reported Friday. Headline sales are seen falling -0.4% m/m, which would be payback for the stronger than expected 1.1% gain in March.

Despite the BOE taking a hawkish tone at its last meeting, markets have gone the other way. Implied yields on the short sterling strip continue to fall, not rise. Next hike has been pushed out to mid-2021 and the one after that to end-2023. No wonder sterling is so soggy. Cable broke below the February low near $1.2775 and is on track to test the January low near $1.2440. In between is a mid-January low near $1.2670.

Japan has a heavy data week. Q1 GDP was reported Monday, growing 2.1% SAAR vs. -0.2% expected. April department store sales will be reported Tuesday, while April trade and March core machine orders will be reported Wednesday. Preliminary May manufacturing PMI will be reported Thursday.

Japan April national CPI will be reported Friday. Headline inflation is expected to accelerate to 0.9% y/y, which would be the highest since October, while ex-fresh food is also expected at 0.9% y/y. Next BOJ meeting is June 20, and no change is expected then. USD/JPY is trading at the highest level since May 7 and has retraced about a third of the April-May drop.

RBA minutes will be released Tuesday. Markets were disappointed that the RBA was not as dovish as hoped for. However, the Statement of Monetary Policy later that week seemed to set up a cut more than the meeting did. Jobs data last week was on the soft side, and so the odds of a cut at the next RBA meeting have risen to nearly 60% from 35% the previous week.

The bounce in AUD from the shock weekend election results has quickly worn off. And that’s how it should be. The currency’s outlook will be driven more by RBA expectations and China growth, rather than domestic political considerations. In that regard, we remain negative on AUD and still look for a test of the January low near .6740.

MSCI EM continues to sink under the weight of rising trade tensions. Last week, it traded below the 1000 area for the first time since January 15. MSCI EM has given up about two thirds of this year’s rally and is on track to test the January low near 946.   MSCI EM FX has fared even worse and is nearing the January low near 1610.

In EM, the central banks of Israel and South Africa meet. Neither are expected to change policy. EM remains hostage to global trade tensions. Last week’s moves by the US to with regards to Japan, EU, Canada, and Mexico should only be viewed as a change in tactics. China is now the sole focus, but these other trade skirmishes are likely to flare again. We remain negative on EM within this environment.