Drivers for the Week Ahead

  • The dollar is getting some traction; US-China relations will likely remain in focus after last week’s reports of potential US actions
  • April jobs report Friday will be the data highlight; weekly jobless claims Thursday are expected at 3 mln vs. 3.839 mln last week
  • BOE meets Thursday; eurozone final April manufacturing PMI will be reported Monday; Moody’s review of Italy is scheduled for Friday
  • Norges Bank meets Thursday
  • Japan’s Golden Week holiday will keep markets closed until Thursday; Reserve Bank of Australia meets Tuesday

The dollar is getting some limited traction.  After five straight down days, DXY is up for the second straight day.  The euro is trading softer after failing to make much headway above $1.10 Friday.  Same thing goes for sterling, as it too is trading heavy after being unable to sustain a move above $1.26.  Lastly, USD/JPY remains heavy and is still trading below 107.  We remain constructive on the dollar.

 

AMERICAS

The Fed ably demonstrated last week that it remains the most nimble and aggressive central banks.  A day before the FOMC was to begin, it expanded its muni bond program.  A day after the meeting in which no changes were announced, the Fed then expanded its Main Street Loan Program.  What this tells us is that the calendar will never be a constraint to Fed action and that the bank will continue to act as needed.  Fed speakers this week include Evans, Bostic, and Bullard Tuesday, followed by Bostic again Wednesday and Harker Thursday.

US-China relations will likely remain in focus after last week’s reports of potential US actions.  The worst (defaulting on USTs held by China) was denied but as they say, where there’s smoke, there’s fire and we have no doubt that some sort of anti-China actions are being seriously considered.  Renewed tensions between the two largest economies would not be taken well by the markets, to state the obvious.

The April jobs report Friday will be the data highlight.  Consensus sees -21.3 mln jobs, with the unemployment rate seen spiking to 16.0%.  Yet we already know that things are bad from the weekly claims data and it’s going to get worse in May.  Ahead of the data, ADP reports its private sector jobs data and is expected to come in at -20.5 mln.

Weekly jobless claims Thursday are expected at 3 mln vs. 3.839 mln last week.  If so, this would mean  that over 33 mln will have become jobless over the last seven weeks, which is over 20% of the labor force.  Unemployment was 3.5% in February, just before the crisis.  If we add these together, the US is likely around 25% unemployment after just a month and a half.  May is unlikely to bring any relief and we cannot rule out the unemployment rate rising to 30% or more.

ISM reports its April non-manufacturing PMI Tuesday and is expected at 37.3 vs. 52.5 in March.  Final Markit services and composite PMIs will also be reported that day and are likely to drop from the preliminary readings of 27.0 and 27.4, respectively.  Other US data this week include March factory orders Monday, trade Tuesday, weekly mortgage applications Wednesday, April Challenger job cuts, Q1 nonfarm productivity and unit labor costs, and March consumer credit Thursday, and March wholesales inventories and trade sales Friday.

Canada also reports April jobs data Friday.  Unemployment is seen rising to 20% from 7.8% in March.  March building permits will also be reported that day.  Ahead of that, it reports March trade Tuesday and April Ivey PMI Thursday.  Incoming Bank of Canada Governor Tiff Macklem was suitably dovish in his joint press conference with outgoing Governor Poloz last Friday.  He inherits a difficult situation for the economy.

 

EUROPE/MIDDLE EAST/AFRICA

Bank of England meets Thursday.  We expect policymakers to remain on hold to better gauge the state of the economy and how its past actions have impacted it.  Like the Fed, the BOE is no longer constrained by the calendar and will act as it sees fit whenever the need arises.  To wit, the BOE just eased its leverage ratios and widened access to its so-called Bounce Bank Loan Scheme.  Ahead of the decision, final April services, construction, and composite PMI readings will be reported Tuesday.

Eurozone final April manufacturing PMI will be reported Monday.  This will be followed by final services and composite PMI readings Wednesday, along with March eurozone retail sales.  Germany and France report March IP Thursday, while Germany reports trade and current account data Friday.  The economic outlook continues to deteriorate.  Next ECB policy meeting is June 4, but we cannot rule out intra-meeting easing measures.

Moody’s review of Italy is scheduled for Friday.  Last week, Fitch cut Italy by a notch to BBB- with stable outlook and noted that the downgrade “reflects the significant impact of the global COVID-19 pandemic on Italy’s economy and the sovereign’s fiscal position ” and now matches Moody’s Baa3 rating.  S&P inexplicably left its rating at BBB with negative outlook two weeks ago.  Our own sovereign ratings model shows Italy at BB+/Ba1 and so a downgrade is warranted.  However, the timing is always tricky to guess and it’s possible Moody’s gives Italy a temporary reprieve.  But make no mistake, Italy will eventually go to sub-investment grade.

Norges Bank meets Thursday.  No change in policy is expected.  Like Sweden, Norway is reluctant to take rates negative.  Low oil prices are taking a toll on the economy and so we cannot rule out more easing ahead.  With rates already at the lower bound of 0.25%, any further easing will likely take the form of QE.

 

ASIA

Japan’s Golden Week holiday will keep markets closed until Thursday.  Japan then reports March cash earnings, household spending, and final April services and composite PMI readings Friday.  The economy is facing strong headwinds and so we expect further stimulus ahead.  Reports suggest that the Abe government plans to extend the national state of emergency until May 31, so Q2 will be another weak quarter for the economy.

Reserve Bank of Australia meets Tuesday.  Like the Fed, the RBA has taken aggressive action already and so is likely to take a wait and see approach this month.  Just ahead of the decision, final April services and composite PMI readings will be reported.  Australia reports March retail sales Wednesday.  March trade will be reported Thursday.  The RBA then releases its Statement on Monetary Policy Friday.