- The dollar continues to get traction
- FOMC minutes will be released Wednesday; there will be many Fed speakers this week; we get some more US economic data for May
- Sterling will hit the trifecta again this week, in the form of Brexit risks, weak data, and dovish BOE; eurozone preliminary May PMI readings will be reported Thursday
- Japan has a heavy data week; RBA minutes will be released Tuesday
The dollar continues to get traction. DXY traded last week near 100.556, the highest since April 24. It has been unable to build on those gains so far but we still target that day’s high near 100.867. The euro continues to flirt with the $1.08 area and remains heavy, while sterling is breaking lower and on track to move below $1.20. USD/JPY remains stuck around 107.
FOMC minutes will be released Wednesday. The Fed took no action at that meeting but stressed that it stands ready to do more as needed. Next FOMC meeting is scheduled for June 10 but at this point, the calendar means nothing to the Fed. If there are any issues that arise, rest assured the Fed will act quickly to address them. Period.
There will be many Fed speakers this week. Bostic speaks Monday. Kashkari and Rosengren speak and Powell testifies before the Senate Banking Committee Tuesday. Bostic and Bullard speak Wednesday. Williams, Clarida, and Powell speak Thursday. Despite the Fed pushback last week, Fed Funds futures are still pricing in a small chance of negative rates by Q2 2021. We expect more pushback this week and continue to believe that the Fed will never go negative.
We get some more US economic data for May. Philly Fed Business Outlook reports Thursday and is expected at -40.0 vs. -56.6 in April. Last week, the Empire survey came in at -48.5 vs. -60.0 expected and -78.2 in April. Preliminary Markit PMI readings will also be reported Thursday, with manufacturing expected to improve to 38.0 from 36.1 in April and services expected to improve to 32.3 from 26.7 in April.
Weekly jobless claims Thursday are expected at 2.425 mln vs. 2.981 mln last week. If so, this would mean that around 39 mln will have become jobless over the last nine weeks, which is over 25% of the labor force. Of note, this claims data is for the BLS survey week that contains the twelfth of the month. There are several minor US data reports out. April building permits and housing starts will be reported Tuesday. Leading index and existing home sales will be reported Thursday.
Canada reports some key data this week. April CPI and March wholesale trade sales Wednesday. Headline inflation is expected at -0.1% y/y vs. +0.9% in May, while common core is expected to remain steady at 1.7% y/y. March retail sales will be reported Friday, with headline sales expected to fall -11.8% m/m and ex-autos by -4.8% m/m. Next Bank of Canada meeting is June 3.
Brexit talks have gone nowhere. If anything, inflamed tensions and ongoing threats suggest the two sides have actually lost ground. UK’s Frost said there was “very limited progress” while EU’s Barnier said the two sides remain far apart. What’s next? There is one more round of talks between the trade negotiators before the politicians meet in June. We will be putting on a longer piece discussing various Brexit scenarios early this week.
UK has a full data week. March jobs data will be reported Tuesday, with unemployment expected to rise to 4.3% from 4.0% in February. CPI data will be reported Wednesday, with headline expected at 0.9% y/y vs. 1.5% in March and CPIH inflation expected at 1.0% y/y vs. 1.5% in March. Preliminary May PMI readings will be reported Thursday. Manufacturing is seen rising to 35.7 from 32.6 in April, services is seen rising to 22.1 from 13.4 in April, and the composite is seen rising to 25.0 from 13.8 in April. April retail sales and public sector net borrowing will be reported Friday. Headline sales are expected to fall -16.0% m/m, with ex-auto fuel expected to fall -15.0% m/m.
Bank of England Chief Economist Haldane admitted it is studying negative rates. To be fair, Haldane said various unconventional policies are being studied more urgently. These also include widening the scope of its asset purchases to include riskier securities. Haldane said, “I don’t want to imply we’re poised on any of those but we have over a number of years been reviewing all of our options for more, if more is needed.” While we do not think the BOE will go negative, just the fact that it is being studied will be very damaging.
Sterling will hit the trifecta again this week, in the form of Brexit risks, weak data, and dovish BOE. Cable is trading at the lowest level since March 26 and is nearing the 50% retracement objective of the March-April rally near $1.2030. The key level is $1.1885, however, as a break below would set up a test of the March low near $1.1410. EUR/GBP has likely bottomed for now and headed higher. Key retracement objectives from the March-April drop come in near .8990, .9086, and .9184.
Eurozone preliminary May PMI readings will be reported Thursday. Manufacturing is seen rising to 38.0 from 33.4 in April, services is seen rising to 25.0 from 12.0 in April, and the composite is seen rising to 25.5 from 13.6 in April. Both Germany and France are expected to show the same pattern of improvement, pushing their composite readings up to 32.3 and 34.7, respectively.
Japan has a heavy data week. Q1 GDP will be reported Monday and is expected to contract -4.5% SAAR vs. -7.1% in Q4. March core machine orders will be reports Wednesday and are expected to contact 8.9% y/y. April trade will be reported Thursday, with exports expected to contract -23.1% y/y and imports by -13.2% y/y. Preliminary May PMI readings will be reported Thursday, followed by April national CPI and department store sales Friday. Headline inflation is expected at 0.1% y/y vs. 0.4% in March, while ex-fresh food is expected to fall -0.1% y/y vs. +0.4% in March. Note that the lockdowns were not seen until April, and so the improvement in Q1 is unlikely to be sustained in Q2. Japan faces three straight quarters of contraction, and the Q3 outlook will depend on how the reopening unfolds. Restrictions have been lifted in any prefectures, and even Tokyo is making plans to reopen.
RBA minutes will be released Tuesday. It kept policy on hold that meeting. The RBA also acknowledged paring its bond purchases but said it stands ready to adjust as needed to ensure bond markets remain functional and the yield curve target is met. Preliminary April retail sales will be reported Wednesday. Preliminary May PMI readings will be reported Thursday. Governor Lowe takes part in a panel Thursday.