Markets to Watch: A Hawkish Twist to the FOMC?

Summary

• The Fed is likely to maintain interest rates this week, emphasizing caution on inflation targets and readiness to hike if necessary.
• We get April’s preliminary inflation in the Eurozone. Our model predicts downside in headline and core vs market expectations.
• The rest of G10 sees ANZ Business Survey and labour market data, Canada GDP (+0.3% expected), and Swiss CPI where a slight tick higher is anticipated.
• In EM, Colombia Central Bank should cut rates 50bps in a split decision, while the CNB should cut 50bps with hawkish commentary.

Markets We Are Watching

• 10-year yields are currently trading around 4.6%. With the QRA and NFP out this week, we should some volatility. The QRA (Monday and Wednesday) could be a driving factor if borrowing requirements and coupon issuance come in above estimates. However, aside of this, we think continued strong job growth should allow 10s to continue moving toward 5%.
• Related to the above, a hawkish QRA (increased coupon issuance) should lead to increased term premium being introduced into the curve. The impact is likely to be a steeper 2s10s curve in the US from current levels of -35 bps.
• Outside of the rates market, we are watching big tech. We saw reasonably strong earnings outside of Meta, with Alphabet posting a particularly strong beat. If the rates picture doesn’t provide a headwind we could see further gains for the big tech companies.
• In FX, all eyes will be on USD/JPY following the potential intervention from MoF this morning. USD/JPY fell by 4 big figures to 155.5, while Kanda-San highlighted once again that MoF remains focused on excessive moves rather than particular levels. Watch for further intervention which could result in material short-covering.
• AUD TWI: Challenging year highs, AUD has benefited from RBA repricing (to now include hikes). Continued superannuation fund outflows could cap the currency.
• Asia Dollar Index: Bloomberg’s ASIADOLR Index is just shy of 90 – the low it reached and bounced off in October 2023. A break of this support level would signal further USD strength ahead.

US: Powell to Hint at Hike if Necessary

The big event this week is the FOMC on Wednesday. We expect rates on hold, with the following sentence to remain in the statement:

‘The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.’

Meanwhile, we expect Powell to reiterate that ‘the recent data has not given them greater confidence, so it will likely take longer than previously expected to achieve that confidence.’

However, there are hawkish risks. We expect Powell to say that ‘if the data requires it, the Fed will not hesitate to hike again to restore price stability.’ Lastly, we do not expect the Fed to announce the tapering of QT at this meeting.

There are four important data releases:

1. Q1 Employment Cost Index (ECI) – Tuesday. Consensus expects +1.0% QoQ (vs +0.9% in Q4). A beat will push the market to pare Fed pricing even further.
2. March (JOLTS – Wednesday) and April jobs data (claims – Thursday; NFP – Friday), and Q1 ULCs – Thursday. Consensus expects AHE to increase +0.3% for a second consecutive month, while ULCs are expected to have increased +2.0% QoQ SAAR.
3. April ISM (Manufacturing – Wednesday; Services – Friday). Manufacturing ISM rose solidly last month, signalling surprising resilience and upside risks to goods price inflation. Meanwhile, Services ISM slowed but remained above 50.
4. QRA – Wednesday. We expect net coupon issuance to remain elevated ($500bn+) and do not expect a large spend down of the TGA materially below the current target ($750bn).

Europe & UK: Downside to EZ Preliminary Inflation

We must wait until 8 May for the ECB and 9 May for the BoE policy meetings. Currently, we still expect a June BoE cut. But we flag risks to this view – particularly in inflation, labour market and consumer spending.

The ECB offered little new at their April meeting, except for that some members already favour a cut. Our longstanding view has been and remains for June’s meeting as the date of the first cut. The data must really surprise to change this.

This week’s main events:

1. EZ April preliminary inflation – Tuesday. The market expects +2.7% in core and +2.4% in headline. Sam’s quantitative model suggests there could be modest downside surprise there (+2.35% headline, +2.64% core).
2. UK local elections – voting Thursday, counting concludes Saturday.  A strong performance for the Tories could incentivise them to call a general election in June. For now, an Autumn election is most likely on the hopes that inflation and interest rates are lower by then.

Rest of G10: A Quiet Week of Data

1. New Zealand ANZ Business Survey and labour market – Tuesday. In the former, services inflation expectations will direct expectations for non-tradables inflation. Meanwhile, private wages are the focus in the latter given it is the last stubborn component of the labour market.
2. Canada GDP – Tuesday. Analysts expect the economy to have grown +0.3% through February, the second strongest increase of the past year.
3. Switzerland CPI – Thursday. Expectations are for a tick higher to +1.1% YoY in April from +1.0% YoY. This will keep headline inflation below forecast and pressure on for a June SNB cut (currently 80% probability).

Emerging Markets: Expect 50bp Cuts from CCB and CNB

EM get two central bank meetings this week. We expect Colombia Central Bank to cut 50bps on Tuesday in another split decision. We expect some will vote for a larger cut, despite recent FX vol. Meanwhile, CNB should cut 50bps on Thursday. We expect hawkish commentary. On the data:

1. Korea exports (Tuesday) and CPI (Wednesday). Korea is an early reporter for April exports – consensus +15% YoY. Weakness would bode poorly for cyclical FX.
2. Poland CPI – Tuesday. Resumption of 5% VAT on food means an end to Poland’s disinflation. March CPI likely jumps to +3%, on course for +5%.
3. Brazil unemployment (Tuesday) and current account (Friday). We expect the unemployment rate to remain 7.8%, below NAIRU of ~ 9%, and signalling a continued tight labour market.

Key Market Movers From Last Week

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)