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Skip to: US, Rest of G10, EM
US
With Dominique away this week, Antonio Del Favero covers the key US data for the coming days.
Summary
- No Fed speakers next week as we enter the blackout period pre-FOMC (1 May).
- As expected, Fed speakers reacted to the third hot inflation print, confirming ‘no rush to cut rates’ – consistent with a base line of two rate cuts this year (likely September and December).
- Next week, data should confirm growth well above potential in Q1 and March core PCE at 0.3%.
Market Implications
- Unless the data weakens materially, the Fed is unlikely to cut before September.
- Risks are for a more hawkish reaction function, with the possibility that the next SEP shifts from a median of three cuts in 2024 to one cut in 2024 (instead of two).
Fed
Next week sees no Fed speakers as we enter the blackout period pre-FOMC (1 May).
As expected, last week Fed speakers reacted to the third hot inflation print. They (including Powell) essentially said the FOMC needs more confidence inflation is falling, which will probably take more time than expected. They also repeated that they can maintain the current FFR for longer if needed, so there is no rush to cut rates, especially because the labour market remains resilient.
Comments have been consistent with two rate cuts this year, most likely in September and in December. While technically a July cut could still be on the table if the next three inflation prints are low, I continue to expect September as the first possible date for a cut (as growth is still strong and above potential).
The risk of a later date is rising because I think a long string of low inflation prints is unlikely. This also increases the risk that in the June SEP the median cuts for 2024 will shift from three to one instead of two.
Comments from Williams, Bostic, Kashkari and Bowman this week had already a more hawkish tilt, opening the door from less than two cuts to possible hikes if the data called for it.
Data
The economy has shown resilient momentum in Q1. It has benefited from the loose fiscal stance and financial conditions in Q4 2023 (lower prices, lower rates, and robust real disposable income growth). These keep hindering the transmission of monetary policy.
This year, many of those trends have reversed, with inflation and rates rising. So far real consumption has remained strong, but were rates to remain elevated, we could see weakness in coming months. This week:
March Core PCE (26 April): I expect 0.3% MoM in line with Bloomberg consensus. This would be the third consecutive high inflation print.
March income and spending (26 April): the savings rate remains important for growth and inflation. A large decline from February 3.6% would create risks of overheating; a large increase would signal risks of recession. I am not expecting much of a change due to stable and resilient wealth and income for average household.
Q1 GDP, first estimate (25 April): I expect GDP growth in Q1 to be above potential and above the current Bloomberg consensus (2.3%), with strong real consumption growth.
Jobless claims (25 April): I expect continued low claims.
March durable and capital goods orders (24 April): I am in line with consensus. The trend in real capital goods spending, which corelates well with equipment capex, has been flatlining. In the hard data, for now there is no evidence of a capex boom.
March new home sales (23 April) and pending home sales (25 April): new home sales have stabilized around 600k and 700k and I am in line with consensus. New home sales are important because they are a proxy for residential investment in the GDP. If residential investment takes off, which seems to be unlikely given the recent increase in yields, that could support more economic over-heating.
Rest of G10
Summary
- Australia: Gradual easing of RBA tightening bias could continue, provided no hawkish CPI surprise.
- Japan: BoJ to signal more of the same.
Market Implications
Australia CPI (Wednesday) Due to Surprise?
Q1 CPI is due with a large drop in the YoY measure expected. That is due to base effects, however. Instead, we outline our key points for the release:
- Quarterly outturns are based on the two monthly outturns and have helped CPI forecasts inch higher for Q1. Most top forecasters are expecting trimmed mean CPI to have grown +0.9% QoQ, but with the final monthly CPI outturn to come, there is risk of a surprise either way.
- Annual health (March) and education (February) repricing could be higher than usual as they tend to reflect inflation already experienced.
- Despite energy rebates, housing price pressures remain strong with record population growth – a point shared across the ditch, too (Chart 1).
- Food prices rose in New Zealand, and they probably did in Australia, too. Even excluding fruit and veg, inflation continues.
BoJ (Friday) to Signal More of the Same
Friday’s inflation data takes the pressure off the BoJ before their next Monetary Policy Meeting on 25-26 April.
Both core and super-core inflation continue to progress and fall towards the BoJ’s target. Meanwhile, the latest Tankan survey earlier this month showed service sector activity remains robust, while output prices are now slowing – albeit from elevated levels.
Therefore, we think the BoJ will keep its forecasts for economic growth unchanged while amending its inflation forecast to reflect the upcoming unwind of the utility bill subsidies set to occur in June. The impact of the subsidy roll-off is that we should expect the inflation data in June/July to show an uptick, which the BoJ is likely to look through. The more important impact will be on household consumption with real wage growth still negative.
We also expect the BoJ to note the recent volatility in oil prices as something to watch, while highlighting the importance of ensuring that ‘accommodative financial conditions will be maintained for the time being.’
All in all, expect more of the same for the time being.
Emerging Markets
Summary
- BI to hold, but risk of a surprise hike to support IDR.
- NBH to shift to 50bps cuts.
- CBT done on rate hikes.
- Brazil and Mexico CPI.
Market Implications
- EM watchers will focus on how local central banks are responding to change in Fed outlook and the sharp rise in FX volatility.
BI to Hold Rates at 6%, but Concerns About FX
While we expect BI to keep rates unchanged on 24 April, there may at least be a debate in the committee about hiking by 25bps to help stabilize the rupiah, which has plummeted along with other EM currencies. The BI governor spoke earlier this week and reiterated that the central bank has several tools to stabilize IDR. This meeting will be about whether BI announces any new measures or hikes to support the currency.
NBH to Slow Rate Cuts
Slowing disinflation and ongoing currency weakness will ensure the NBH sticks to its pledge to slow rate cuts. March inflation at 3.6% was slightly below the NBH forecast, but still-high services inflation and continued gains in fuel prices will leave inflation risks to the upside. We expect a 50bp cut to 7.75% and for the policy rate towards the top end of the stated 6.5-7.0% range by June.
CBT on Hold After Last Month’s Surprise Hike
Erdogan’s commitment to continued orthodox policy after the late March local elections ensures policy continuity at the CBT. After last month’s surprise rate hike to 50% and recent measures to tighten liquidity and dismantle the artificial support to TRY, we do not expect further policy tightening this month. Nevertheless, the central bank will continue to sound hawkish to ensure inflation expectations start to decline and the end year inflation projection of 36% remains broadly on track.
Brazil and Mexico CPI
On 24 April, Brazil will release IPCA-15 and Mexico will release 1H April CPI. In Brazil, core services has been a source of concern for BCB, and we do not expect a large improvement in this measure. Mexico’s partial CPI figures will be background noise as the local rates market is likely to be affected by FX volatility.
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Antonio Del Favero is a macro strategist at Macro Hive, focusing mainly on US economy and markets and G5 FX. Formerly, he worked at Tudor and Maniyar Capital, Rubrics Asset Management, Brevan Howard, Credit Suisse and UBS.
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Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
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Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
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Mirza Baig is a Senior Macro Strategist at Macro Hive, specializing in EM research. He has been researching and trading global FX & rates products for over 19 years, boasting affiliations with Morgan Stanley, BNP Paribas, Deutsche Bank, and Point 72.
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