Key Events: Hawkish Fed Risks

We are updating our key events report. From now on, you will receive a short document to prepare you for the week ahead. This new form focuses on a curated list of data/events, as well as key central bank meetings and market views across G10 and EM.

Key Events

G10

In the US, there are four important data releases to come:

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. Sam will release his quantitative NFP forecast next week.
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. We expect the long end (10s and 30s) to prove more sensitive to the release.
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). Long end yields (10s and 30s) should be helped higher by increasing term premium.

Meanwhile, in the Eurozone and UK the main events will be:

1. EZ April preliminary inflation – Tuesday (Germany and Spain – Monday). The market is looking for +2.7% in core, +2.4% in headline. Sam’s quantitative model suggests there could be modest downside surprise there (+2.35% headline, +2.64% core). Our bottom-up analysis agrees on core (+2.65%) but sees an even weaker outturn in headline (+2.1%).
2. UK local elections – voting Thursday, counting begins Friday and concludes Saturday. There is a lot of anticipation around when the next general election will be held, and the results could impact that. A strong performance for the Tories could incentivise them to call one in June. For now, an Autumn election is most likely, on the hopes that inflation and interest rates are lower by then, and the Tories can ride some positive feeling.

Elsewhere in G10:

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).

EM

1. China PMIs – Monday. Exports are main engine of growth for China. Watch new orders component – weakness here would be more worrying than headline. The Caixin PMI is more exporter heavy.
2. Korea exports (Tuesday) and CPI (Wednesday). Korea is an early reporter for April exports – consensus +15% YoY. Weakness would bode poorly for cyclical FX.
3. 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%.
4. 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.

Central Banks in Action

1. FOMC – Wednesday. We expect ‘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.’ remains in the statement. 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.
2. Colombia Central Bank to cut 50bps – Tuesday. Another split decision. We expect some will vote for a larger cut, despite recent FX vol.
3. CNB to cut 50bps – Thursday. MPC meeting on Thursday – we expect another 50bps cut (risk of 25), and hawkish commentary. We are long PLN vs. CZK.

Markets to Watch

• US Treasuries. If we are wrong on QRA – i.e., lower net coupon issuance and TGA – then the long end (10s and 30s) likely rallies. We would see value in fading this move.
• ECB pricing. There is a risk of stickier services inflation emerging from the April preliminary CPI. June pricing would be pared, as a result. While we have previously been more hawkish on EZ inflation conditions than the market, we are wary that if the Fed turns out more hawkish, then the ECB will need to ease more to make up for it.
• 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.

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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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Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

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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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(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.)