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by Charalambos Pissouros

Weekly Outlook: Apr 29th – May 3rd: Fed and BoE Meetings, US NFPs and Eurozone GDP

The calendar gets heavier this week. On the central-bank front, it’s the turn of the FOMC and the BoE. Neither of these two Banks is expected to alter its policy, and thus, investors will focus on any signals with regards to their future plans. The BoE will also publish its quarterly Inflation Report, which includes its updated economic projections. As for the data, the highlights are likely to be the US employment report for April, Eurozone’s GDP for Q1, the bloc’s preliminary CPIs for April, and New Zealand’s jobs data for Q1. What’s more, on Tuesday, US officials will travel to China for another round of trade talks.

On Monday, the calendar appears relatively light, with the only noteworthy releases being the US personal income for March, personal spending for both February and March, as well as the core PCE index for both of these months. Personal income is forecast to have accelerated to +0.4% mom in March from +0.2%, but taking into account the slide in the monthly earnings rate for the month, we view the risks surrounding the forecast as tilted to the downside. The personal spending rate is expected to have risen to +0.2% mom in February from +0.1%, and the March figure is expected to come out at +0.7%.

With regards to the yoy rate of the core PCE index, it is anticipated to have ticked down to +1.7% yoy in February from +1.8% in January, but the March number is believed to show up around +0.1%. That said, if we consider that the core CPI rate slid in both those months, the core PCE index could move in a similar fashion. Despite the latest improvement in US data, a sliding yoy core PCE rate, which is the Fed’s favorite inflation gauge, will confirm market’s perception that Fed officials are unlikely to turn their eyes to the hiking button this year.

In Japan, markets will be closed for the whole week, as well as on Monday, May 6th, in celebration of the “Golden Week”. The “Golden Week” usually consists of four holidays (around the end of April or beginning of May) but this year, in between those holidays, comes the new emperor’s accession, which will add two extra days off, and thereby result in a break of six consecutive trading sessions.

Nevertheless, most bourses in the rest of the world will be open, with the exception being China, which will be off on Wednesday, Thursday and Friday. EU will be off only on Wednesday for the Labor Day. Thus, with the agenda including major events, like the FOMC decision on Wednesday, market participates may be afraid that liquidity could dry up and thereby trigger another “flash crash” during the Asian morning hours, similar to the one we saw on January 2nd. The gap between the US close and the Tokyo open is the thinnest period of the day in terms of liquidity and back then, January 3rd was a holiday for Japan, which resulted in even thinner conditions and thus, overstretched reactions in the currency world.

On Tuesday, during the Asian morning, we get China’s official manufacturing and non-manufacturing PMIs for April, but no forecast is currently available. Following the better-than-expected GDP print for Q1, another rise in these PMIs could signal that the Chinese economy has entered the second quarter on a decent footing, and thereby ease further concerns with regards to a global economic slowdown.

During the European session, Eurozone’s 1st estimate of Q1 GDP is due to be released and the forecast suggests that the economy to have accelerated somewhat, to +0.3% qoq from +0.2% in Q4 2018. Still, this could drive the yoy rate somewhat lower as the qoq rate of Q1 2018 that will drop out of the yearly calculation was +0.4%. Coming on top of the disappointing Euro-area PMIs for April, a potential miss of the GDP forecast could increase speculation for additional stimulus measures by the ECB, beyond the new round of TLTROs which is expected to begin in September, as well as for another delay in the timing of when interest rates could start rising.

Germany’s preliminary inflation data for April is coming out as well, three days ahead of the CPIs for the Eurozone as a whole. Both the German CPI and HICP rates are forecast to have risen to +1.5% yoy and +1.7% yoy from +1.3% and 1.4% respectively. This could raise speculation that Eurozone’s headline inflation rate, due out on Friday, may rise as well. Germany’s unemployment rate for April, and Eurozone’s unemployment rate for March are also scheduled to be released.

Later in the day, the US employment cost index for Q1 is expected to have accelerated to +0.8% qoq from +0.7%, while pending home sales for March are anticipated to have rebounded 1.0% mom, after falling by the same percentage in February. Canada’s monthly GDP for February is also coming out, and expectations are for a slowdown to +0.1% mom from +0.3% mom.

Apart from the data, another round of trade talks between the US and China is set to begin. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are scheduled to travel to Beijing, in order to bring the world’s two largest economies closer to a final accord. Next week, Chinese Vice Premier Liu He will visit Washington for further talks. We may once again get “further progress” remarks, which could increase speculation for a deal in the weeks to come. That said, we remain skeptical as to whether something like that could decently boost risk appetite, as a large part of a sealed deal appears to be already priced in, in our view. Also, let’s not forget that investors may be reluctant to increase their risk exposure this week, due to Japan’s “Golden Week” holiday.

On Wednesday, the spotlight is likely to fall on the FOMC monetary policy decision. Market participants are almost certain that the Committee will keep interest rates within the 2.25-2.50% range, and if this is the case, they will quickly turn their eyes to the accompanying statement and the press conference by Fed Chair Jerome Powell. When they last met, policymakers left rates unchanged and reiterated their “patient” stance with regards to future policy actions, also noting that the economy has slowed from its solid rate in the fourth quarter. The icing on the cake though, was the downside revision of the “dot plot” from 2 to 0 hikes in 2019.

Latest data showed that the headline CPI accelerated to +1.9% yoy in March from +1.5%, but the core rate ticked down to +2.0% from +2.1%. Retail sales rebounded strongly during the month, while employment data suggested that the labor market continued to tighten, although wages slowed somewhat. Most importantly, the 1st estimate of the US GDP for Q1 showed that the economy accelerated to +3.2% qoq SAAR from +2.2% in Q4 2018, but the inflation components of the growth report were soft, leaving no room to Fed officials for start thinking about raising rates again soon. We believe that they will stick to their “patient” stance once again, but the language over the domestic economy may be somewhat more upbeat than the previous one.

With regards to Wednesday’s data, during the early Asian morning, New Zealand’s employment report for Q1 is due to be released. Expectations are for the unemployment rate to have declined to 4.1% from 4.3%, while the net change in employment is forecast to have accelerated to +0.3% from +0.1%. The Labor Cost index is also expected to have accelerated, to +0.6% qoq from +0.5%, which could drive the yoy rate up to +2.1% from +2.0%.

At the statement accompanying the latest rate decision, RBNZ Governor Orr noted that “the more likely direction of our next OCR move is down”.  While disappointing inflation data for Q1, combined with a Q4 GDP growth rate below officials’ estimates, may have prompted NZD-traders to raise bets that a cut could come as early as at the May meeting. Indeed, according to New Zealand’s OIS, the market sees a 50% chance for a May cut. A decent employment report is unlikely to alter officials view that the next move is likely to be lower, but taking into account recent remarks from Governor Orr that he still doesn’t know yet whether a May cut is appropriate, it could allow them to wait a bit longer before they decide whether lower interest rates are needed.

During the European session, the UK manufacturing PMI for April is coming out and the forecast suggests a retreat to 53.5 from 55.1. On Thursday, we get the construction PMI for the month, which is expected to have fractionally returned back within the expansionary territory (50.3 from 49.7), and then, on Friday, the services index is due to be released. Expectations are for this index to have also rebounded back above 50. Specifically, the forecast is for a rebound to 50.2 from 48.9.

Under normal circumstances, the market tends to pay more attention to the services print, given that the sector accounts for around 80% of the UK GDP. However, with GBP-traders’ gaze locked on the Brexit landscape, market data have taken the back seat recently. Even after the EU granted another extension to Article 50, which could last until October 31st, the pound’s reaction to economic data continued to be muted. Barring any major deviations to the forecasts, this could be the case this week as well. Pound traders may prefer to pay more attention to the BoE meeting, as they scratch their heads to figure out what the Bank’s plans are now, after the extension allowance.

In the US, we get the ADP employment report for April. Expectations are for the private sector to have gained 175k jobs, more than March’s 129k. Even though the ADP is the only major gauge we have for the non-farm payrolls, we have to repeat once again that the correlation between the two time-series at the time of the release (no revisions are taken into account), has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.44. Even in March, when the ADP number slid to 129k from 197k, the NFP one rose to 196k from a slightly upwardly revised 33k. The final Markit manufacturing PMI for April and the ISM manufacturing index for the month are also scheduled to be released.

On Thursday, the central bank torch will be passed to the Bank of England, which is also expected to stand pat. This will be one of the “bigger” meetings, where apart from the decision, the statement and the minutes, we also get the quarterly Inflation Report and a press conference by Governor Carney.

With all eyes turned to the Brexit landscape, the latest BoE policy meeting passed unnoticed. Policymakers kept interest rates unchanged at +0.75%, reiterating that an ongoing tightening at a gradual pace and to a limited extent would be appropriate. According to the minutes, they also maintained the view that whatever form Brexit takes, the policy response will not be automatic and could be in either direction. That said, with the EU granting a second extension to Article 50, which could last until October 31st, investors may be eager to find out whether officials still believe that an ongoing tightening is appropriate, or whether the delayed Brexit uncertainty will prompt them to abandon that view. According to the latest data of the BoE’s OIS forward curve, a hike is fully priced in for May 2022. It will also be interesting to see whether officials expect this uncertainty to leave more marks to the UK economy, and whether this has led them to revise downwards their economic projections.

As for Thursday’s economic releases, during the European morning, Eurozone’s final manufacturing PMI for April and Germany’s retail sales for March are due to be released. The bloc’s final manufacturing print is expected to confirm its preliminary estimate, while Germany’s retail sales are anticipated to have slid 0.5% mom in March after rising 0.9% in February. From the US, we get the Unit Labor Costs index for Q1 and factory orders for March.

On Friday, the highlight is likely to be the US employment report for April. Nonfarm payrolls are anticipated to have risen 180k, slightly less than March’s 196k, while the unemployment rate is expected have held steady at 3.8%, just a tick above its 50-year low of 3.7%. Average hourly earnings are forecast to have accelerated to +0.3% mom +0.1%, which, barring any deviations to the prior monthly prints, would drive the yoy rate up to +3.3% from +3.2%.

Overall, the forecasts point to a decent report, in line with further tightening in the US labor market, but we doubt that this could be enough to revive any speculation with regards to a Fed hike this year, especially if the core PCE index slows further on Monday, and the Fed reiterates its “patient” stance on Wednesday. It could just prompt investors to take some cut bets off the table. According to the Fed funds futures, market participants see a nearly 64% probability for interest rates to be lower by year end.

As for the rest of Friday’s releases, during the European morning, we get Eurozone’s preliminary inflation data for April. The headline CPI rate is forecast to have risen to +1.6% yoy, while no forecast is currently available for the core rate, which slid to +0.8% yoy in March from +1.0% in February. The forecast for a rising headline rate is supported by the German forecast, but we prefer to pay more attention to the core inflation metric. Another print pointing to subdued underlying inflationary pressures in the Euro area, could add to speculation for more stimulus measures by the ECB and perhaps another delay in the timing of when interest rates could start rising, especially if Tuesday’s GDP data reveal another slowdown in the bloc’s economic activity.

In the US, the final Markit services and composite PMIs for April are coming out, alongside the ISM non-manufacturing index for the month. The Markit prints are just expected to confirm their preliminary estimates, while the ISM index is forecast to have risen to 57.0 from 56.1.

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