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by Charalambos Pissouros

Weekly Outlook: May 04 – May 08: Trade Woes, RBA and BoE Meetings in Focus Ahead of the NFPs

This week, we have two central banks deciding on monetary policy: The RBA and the BoE. That said, we don’t expect any additional easing by either Bank.  After US President Trump threatened China with more tariffs, investors may also keep an eye on developments and headlines surrounding the US-China trade saga. As for the data, we get employment reports from the US, Canada and New Zealand.

On Monday, the calendar appears to be very light with the only noteworthy releases being the final manufacturing PMIs for April from several European nations and the Eurozone as a whole, and the US factory orders for March. As it is always the case, the final PMIs are expected to confirm their initial estimates, while the US factory orders are anticipated to have fallen 9.8% mom after stagnating in February.

Investors may keep their attention locked on the US-China trade saga, headlines regarding which resurfaced on Friday and continued today, early Asian morning as well. US President Trump said that China could have contained the virus, but they didn’t. “They were either unable to or they chose not to”, Trump said. He also accused the nation of covering up the release of the virus from a laboratory in Wuhan. Trump threatened that he could use tariffs to respond to China and if China does not buy US goods, the US will end the trade deal. All this does not only reduce the chances for a Phase 2 accord between the world’s two largest economies, but also puts at risk the already agreed Phase 1 deal. Equity markets (those which were open) and commodity-linked currencies reacted negatively on the news, while safe havens gained.

USD performance G10 currencies

On Tuesday, the RBA decides on monetary policy. When they last met, policymakers of this Bank left monetary policy unchanged and offered some details with regards to their QE program. They noted that they will do what is necessary to achieve a 3-year yield target of 0.25%, with the target expected to remain in place until progress is being made towards the goals for full employment and inflation. However, they added that if conditions continue to improve, it is likely that smaller and less frequent purchases of government bonds will be required.

RBA interest rates

After saying that interest rates have reached their effective lower bound at the previous meeting, the aforementioned points suggest that there is very little chance of expanding their QE program. On the contrary, they could soon scale it back if the spreading of the coronavirus continues to level off.

Last week, Australia’s CPIs came in better than expected, with the headline rate entering the Bank’s inflation target range of 2-3%. Specifically, the headline rate moved to +2.2% yoy from +1.8%, while the trimmed mean and weighted mean CPIs accelerated to 1.8% and +1.7%, from +1.6% and +1.3% respectively. Thus, accelerating inflation may encourage policymakers to announce a reduction in QE purchases perhaps as early as at this gathering, something that may prove positive for the Aussie, which traded on the front foot recently due to the broader market optimism surrounding the coronavirus saga.

As for the rest of Tuesday’s events, Japanese markets will be closed due to the Greenery Day holiday.

During the European morning, Sweden’s GDP for Q1 is due to be released, but no forecast is currently available. At last week’s gathering, Riksbank policymakers decided to leave the repo rate unchanged at 0% and to continue their purchases of government and mortgage bonds up to the end of September 2020. They noted that they cannot rule out the possibility of interest rates being cut at a later date, but they added that it was not deemed justified at this point to increase demand by a cut. Given the fast spreading of the coronavirus outside China during the last month of the quarter, we wouldn’t be surprised if we get a negative print. So, the question may be how deep the wounds have been. Following just a downtick in the core CPIF rate for the month of March, a not-that-bad number may allow Riksbank policymakers to stay sidelined for a while more. On the other hand, a deep contraction may raise speculation that policymakers could take interest rates back into the negative territory. Switzerland’s CPIs for April are also coming out and the forecast suggests that the yoy rate fell further into the negative territory, to -0.8% from -0.5%.

From the UK, we get the construction PMI for April, which is expected to have rebounded to 44.0 from 39.3, as well as the final services and composite PMIs, which are expected to confirm their preliminary estimates of 12.3 and 12.9 respectively.

Later in the day, we get more final PMIs for April, this time from the US. The services and composite indices are due to be released, but similarly to the UK ones, they are anticipated to confirm their initial forecasts. Market participants may pay more attention to the ISM non-manufacturing PMI for the month, which is expected to have declined to 44.0 from 52.5. The US and Canadian trade data are also coming out.

On Wednesday, it’s another holiday in Japan and thus, Japanese markets will stay closed. In New Zealand, the employment report for Q1 is coming out. The unemployment rate is expected to have increased to 4.3% from 4.0%, while the net change in employment is forecast to show that the economy lost 0.3% jobs, after a stagnation in the last three months of 2019. The labor costs index is anticipated to have ticked up to +2.5% yoy from 2.4%.

New Zealand unemployment rate

Last Tuesday, the Kiwi came under strong selling pressure after Westpac said it expects the RBNZ to cut interest rates to -0.5% in November, a move that could be telegraphed as early as in August. The bank also expects officials to double their QE program to NZD 60bn in May. Thus, a soft employment report may add more credence to that view and perhaps hurt the currency, at least temporarily. That said, due to its commodity-linked status, the Kiwi is likely to be mostly driven by the broader market sentiment, which, if stays supported due to the easing of the virus spreading, may keep any Kiwi declines limited and short lived.

Australia’s retail sales for Q1 and China’s Caixin services PMI for April are also due out. Australian retail sales are expected to have accelerated to +1.7% qoq from +0.5%, while no forecast is available for China’s Caixin index. That said, bearing in mind that the official non-manufacturing PMI rose to 53.2 from 52.3, we see the case for the Caixin index to have moved in a similar fashion.

From the Eurozone, we get the final services and composite PMIs for April from the nations of which we get the manufacturing prints on Monday, as well as from the bloc as a whole. As usual, expectations are for confirming their initial estimates. The Euro area retail sales for March are also coming out and they are expected to have tumbled 10.5% after rising 0.9% in February.

From the US, we get the ADP employment report for April, which is expected to show that the private sector lost 20mn jobs, after losing only 27k the prior month. With continuing jobless claims hitting 18mn last week, 20mn job losses will not come a surprise to us. This could raise speculation that the NFP number, due out on Friday, may also come close to that number.

ADP vs NFP at the release employment reports

On Thursday, the central bank torch will be passed to the BoE. It will be a “Super Thursday” for the Bank, as apart the decision, the statement and the meeting minutes, we get the quarterly Inflation Report and a press conference by the Governor. This will be the first press conference of the new Governor Andrew Bailey and thus, it may receive extra attention.

BoE interest rates

At the last meeting, the first under the leadership of Andrew Bailey, policymakers decided to keep interest rates unchanged at +0.10%, and also agreed unanimously to continue with the program of GBP 200bn of UK government bond and sterling non-financial investment-grade corporate bond purchases, to take the total stock of these purchases to GBP 645 billion. With regards to their future plans, they noted that they will continue to monitor the situation closely and that they stand ready to respond further if needed.

However, with the coronavirus leveling off and reports suggesting that a vaccine may be ready for distribution soon, we don’t expect any new action by this Bank. Thus, all the attention may fall to the Inflation Report and Bailey’s press conference as investors may be eager to find out the policymakers’ view on how hard was the UK economy hit from the virus spreading, and how long it will take before a recovery starts. The pound may slide somewhat in case the forecasts paint an ugly picture and the Governor hints that more stimulus is still an option for the foreseeable future.

Having said all that though, the currency’s overall faith may depend on developments surrounding the Brexit sequel, which has been overshadowed by the pandemic. As soon as the virus situation eases, market participants may well turn their gaze back to Brexit, and with PM Johnson insisting to the December deadline for the transition period, it seems that the currency could be poised for a bumpy ride.

As for Thursday’s data, Australia’s and China’s trade balances for March and April respectively are coming out, as well as the US initial jobless claims for last week. Australia’s trade surplus is expected to have increased to AUD 6.8bn from AUD 4.36bn, while the Chinese surplus is anticipated to have declined to USD 9.70bn from USD 19.93bn. Both exports and imports are forecast to have fallen at a much faster pace than in March. The US initial jobless claims are expected to show that 3mn more people signed for unemployment benefits.

Finally, on Friday, the main event may be the US employment report for April. Expectations are for non-farm payrolls to have fallen 21mn after sliding 701k in March, while the unemployment rate is expected to have surged to 16.0% from 4.4%. Average hourly earnings are expected to have risen 0.4% mom, the same pace as in March, which – barring any deviations to the prior monthly prints – could drive the yoy rate up to 3.3% from 3.1%.

Average hourly earnings vs core PCE

Last week, the Fed kept interest rates unchanged at the 0-0.25% range, and hinted that more stimulus may be delivered if judged necessary. “We will continue to use powers proactively until we’re confident that the US is solidly on the road to recovery”, Fed Chair Powell noted. He also added that economic activity will likely drop at an “unprecedented pace” in Q2, which suggests that they are more likely to act again than not. Thus, a very bad employment report could mean that the labor-market wounds at the start of the quarter are deeper than previously anticipated and may increase the chances for more easing by the Fed in case things get out of control again.

We get jobs data for April from Canada as well. The unemployment rate is forecast to have surged to 16.0% here as well, from 7.8% in March, while the net change in employment is anticipated to show that the economy has lost 2.75mn jobs after losing 1.01mn the month before.

Canada unemployment rate

At its latest gathering, the BoC announced an expansion of its QE purchases, while the latest CPI data revealed that the headline rate tumbled to +0.9% yoy from 2.2%, but the core one just slid to +1.6% yoy from +1.8%. This suggests that the fall in the headline print was mainly due to the tumble in oil prices, and may not necessarily prompt the Bank to add more stimulus as soon as at its upcoming gathering. Even if the employment report disappoints, policymakers may prefer to wait for a while before they consider further action, as they would like to see whether the latest easing efforts are having the desired effects on the economy.

As for the rest of Friday’s releases, Germany’s trade surplus is expected to have narrowed to EUR 18.8bn in March from EUR 21.6bn. Canada’s housing starts for April and building permits for March are also coming out.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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