Weekly Market Outlook: Mar 28 — Apr 1: US NFPs and EZ CPIs Enter the Spotlight

We don’t have any central bank decisions on this week’s agenda, but although the calendar is relatively light again, we do get a few important data releases. The most important ones are Eurozone’s preliminary CPIs for March and the US employment report for the same month, with both data sets having the potential to affect expectations around the future course of action of the ECB and the Fed.

On Monday, there are no noteworthy indicators on the agenda. The only event worth mentioning is as speech by BoE Governor Andrew Bailey.

At their latest gathering, BoE officials decided to hike interest rates by another 25bps via an 8–1 voting, with the dissenter calling for no increase at all. Remember that at the February gathering, officials lifted rates by 25 bps as well, but the vote was 5–4, with the dissenters calling for a 50bps increase. Compared to that, the last decision revealed a more cautious approach by policymakers and raised questions as to whether they will indeed proceed as aggressive as the market has been pricing in heading into the gathering.

However, last week, data showed that both the headline and core CPI rates accelerated by more than anticipated in February, which may have revived expectations that the BoE may need to act more quickly. Indeed, according to the UK OIS (Overnight Index Swaps) forward yield curve, market participants added back to their bets and they are again nearly pricing in 6 more quarter-point rate hikes by year end. So, it will be interesting to see whether Bailey’s comments will add credence to that view, something that could prove positive for the British pound.

On Tuesday, during the Asian session, we get Japan’s employment data for February, with the unemployment expected to have held steady at 2.8%, as well as the Summary of Opinions from last week’s BoJ gathering. We don’t expect the Summary to result in any fireworks, and this is because the BoJ has been maintaining its extra-loose monetary policy, without proceeding with any bold changes lately. With other major central banks raising interest rates and expected to deliver many more by the end of the year, the monetary policy divergence between the BoJ and those Banks is likely to continue widening, which means more weakness for the Japanese yen.

As for the rest of the day, we get Germany’s retail sales for February, the US Conference Board consumer confidence index for March, and the JOLTs Job Openings for February.

On Wednesday, although not major market movers, the most important releases to monitor are Germany’s preliminary CPIs and the US ADP employment report, both for March. In Germany, both the CPI and HICP rates are expected to have continued climbing north. Specifically, they are expected to rise to +6.1% yoy and +6.4% yoy, from +5.1% and +5.5% respectively, which could mean that Eurozone’s rates, at least the headline one, due out on Friday, may follow suit. As for the US’s ADP report, the forecast suggests that the private sector has gained 438k jobs in March after adding 475k in February. This could raise some speculation that the NFPs, due out on Friday, may also come in below their February print. Indeed, the forecast is for the NFPs to have slowed to 475k from 678k. Having said all that though, we need to remind you that the ADP number is not a reliable predictor of the NFPs, and thus, we will not form an official opinion about the Fed’s and the dollar’s future course based on the ADP result.

As for the rest of Wednesday’s data, during the Asian trading, Japan’s retail sales for February are forecast to have slid 0.3% yoy after expanding 1.1% in January. New Zealand’s ANZ business confidence index for March is also coming out, but nor forecast is currently available. Later in the day, from the US, besides the ADP report, we also get the final GDP for Q4, with the forecast pointing to a fractional upside revision, to +7.1% qoq SAAR from +7.0%.

On Thursday, Japan’s preliminary industrial production for February is expected to reveal a rebound to +0.5% mom from -0.8%. The Chinese PMIs for March are also due to be released, but no forecast is currently available. That said, with several cities entering lockdowns due to accelerating spreading of the coronavirus, we see the risks as tilted to the downside. This could initially hurt currencies of countries which have close trade ties with China, the likes of Australia and New Zealand. However, with Chinese officials pledged to take all the necessary measures to support the economy, and also taking into account the latest recovery in the broader market sentiment, we will treat any such setbacks in the Aussie and the Kiwi as corrective moves before their next legs north.

Later in the day, we get the UK final GDP for Q4, which is expected to confirm its preliminary estimate of +1.0% qoq, as well as Germany’s and Eurozone’s unemployment rates for March and February respectively. The German one is expected to have held steady at 5.0%, while Eurozone’s is forecast to have ticked down to +6.7% from +6.8%.

From the US, we have the personal income and spending data for February, as well as the core PCE index for the month, the Fed’s favorite inflation metric. Personal income is expected to have risen 0.5% mom after stagnating in January, while spending is forecast to have slowed to +0.5% mom from +2.1%. No forecast is available for the core PCE index, but bearing in mind that the core CPI rose to +6.4% yoy from +6.0%, we would consider the risk as tilted to the upside. However, at this point, we need to point out that, although it is the Fed’s preferred inflation gauge, the core PCE index is not a major market mover, and this is because we get the CPIs well in advance.

Finally, on Friday, the spotlight is likely to fall on Eurozone’s preliminary CPIs for March, as well as the US employment report for the month.

Getting the ball rolling with Eurozone’s CPIs, the headline rate is forecast to have climbed to +6.5% yoy from +5.9%, while the HICP rate excluding energy and food is anticipated to have risen to +3.3% yoy from +2.9%.

The main message we got from the latest ECB meeting is that officials were more concerned over high inflation than the effects of the war in Ukraine on the Euro area economy. However, last week, ECB President Christine Lagarde warned that the Fed and the ECB may move out of sync in the foreseeable future, as the war has vastly different effects on their economies. Her remarks raised questions as to whether officials will continue paying more attention to inflation and, thereby, decide to lift rates later this year. Nonetheless, further acceleration in inflation could allow market participants to keep some of their hike bets on the table, and thereby buy some more euros, at least temporarily.

Now, passing the ball to the US and the employment data, nonfarm payrolls are expected to have slowed to 475k from 678k in February, while the unemployment rate is forecast to have ticked down to 3.7% from 3.8%. Average hourly earnings are expected to have accelerated to +5.5% yoy from +5.1%, which is a sign of inflation keep accelerating in the next couple of months.

In our view, a combination of declining unemployment rate and accelerating wages adds validity to the view that the Fed may need to lift rates even more aggressively than previously thought, and thereby, it could support the US dollar. At its latest meeting, the Committee, hiked rates by 25bps, while the updated “dot plot” pointed to 6 more quarter-point increases by the end of the year. That said, last week, Fed Chair Jerome Powell said that they could use larger lift offs if needed, something which encouraged market participants to assign a nearly 70% chance for a 50bps hike at the upcoming gathering, and they see the Federal funds rate nearly hitting 2.5% by the end of the year. All this is according to the CME FedWatch tool and the yield curve of the Fed funds futures.

As for the rest of Friday’s events, during the Asian session, Japan’s Tankan survey for Q1 is coming out and the forecasts suggest that both the Large Manufacturers and Large Non-manufacturers indices declined. Later, during the European trading, Switzerland’s CPI for March is expected to have inched up to +2.4% yoy from +2.2%. Although this is further above the SNB’s objective of 2%, the rate is well behind those of most other major economies, and thus we don’t believe that it will tempt policymakers to tighten their monetary policy stance. The final manufacturing PMIs for March from the Eurozone, the UK, and the US, as well as the ISM manufacturing index for the month, are also due to be released. The final Markit prints are expected to confirm their preliminary estimates, and the ISM index is forecast to have held steady at 58.6.

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