• U.S. yields continue to rise; Fed tightening expectations have picked up bit; regional Fed business surveys for April started rolling out; House Speaker McCarthy yesterday proposed a one-year debt ceiling increase in return for a series of budget concessions; Canada reports March CPI
  
• Germany reported a mixed April ZEW survey; U.K. reported mixed labor market data
  
• Reports suggest Japanese insurer Fukoku Mutual Life Insurance plans to sell all of its hedged foreign debt holdings; RBA minutes were released; China reported Q1 GDP and March IP and retail sales data; Indonesia kept rates steady at 5.75%, as expected

The dollar is consolidating its recent gains. DXY is trading lower near 101.691 after two straight up days. A break above 102.036 Is needed to set up a test of the April 10 high near 102.807. The euro is trading higher just below $1.10 while sterling is trading higher near $1.2450 after higher than expected wage increases were reported (see below). USD/JPY traded at the highest since March 15 near 134.70 earlier today before falling back to trade near 134 currently. We believe the pair remains on track to test the March 15 high near 135.10 before eventually testing the March 8 high near 138. Recent data have been dollar-supportive and we are finally seeing a reaction in U.S. yields. Until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable. However, it seems that the process is under way.

AMERICAS

U.S. yields continue to rise. The 2-year yield traded near 4.20% today. While it is well off the 3.55% low from March 24, it is still well below the March 8 high near 5.08%. Elsewhere, the 10-year yield traded near 3.61% today. Similarly, it is well off the 3.25% low from April 6 but is still well below the March 2 high near 4.09%. As markets normalize and Fed rate cuts get priced out, U.S. yields should continue to edge higher.

Fed tightening expectations have picked up bit. WIRP suggests nearly 90% odds of 25 bp hike at the May 2-3 meeting, up from 70% at the start of last week and 50% at the start of the week before that. We think a 25 bp hike next month is a done deal and the Fed should leave the door open to further tightening. Between that decision and the next one June 14, the Fed will see two more job reports, two more CPI/PPI reports, and one retail sales report. If data are still firm, we think another hike in June is a real possibility. Right now, market sees around 10% odds of a second hike but we need to keep an eye on this because it was at zero last week. Market is also back to pricing in a cut by year-end vs. 2-3 earlier this month. While this is moving in the right direction, a cut needs to be totally priced out. We can argue about whether the Fed needs to hike again but we remain very confident that the Fed will not cut rates this year.
Bowman speaks today.

Regional Fed business surveys for April started rolling out. Empire manufacturing survey kicked things off yesterday and came in at 10.8 vs. -18.0 expected and -24.6 in March. New York Fed services index will be reported today. Philly Fed reports Thursday and is expected at -19.7 vs. -23.2 in March. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR, up from 2.2% previously. Next model update will come today after the data.

Only data report today is March building permits and housing starts. They are expected at -6.5% m/m and -3.5% m/m, respectively. March existing home sales will be reported Thursday and are expected at -1.8% m/m vs. 14.5% in February.

As reported last week, House Speaker McCarthy yesterday proposed a one-year debt ceiling increase in return for a series of budget concessions. Speaking from the NYSE, McCarthy said House Republicans would vote “in the coming weeks” on a measure that would lift the debt ceiling for a year in exchange for a spending freeze at last year’s levels, stricter work requirements for social programs, and regulatory rollbacks. The plan is considered DOA in the Senate but McCarthy stressed that in the House ”A no-strings-attached debt limit increase will not pass.” As we wrote last week, this proposal should be seen as an opening gambit in negotiations with President Biden and his Democratic colleagues in Congress. There will be lots of difficult negotiations ahead but the fact that these talks are about to get started should be seen as mildly positive.

Canada reports March CPI. Headline is expected at 4.3% y/y vs. 5.2% in February. If so, this would be the lowest since August 2021 but still well above the 1-3% target range. Of note, core median is expected at 4.5% y/y s. 4.9% in February and core trim is expected at 4.4% y/y vs. 4.8% in February. Canada is one of the few countries to be experiencing disinflation in its core measures, which is a big factor that allowed it to pause the tightening cycle March 8 and follow up with another hold April 12. However, after its hold last week, the bank pushed back against any notions of early easing by noting “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.” Next policy meeting is June 7. While another hold is expected, WIRP suggests nearly 20% odds of a hike, rising to over 30% in July and nearly 40% in September. Furthermore, a cut by year-end is no longer priced in. Macklem and Rogers appear before Parliament today.

EUROPE/MIDDLE EAST/AFRICA

Germany reported a mixed April ZEW survey. Expectations came in at 4.1 vs. 15.6 expected and 13.0 in March, while current situation came in at -32.5 vs. -40.0 expected and -46.5 in March. Expectations fell for the second straight month to the lowest since December, while current situation continued to improve to the highest since June 2022. Clearly, the impact of banking sector stresses carried over from March as senior ZEW official noted that “Experts expect banks to be more cautious in granting loans.” He added that “The still-high inflation rates and the internationally restrictive monetary policy are also weighing on the economy.”

ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests nearly 25% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June 15 followed by another one in September or October. There are currently no odds of further tightening in Q4 and so the peak policy rate is now seen near 3.75%, up from3.50% at the start of last week and 3.25% during the height of the banking panic.

The U.K. reported mixed labor market data. Unemployment for the three months ending February was expected to remain steady at 3.7% but instead rose a tick to 3.8%, while average hourly earnings came in at 5.9% y/y vs. 5.1% expected and a revised 5.9% (was 5.7%) previously. Excluding bonuses, earnings grew even faster at 6.6% y/y. Wage growth has remained sticky, which helps explain some of the recent upside surprises in the inflation data. March CPI will be reported tomorrow. Headline is expected at 9.8% y/y vs. 10.4% in February, core is expected at 6.0% y/y vs. 62% in February, and CPIH is expected at 8.7% y/y vs. 9.2% in February.

BOE tightening expectations have picked up modestly. The next policy meeting is May 11 and WIRP suggests around 90% odds of a 25 bp hike, with another 25 bp hike priced in for August 3. The odds of one last hike in September or November top out near 20%. As a result, the peak policy rate is seen near 4.75% vs. between 4.50-4.75% at the start of last week.

ASIA

Reports suggest Japanese insurer Fukoku Mutual Life Insurance plans to sell all of its hedged foreign debt holdings. The company is relatively small, with $65 bln of assets compared to an estimated $2.9 trln of total industry assets. However, the move should be concerning to foreign debt issuers who have long counted on solid demand from yield-starved investors in Japan. Fukoku said it will cut its holdings of foreign debt by JPY300 bln in FY23 that started April 1, which a company official said would eliminate all of its remaining hedged foreign holdings. Again, the amounts here are small but if the larger insurers follow similar strategies, the impact would be significant. It’s worth noting that the February current account data showed a big jump in foreign bond purchases so it’s not yet clear how this all plays out. Stay tuned.

RBA minutes were released. At the April 4 meeting, the bank kept rates steady at 3.60% and was the first pause in the tightening cycle since it began hiking rates back in May 2022. However, the minutes show that a 25 bp hike was discussed before the bank decided on the pause whilst noting “Members recognized the strength of both sets of arguments, but, on balance, agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings.” Furthermore, “Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much monetary policy would need to be tightened to bring inflation back to target within a reasonable timeframe.” WIRP now suggests over 55% odds of one last 25 bp hike in Q3. Furthermore, a rate cut is no longer priced in by year-end. We concur.

China reported Q1 GDP and March IP and retail sales data. Growth came in at 2.2% q/q vs. 2.0% expected and 0.0% in Q4, while the y/y rate came in at 4.5% vs. 4.0% expected and 2.9% in Q4. Elsewhere, IP came in at 3.9% y/y vs. 4.4% expected and 2.4% in January-February while sales came in at 10.6% y/y vs. 7.5% expected and 3.5% in January-February. The ongoing divergence between consumption and production helps explain why China reopening has yet to significantly impact regional trade and activity; that is, policymakers are focusing more on boosting domestic activity rather than the export sector.

Bank Indonesia kept rates steady at 5.75%, as expected. The bank now sees inflation returning to its 2-4% target range by August vs. September previously. Governor Warjiyo sees consumption, investment, and exports sustaining GDP growth slightly above 5% in Q1 and Q2. Warjiyo added that the bank expects the rupiah to strengthen further due to foreign inflows driven by attractive yields and robust growth. We believe that the tightening cycle has ended and so talk now turns to the start of an easing cycle. Bloomberg consensus currently sees Q1 2024 but we think Q4 is more likely. We cannot rule out Q3 but much will depend on how the data come in over the course of Q2.