• Inflation data will remain in focus with PPI; Fed easing expectation are still running high; Peru is expected to keep rates steady at 7.75%
  
• The BOE is expected to hike rates 25 bp to 4.5%; the decision comes ahead of the monthly U.K. data dump tomorrow; the ECB hawks remain vocal
  
• The account of the April 27-28 BOJ meeting was released; March current account data are worth discussing; China reported soft April CPI and PPI data; China also reported weak April new loan data

The dollar remains firm ahead of the PPI data. DXY continues to claw back its recent losses and traded near 101.941, the highest since May 2 and on track to test that day’s high near 102.404. A break above that sets up a test of the early April high near 103.058. The euro is trading lower near $1.0920 and is on track to test the April 10 low near $1.0830. Sterling is trading lower near $1.2570 ahead of the BOE decision (see below) and a break below $1.2530 is needed to set up a test of the May 2 low near $1.2435. Sterling tends to weaken on BOE decision days, having done so on 4 of the past 5. If today’s losses are maintained, that streak will be extended. USD/JPY is inching higher to trade near 134.64 and looks set to make another run at 135. We look for continued gains and a break above 136.15 is needed to set up a test of the May 2 high near 137.75. Lastly, AUD is the worst performing major as data out of China suggest the reopening impact remains uneven (see below). Banking sector concerns and dovish market pricing for Fed policy have been the two major negative headwinds on the dollar and the former is clearly fading and so the dollar has likely put in a near-term bottom. However, we need significant repricing of the latter in order to see another leg higher for the greenback. Let’s see if PPI data will do the trick after CPI failed to do so (see below)

AMERICAS

Inflation data will remain in focus. PPI will be reported today. Headline is expected at 0.3% m/m vs.- 0.5% in March while the y/y rate is expected to fall two ticks to 2.5%. Core is expected to rise 0.2% m/m vs. -0.1% in March while the y/y rate is expected to fall a tick to 3.3%. After PPI today, the next key inflation report is PCE on May 26. The Cleveland Fed’s Nowcast model estimates headline PCE at 0.48% m/m and 4.46% y/y and core PCE at 0.38% m/m and 4.66% y/y. Of note, the model’s estimates for both headline and core CPI came in higher than both consensus and the actual April readings.

Indeed, April CPI came in pretty much as expected. Headline came in as expected at 0.4% m/m vs. 0.1% in March but the y/y rate came in a tick lower than expected at 4.9%. Core came in as expected at 0.4% m/m vs. 0.4% in March, while the y/y rate fell a tick as expected to 5.5%. Some of the details were favorable, as core ex-shelter and core services ex-shelter eased to 3.7% y/y and 5.2% y/y, respectively. Still, the data underscore just how stubbornly high inflation remains despite 500 bp of tightening and QT. To those that are breathing a sigh of relief, we say "not so fast" as the 0.4% m/m gains in both headline and core translate into nearly 5% annually. This is still well above the Fed’s comfort zone.

Fed easing expectation are still running high. At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months. Now, it's seen in the 3.5-3.75% range in 12 months with three cuts still priced in by year-end and a fourth in January. Fed officials are likely to continue pushing back against this dovish take. Yesterday, Barkin said of the CPI data that “Just looking through all that it still paints a picture of inflation that is stubbornly high.” He noted that core inflation gains have been stuck in a range of 0.3-0.5% m/m for months but “where you’d really like it to be moving down and in concert with our target." Kashkari and Waller speaks today. Both are leading hawks on the FOMC and so we expect some strong pushback against the notion of any pre-ordained pause or pivot. However, it will really be up to the data to do the talking. We think the markets misheard what the CPI data is telling us and so today’s PPI data takes on even greater significance.

Weekly jobless claims will be reported. Initial claims are expected at 245k vs. 242k last week and continuing claims are expected at 1.82 mln vs. 1.805 mln last week. If so, the 4-week moving average for initial claims would rise slightly from 239k last week. Next week’s initial claims data will be for the BLS survey week containing the 12th of the month. While most indicators suggest some softening, the labor market remains relatively tight and tighter than the Fed’s comfort zone at this point.

Peru central bank is expected to keep rates steady at 7.75%. The bank has been on hold since its last 25 bp hike back in February. At the last meeting April 13, the bank said the tightening cycle was not necessarily over but reiterated that inflation would fall to the 1-3% target range by Q4. CPI rose 7.97% y/y in April, the lowest since April 2022 but still well above the target range. The market expects the easing cycle to begin in Q3 but that may be too soon.

EUROPE/MIDDLE EAST/AFRICA

The Bank of England is expected to hike rates 25 bp to 4.5%. WIRP suggests no odds of a larger 50 bp move. Looking ahead, another 25 bp hike is nearly 80% priced in for June 22 and fully priced in for August 3. However, the odds of one last hike top out near 65% for September 21 and so the policy rate is seen peaking between 4.75-5.0%. Some analysts are looking for some signal of a pause but we view this as unlikely. Inflation remains stubbornly high and the market has started to price in a more hawkish rate path. Forward guidance today will be key, along with new macro forecasts that will be released. In light of recent trends in the U.K. economy, we expect both growth and inflation forecasts to be revised higher and unemployment revised lower. Sterling tends to weaken on BOE decision days. It has done so on 4 of the past 5 and if today’s losses are maintained, the streak will be extended. After Governor Bailey’s press conference today, Chief Economist Pill speaks tomorrow.

The decision comes ahead of the monthly U.K. data dump tomorrow. March GDP, IP, services index, construction output, and trade will all be reported. GDP is expected flat m/m vs. flat in February, IP is expected at 0.1% m/m vs. -0.2% in February, services is expected flat m/m vs. -0.1% in February, and construction is expected at -0.3% m/m vs. 2.4% in February. Q1 GDP will also be reported tomorrow and is expected at 0.1% q/q and 0.2% y/y vs. 0.1% q/q and 0.6% y/y in Q4. Despite the fact that a contraction may have been avoided again, the U.K. growth outlook remains quite weak.

The ECB hawks remain vocal. Regarding a September move, Nagel said “there’s nothing off the table.” He stressed that “Inflation is still very sticky.” These comments come after reports yesterday that some ECB officials believe that two more 25 bp hikes won’t be enough to tame inflation and that hikes may extend to the September meeting. WIRP suggests a 25 bp hike is priced in for June 15. However, the odds of another 25 bp hike top out for September 14 at around 85% vs. fully priced in before last week’s ECB meeting. De Cos, Schnabel, and Guindos speak later today. The split between the hawk and the doves clearly remains in place but market pricing suggests that the doves have taken control of the narrative, at least for now.

ASIA

The account of the April 27-28 Bank of Japan meeting was released. At that meeting, the bank stood pat but the account will be of interest since it was the first under Governor Ueda. So far, he has taken a very cautious approach that tilts quite dovish. One member felt the risks from premature adjustment is greater than being late. One though that the 2% inflation target is coming into sight and one saw the need to act in a timely manner by watching prices. One member saw no need to modify Yield Curve Control given the recent improvement, while one expects high pay raises next year. Tightening expectations have fallen this week. WIRP now suggests odds of liftoff near 25% June 16, rising to over 30% July 28 and no longer fully priced in December 19. In addition, the tightening path is expected to be even shallower, with 15 bp of tightening over the next 12 months followed by another 10 bp over the subsequent 12 months.

March current account data are worth discussing. The adjusted surplus came in at JPY1.0 trln vs. JPY1.3 trln and a revised JPY1.2 trln (was JPY1.1 trln) in February. However, the investment flows will be of most interest. The March data showed that Japan investors remained net buyers of U.S. bonds (JPY4.2 trln) for the third straight month after being net sellers four straight months and for thirteen of the past fifteen. Japan investors turned net buyers (JPY189 bln) of Australian bonds for the first time after eight straight months of selling and remained net sellers of Canadian bonds (-JPY118 bln) for the third straight month and for thirteen of the past fourteen months. Investors turned net buyers of Italian bonds (JPY112 bln) again. Overall, Japan investors were total net buyers of foreign bonds (JPY4.7 trln) for the third straight month in March after four straight months of net selling, and was the largest net buying since November 2020. With signs growing that the BOJ is on hold for now, it appears that investors are back to chasing higher yield abroad and that’s yen-negative.

China reported soft April CPI and PPI data. CPI came in at 0.1% y/y vs. 0.3% expected and 0.7% in March while PPI came in at -3.6% y/y vs. -3.3% expected and -2.5% in March. CPI inflation is the lowest since February 2021 while PPI deflation is the deepest since May 2020. It seems that China doesn’t just have a growth problem, it has a serous deflation problem developing too. This is another development that supports our view that China reopening remains disappointing and so we expect further stimulus in the coming months. So far, the measures taken have had little impact on the economy.

China also reported weak April new loan data. New loans came in at CNY719 bln vs. CNY1.4 trln expected and CNY3.9 trln in March, while aggregate financing came in at CNY1.22 trln vs. CNY2.0 trln expected and CN5.4 trln in March. While April tends to show seasonal weakness in loan activity, the data are nevertheless very disappointing and suggests that more needs to be done to boost the economy. This is of course another headwind for EM and commodities, which really need strong growth in China in order to thrive.