• The Fed’s weekly H.4.1 report suggests banking sector concerns are overblown; yet Fed easing expectations remain elevated; jobs data will be the highlight; Canada highlight will be April jobs data too; BOC Governor Macklem sounded a bit more dovish
  
• The ECB hiked rates 25 bp, as expected; March eurozone retail sales came in weak; Germany reported weak March factory orders; early results show the U.K. Tories doing poorly in local council elections; Switzerland reported April CPI data
  
• RBA released it Statement on Monetary Policy with updated macro forecasts

The dollar remains under pressure ahead of the jobs report. DXY is trading lower near 101.271 after trading near 102.294 Tuesday, the highest since April 11. The euro is trading higher near $1.1025 in the wake of the ECB decision (see below), while sterling traded at a new cycle high near $1.2635 and is nearing a test of the May 2022 high near $1.2665. USD/JPY remains heavy and is trading flat near 134.25 after trading as low as 133.50 yesterday. We had hoped that the First Republic deal would help address banking sector concerns but more clearly needs to be done. Yesterday’s H.4.1 report may be a start (see below). We had also hoped that a less dovish than expected FOMC decision would help the dollar but that didn’t happen and Fed rate cut expectations have actually picked up instead. So while recent data have been dollar-supportive, the dollar remains vulnerable until those major negative headwinds have been fully addressed. A strong jobs report today would be a good start.

AMERICAS

The Fed’s weekly H.4.1 report suggests banking sector concerns are overblown. Data show commercial bank use of emergency borrowing from the Fed falling sharply in the week through May 3. Discount Window borrowing fell to a mere $5 bln vs. $74 bln the previous week while Bank Term Funding Program borrowing fell to $76 bln vs. $81 bln the previous week. That’s the lowest since the banking sector turmoil started in early March. Of note, much of this drop was due to the seizure of First Republic as the Fed said that outstanding lending to the troubled bank were reclassified under the “other credit extensions.” We’ll get a fuller picture when the deposit data is reported but the drop in emergency Fed borrowing this past week suggests there really weren’t any serious banking sector stresses besides the drop in share prices. Of note, pre-market trading suggests regional bank shares are stabilizing but the story is by no mean over.

The Fed’s weekly H.8 report today will be another piece of the puzzle. However, the deposit data are lagged and this report will be for the week ending April 26. As a result, the data won’t pick up any deposit flight that we may have seen this week. But if the lack of any emergency borrowing this week means anything, there shouldn’t be much deposit flight to be seen the past week or two.

Yet Fed easing expectations remain elevated. The market is now pricing in three (yes, three!) cuts by year-end, with nearly 40% odds of a fourth one. There are also nearly 50% odds that the easing cycle starts July 26. This is simply not going to happen but of course, the market is once again getting carried away with the Fed pivot story. Fed officials will likely try to push back in the coming days but the market isn't really listening to the Fed anymore. Once again, it will be up to the data to do the talking for the Fed. Between now and the June 13-14 FOMC meeting, we get two sets each of jobs, CPI, and PPI data as well as one set each of retail sales and PCE data. Let the games begin.

Jobs data will be the highlight. Consensus for NFP currently stands at 185k vs. 236k in March, while the unemployment rate is expected to rise a tick to 3.6% and average hourly earnings are expected to remain steady at 4.2% y/y. ADP reported a strong private sector jobs estimate of 296k vs. 150k expected and 145k in March. We all know ADP has been an awful predictor of NFP, even after its revamp last year. That said, NFP has outperformed ADP for 8 of the past 9 months and 13 of the past 15. While there have been some signs of cooling in the labor market, it remains relatively tight. March consumer credit will also be reported and is expected at $17.0 bln vs. $15.29 bln in February. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.7% SAAR growth for Q2, up from 1.8% previously and 1.1% in Q1. Next model update comes Monday. Bloomberg consensus currently sees Q2 at 0.1% SAAR and Q3 at -0.9% SAAR.

Canada highlight will be April jobs data too. Consensus sees 20.0k jobs added vs. 34.7k in March, while the unemployment rate is expected to rise a tick to 5.1%. Bank of Canada expectations have steadied. After the bank held rates at 4.5% at both the March 8 and April 12 meetings, WIRP suggests another hold is expected at the next meeting June 7. Looking further ahead, markets have nearly priced in a cut at the October 25 meeting. This seems way too soon to us.

BOC Governor Macklem sounded a bit more dovish. He acknowledged that a further tightening of financial conditions due to global banking stresses could impact Canadian monetary policy. Specifically, he said “If financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target.” Macklem warned that the bank “would risk overtightening” if negative spillover from the global banking stresses led to a more difficult borrowing environment than was intended by the bank. That said, Macklem reiterated that “We’ve paused - that doesn’t mean we’re necessarily at the end. It means we know there’s lags and we’re using this pause as the opportunity to assess whether we’ve done enough.”

EUROPE/MIDDLE EAST/AFRICA

The ECB hiked rates 25 bp, as expected. Apparently, the decision was “almost unanimous” as some favored a larger 50 bp move. The bank said that the pace of QT would be maintained at EUR15 bln through June but said it expects to stop all APP reinvestments as of July. Reports suggest that this was the compromise with the hawks in order to settle on a smaller 25 bp move. Of note, PEPP reinvestments will run through at least the end of 2024. President Lagarde later estimated that the halt of APP reinvestments will average EUR25 bln per month and so it’s almost double the current pace so it's a bit on the hawkish side. Lagarde reiterated that while future decisions are data dependent, it’s very clear that the ECB isn’t pausing. Updated macro forecasts won’t come until the June meeting. Looking ahead, WIRP suggests another hike is priced in for June 15. However, the odds of one last 25 bp hike September 14 have fallen to around 80% vs. fully priced in before the ECB meeting. We suspect ongoing weakness in the economic data (see below) is a big part of this story.

March eurozone retail sales came in weak. Sales came in at -1.2% m/m vs. -0.2% expected and a revised -0.2% (was -0.8%) in February, while the y/y rate came in at -3.8% vs. -3.3% expected and a revised -2.4% (was -3.0%) in February. Sales have contracted for six straight months and 9 of the past 10 months, and the March number was the worst since January 2021. Italy reported March retail sales at 5.8% y/y today too. It seems that weakness in German and French retail sales in March was more than enough to offset strength in Italy and Spain. While the eurozone was (barely) able to avoid contraction in Q1, the economy is limping into Q2 and there are risks that it stagnates or even contracts if the ECB tightening starts to really bite. There isn’t much help coming from the external sector.

Germany reported weak March factory orders. Orders came in at -10.7% m/m vs. -2.3% expected and a revised 4.5% (was 4.8%) in February, while the y/y rate came in at -11.0% vs. -3.1% expected and a revised -6.0% (was -5.7%) in February. Orders have contracted y/y for 13 straight months and the March rate is close to the cycle low of -12.0% in January. Continued weakness in the German data support our view that China reopening continues to have little impact on its major trading partners. March IP will be reported Monday and we see downside risks to the consensus -1.3% m/m. Of note, France reported March IP today at -1.1% m/m and Spain at 1.5% m/m. Eurozone-wide March IP will be reported May 15.

Early results show the U.K. Tories doing poorly in local council elections. Elections were held in 230 of the 317 councils for a total of 8,058 local authority seats. Of the roughly 1,600 results announced today, Tories lost more than 200 seats, with Labour picking up over half of those and the Liberal Democrats also benefiting. While most of the votes from yesterday’s elections have yet to be tallied, the early losses have to be disappointing for Prime Minister Sunak and his party. Of note, Labour made gains in the so-called “Red Wall” in the north. While we should wait for all the results before making any grand pronouncements, it does seem clear that strong polling by Labour is translating into wins at the voting booth. This is bad news for Sunak, who must call general elections by January 2025.

Switzerland reported April CPI data. Headline came in at 2.6% y/y vs. 2.8% expected and 2.9% in March while core came in steady at 2.2% y/y. Headline has decelerated two straight months to the lowest since last April and is moving closer to the 2% target. At the last policy meeting March 23, the bank hiked rates 50 bp to 1.5% and said that more rate hikes can’t be ruled out. It pledged to intervene in the FX market if needed in either direction. Jordan said today that the fight against inflation is not over and repeated the March statement that he cannot exclude further tightening. Next policy meeting is June 22 and WIRP suggests a 25 bp hike to 1.75% is priced in. Another 25 bp hike either September 21 or December 14 is also priced in that would see the policy rate peak near 2.0%.

ASIA

Reserve Bank of Australia released it Statement on Monetary Policy with updated macro forecasts. Most of the changes were for 2023, with growth and inflation forecasts revised down slightly. Of note, the path for unemployment was revised up slightly across the forecast horizon. The RBA noted that “The revised forecasts continued to have inflation above target for an extended period. With the benefit of this information, at the May meeting the Board judged that it was appropriate to increase interest rates again, by a further 25 bp.” However, the bank warned that “The outlook is subject to a range of uncertainties. Growth in consumption is being influenced by competing forces, with higher interest rates and declines in real wages being offset by strong growth in employment and, for many households, still-high accumulated savings, which could be drawn down to support spending.” Next policy meeting is June 6 and no change is expected. However, WIRP suggests odds of a cut rise in Q4 and a cut December 5 is now priced in. We consider a cut this year very unlikely.