• Fed officials are sounding a bit more cautious; S&P Global preliminary April PMI readings will be a data highlight; regional Fed business surveys for April have been mixed so far; Canada reports February retail sales data
  
• ECB policymakers sound more cautious; eurozone reported preliminary April PMI readings; U.K. Deputy Prime Minister Dominic Raab has resigned; U.K. reported soft March retail sales data and mixed preliminary April PMI readings
  
• Japan reported March national CPI and preliminary April PMI readings; Australia reported preliminary April PMI readings; Korea reported soft trade data for the first 20 days of April

The dollar is trading flat ahead of the weekend. DXY is trading flat near 101.85 but the recent break above 102.036 sets up a test of the April 10 high near 102.807. The euro is trading lower near $1.0965 and the recent clean break below $1.0925 sets up a test of the April 10 low near $1.0830. Sterling is underperforming due to the double whammy of rising political risk and weak economic data (see below) and is trading lower near $1.2380. Cable remains on track to test its April 10 low near $1.2345. USD/JPY is trading heavy near 133.75 as it was unable to build on its gains after trading at the highest since March 10 near 135.15 earlier this week. A clean break of the March 15 high near 135.10 would set up a test of 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 this repricing is now under way.

AMERICAS

Fed officials are sounding a bit more cautious. Mester said “I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time. Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on economic and financial developments.” Mester noted that “Even before the stresses in the banking industry in March, banks were already beginning to tighten their credit standards. The question now going forward is, Will stresses in the banking industry, those stresses in March, lead banks to move faster to tighten their credit standards?” Logan said “As you surely know, inflation has been much too high. The Fed has raised interest rates by 4.5 percentage points over the past year to bring the economy into better balance.” She added that she’s been looking at the impact of banking sector stresses on the broader economy. Harker said “I think we’re close to where we need to be. We need to be a little cautious here to not just respond to the current level of inflation, but where we think it’s going,” adding that due to monetary policy lags, “So this is where I am not in the camp where just keep increasing rates and rates and rates. I think we need to slow it down.” Bostic said he favors one mor hike and noted “Our policy works with the lag. We’ll have moved firmly into restrictive space. And then I think it’s time for us to let the restrictive action work its way through. And that will take some time.” Cook speaks today. At midnight tonight, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference May 3.

Fed tightening expectations have picked up bit. WIRP suggests nearly 90% odds of 25 bp hike at the May 2-3 meeting, up from 80% at the start of this week and 70% at the start of last week. There are about 10% odds of another 25 bp hike in June. Between the May 2-3 and June 13-14 meetings, the Fed will have digested two more job reports, two CPI/PPI reports, and one retail sales report. At this point, a pause in June might just be the most likely outcome but it really will depend on how all that data come in. After all that, one cut is still priced in by year-end vs. two at the start of last week. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. We concur.

S&P Global preliminary April PMI readings will be a data highlight. Manufacturing is expected at 49.0 vs. 49.2 in March, services is expected at 51.5 vs. 52.6 in March, and the composite is expected at 51.2 vs. 52.3 in March. If so, this would suggest that the U.S. economy is still expanding as Q2 gets under way but at a slower pace than what was seen at the end of Q1. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR. Next and final model update for Q1 will come next Wednesday. After that, the model will start tracking Q2 as actual Q1 GDP data will be reported next Thursday, with consensus currently at 2.0% SAAR vs. 2.6% in Q4.

Regional Fed business surveys for April have been mixed so far. Yesterday, Philly Fed came in at -31.3 vs. -19.3 expected and -23.2 in March. This comes after Empire manufacturing survey kicked things off earlier this week at 10.8 vs. -18.0 expected and -24.6 in March.

Weekly jobless claims are worth discussing. Initial claims were for the BLS survey week containing the 12th of the month and came in at 245k vs. 240k expected and a revised 240k (was 239k) last week. The 4-week moving average fell slightly to 239.,750 vs. 240,250 last week. Recent claims data suggest the labor market is softening. Current consensus sees 175k for April NFP vs. 236k in March. Of note, continuing claims came in at 1.865 mln vs. 1.825 mln expected and a revised 1.804 mln (was 1.81 mln) last week.

Canada reports February retail sales data. Headline is expected at -0.6% m/m vs. 1.4% in January and ex-autos is expected at -0.2% m/m vs. 0.9% in January. Recent data have come in solid, raising the possibility that this current BOC pause may turn out to be temporary. Like the Fed, it will really depend on the data going forward. Next BOC policy meeting is June 7 and another hold is expected. However, the market sees nearly 85% odds of a cut at the December 6 meeting.

EUROPE/MIDDLE EAST/AFRICA

ECB policymakers sound more cautious. Vujcic said “The biggest challenge for monetary policymakers is to correctly calibrate the length and intensity of the monetary-policy tightening cycle in conditions of heightened uncertainty. It is difficult to assess how monetary policy will affect the economy and with what time lag monetary policy measures will affect prices.” Visco said “We do not have a credit crunch situation now, but we have a reduction in credit certainly for the business sector, and a substantial slowdown for households, and these have taken place in a matter of months. Long lags means that we have still to see all the effects of our monetary policy measures. This is why I am saying, I don’t exclude rising rates or whatever, but I think we have to be prudent, cautious and patient.” Guindos said “Core inflation remains very sticky” but added that any future decisions will be data dependent and that the ECB will refrain from any explicit forward guidance until the macro outlook clears up. Lastly, Makhlouf said “On the evidence so far, it’s too early to start planning for a pause in our tightening of policy Indeed, and again based on the evidence we have to-date, rates will need to continue at restrictive levels to help re-set the balance between supply and demand in the economy and bring down inflation.” Elderson speaks later today.

ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests over 30% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June 15 followed by nearly 90% odds of another hike July 27. Odds of one final hike in in September or October top out near 33% and so the peak policy rate is now seen between 3.75-4.0%%, up from3.75% at the start of this week and 3.50% at the start of last week.

Eurozone reported preliminary April PMI readings. Headline manufacturing came in at 45,5 vs. 48.0 expected and 47.3 in March, services came in at 56.6 vs. 54.5 expected and 55.0 in March, and the composite came in at 54.4 vs. 53.7 expected and actual in March. The divergence is stark, as manufacturing fell to the lowest since May 2020 and services rose to the highest since April 2022. This is a trend that is being seen in most of the major economies. Looking at the country breakdown, the German composite came in at 53.9 vs. 52.9 expected and 52.6 in March while the French composite came in at 53.8 vs. 52.9 expected and 52.7 in March. Italy and Spain will report with the final readings in early May.

U.K. Deputy Prime Minister Dominic Raab has resigned. An independent investigation into his workplace behavior criticized his treatment of civil servants and so Raab said “I feel duty bound to accept the outcome of the inquiry.” However, Raab noted that the inquiry had dismissed most of the accusations made against him and “Its two adverse findings are flawed and set a dangerous precedent for the conduct of good government.” Whilst Prime Minister Sunak loses a key ally, Raab’s quick exit underscores Sunak’s commitment to regain the public trust after the serious erosion seen under his predecessors.

The U.K. reported soft March retail sales data. Headline came in at -0.9% m/m vs. -0.5% expected and a revised 1.1% (was 1.2%) in February while sales ex-auto fuel came in at -1.0% m/m vs. -0.6% expected and a revised 1.4% (was 1.5%) in February. ONS official noted that “Poor weather impacted on sales across almost all sectors. Food store sales also slipped, with retailer feedback suggesting the increased cost of living and climbing food prices are continuing to affect consumer spending.” Weak sales were reported despite the jump in GfK consumer confidence to -30 in April, the highest reading since February 2022. Yet despite the weak March data, strong sales in January and February led to a 0.6% gain in Q1. Of note, Bloomberg consensus for Q1 GDP stands at -0.1% q/q.

The U.K. reported mixed preliminary April PMI readings. Manufacturing came in at 46.6 vs. 48.4 expected and 47.9 in March, services came in at 54.9 vs. 52.8 expected and 52.9 in March, and the composite came in at 53.9 vs. 52.2 expected and 52.2 in March. The composite reading is the highest since April 2022.

BOE tightening expectations have picked up this week. The next policy meeting is May 11 and WIRP suggests a 25 bp hike is fully priced in, with another 25 bp hike around 85% priced in for June 22. Odds of a last 25 bp hike stand near 85% for September 21 and so the peak policy rate is seen near 5.0% vs. 4.75% at the start of this week and between 4.50-4.75% at the start of last week. Outgoing MPC dove Tenreyro yesterday said “The shape of the inflationary shock stemming mostly from the large increase in energy prices, coupled with the long lags with which monetary policy affects the economy, means that the most likely scenario now is that we undershoot the inflation target in the medium term, meaning 2025.” She added that those that want to keep hiking rates to a “fool in the shower” because “When the fool starts the water and it runs cold, he keeps turning the faucet and, eventually, because he’s impatient, he gets burned.” Her second three-year term ends in July but reports have recently emerged that the Treasury will soon announce her replacement. Tenreyro is the leading doves on the MPC and so her replacement could lead to a shift in the hawk-dove balance.

ASIA

Japan reported March national CPI. Headline came in as expected at 3.2% y/y vs. 3.3% in February, while core (ex-fresh food) came in a tick higher than expected a 3.1% y/y and steady from March. Recent improvements have been due largely to energy subsidies as core ex-energy came in at 3.8% y/y vs. 3.6% expected and 3.5% in March. This measure continues to accelerate and is the highest reading since December 1981. This should be very concerning to the Bank of Japan.

Yet BOJ tightening expectations remain low. WIRP suggests no odds of liftoff April 28 or June 16 before rising to aro8und 15% for July 28. A hike isn’t priced in until 2024 as the odds stand near 60% for December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited. Of note, recent reports suggest BOJ policymakers are concerned about tweaking YCC so soon after the banking sector turmoil.

Japan also reported preliminary April PMI readings. Manufacturing came in at 49.5 vs. 49.2 in March, services came in at 54.9 vs. 55.0 in March, and the composite came in at 52.5 vs. 52.9 in March. This was the first drop in the composite since November and reflects other signs of slowing in the economy.

Australia reported preliminary April PMI readings. Manufacturing came in at 48.1 vs. 49.1 in March, services came in at 52.6 vs. 48.6 in March, and the composite came in at 52.2 vs. 48.5 in March. This is the highest since June 2022 and reflects other signs of resilience in the economy. No wonder odds of one last 25 bp hike in Q3 have risen to nearly 75% now vs. zero chance after its pause in early April.

Korea reported trade data for the first 20 days of April. Exports came in at -11.0% y/y and imports at -11.8% y/y. Exports to China fell -26.8% y/y while exports to the U.S. rose 1.4% y/y. Lastly, chip exports fell -39.3% y/y. All in all, the data support our longstanding view that China reopening has so far had little impact on regional trade and activity. Yesterday, Taiwan reported very weak export orders for March.