Let The Data Do The Talking

May 03, 2024

Let The Data Do The Talking

  • The April non-farm payrolls report and ISM Services index will drive US interest rate expectations.
  • The Norges Bank is widely expected to keep the policy rate at 4.50%. Watch-out for the policy guidance.
  • ECB Chief Economist Philip Lane sticks to the script.

USD is down against most major currencies and Treasury yields are drifting lower. Fed Chair Jay Powell essentially ruling out rate hikes Wednesday has lifted financial market risk sentiment and is weighing on USD and Treasury yields.

Today, the US April non-farm payrolls (1:30pm London) and ISM Services index (3:00pm London) will do the talking. Softer data prints will further undermine USD and bode well for risk assets. But more evidence of strong US labor demand and/or services sector growth can fuel an upswing in USD and Treasury yields.

Non-farm payrolls are projected to increase by 240k following the much better than expected 303k gains in March. Bloomberg’s whisper number estimate is slightly lower at 231.5k. The unemployment rate is expected to remain at 3.8% for a second consecutive month in April.

The pace of US wage growth, a key driver of core services CPI inflation, will also draw plenty of attention. Average hourly earnings are forecast to rise for a second consecutive month by 0.3% m/m and slow at an annual pace of 4.0% from 4.1% in March.

Meanwhile, US services sector activity is projected to improve to 52.0 vs. 51.4 in March. The regional Fed non-manufacturing business surveys suggest the risks to the ISM services print are balanced. Of note the US S&P Global services PMI fell to a five-month low of 50.9 in April vs. 51.7 in March.

Chicago Fed President Austan Goolsbee (non-voter) speaks after the data releases (3:30pm London). Recall, Goolsbee is one of nine who voted for 3 cuts in 2024.

NOK pared back some of its overnight gains ahead of the Norges Bank interest rate decision (9:00am London). The Norges Bank is widely expected to keep the policy rate at 4.50%. We also anticipate the Norges Bank to maintain its guidance that the policy rate will continue to lie at the current level “for some time ahead”. Inflation in Norway is tracking marginally lower than the central bank’s forecast but is still well above target. Meanwhile, forward-looking survey indicators point to a pick-up in Norwegian economic activity.

The Norges Bank projects the policy rate to stay around 4.50% until Q3 2024 before gradually moving down. The swaps market implies a 70% probability of a cut in September. As such, NOK downside will likely be contained if the Norges Bank delivers a dovish hold. But there’s a greater potential for NOK upside in the event of a hawkish/neutral hold.

EUR/USD is firmer reflecting USD weakness. ECB Governing Council member Yannis Stournaras said “we now consider three rate cuts in 2024 as the more likely scenario”, which is currently 90% priced-in by the swaps market. But ECB Chief Economist Philip Lane was much more cautious reminding investors “we are not pre-committing to a particular rate path” adding, the next phase of the disinflation process is likely to be more gradual.

AUD/USD is up and testing key resistance near 0.6580. The value of new housing loans commitments in Australia rose more than expected in March to 3.1% m/m (consensus: 1.0%) following a 1.9% increase in February. The increase in the value of new home loans may be more a reflection of rising house prices (which has raised the average loan size) rather rising demand for dwelling. Indeed, the “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey points to sluggish buying sentiment.

RBA cash rate futures continue to imply a small 10% probability of a rate hike by year-end. In our view, there is scope for a downward adjustment to Australian interest rate expectations against AUD because household spending is weak. Australia retail turnover unexpectedly fell 0.4% m/m in March following monthly rises of 0.2% in February and 1% in January.

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