Ok, so who’s ready for next week?
That’s right, today’s Sunday which means tomorrow is Monday and I guess that’s why we don’t quite understand why everyone gets so goddamn excited on Friday afternoon. It’s still going to be next week in two days.
Anyway, optically this should be a big week but the reality is, we’d have to get completely blindsided for the outlook to materially change despite the data deluge. We’ll get the Fed, but not really (there’s no presser and no Economic projections) and we’ll get NFP which could potentially be interesting in terms of econ signaling given the lackluster Q1 GDP read and last month’s epic miss. PCE is also worth watching.
There’s a French presidential debate on Wednesday, but Macron would probably have to murder someone on camera for that to change the outcome of the May 7 runoff.
For those interested in a more comprehensive week ahead preview, you can find some color from Barclays below followed by the full calendar from BofAML…
Global risk sentiment remains supportive, despite the lack of clarity on US fiscal policy and moderation in global data surprises, with upbeat US earnings and reduced European political uncertainty acting as the main catalysts recently. The reduction in European political uncertainty, in particular, has helped further depress cross-asset volatility (Figure 2), a trend we think will remain intact. Altogether, the low volatility environment continues to favour high carry positions, with our Carry Unwind Index showing little risk of an immediate unwind (Figure 3).
Despite the generally positive backdrop, however, commodities underperformance has led to a breakdown of the correlation with equities to its weakest level since mid-2014. This has resulted in mixed high-beta G10 and EM FX performance versus the USD in the past couple of weeks, with currencies that would normally benefit from a positive risk environment through sentiment-sensitive capital inflows failing to rally (Figure 4).
Similar to 2014, when we last observed such a weak correlation and decoupling from global data surprises (Figure 1), we think the recent commodities weakness primarily reflects supply-side factors, rather than rising concerns about global growth prospects. We find this to be the case particularly for iron ore and, to a lesser extent, oil. As a result, we are not convinced about an immediate correction and would argue against fading the recent weakness in commodity-linked FX for now. Our preferred vehicle to express this view is still long GBPAUD positions. The case for higher oil prices later in the year still looks compelling, in our view, with the upcoming May OPEC meeting perhaps acting as the catalyst.
US data and the May FOMC (Wednesday) will be a focus for markets this week. We expect the USD to stabilize around current levels, as the Fed remains on track to hike in June and US fiscal policy expectations seem largely priced out of the greenback. We expect the FOMC to remain on hold this week and balance its language to acknowledge the recent softness in data, while signaling that further rate normalization this year is appropriate. We expect no change in the Fed’s language on balance sheet reinvestment policy. We forecast payrolls (Friday) to rebound by 225k in April and wages to increase slightly, while ISM manufacturing and non-manufacturing PMI data (Monday and Wednesday) will also be followed. With markets pricing c.30bp of hikes by September (we expect 50bp), we think the USD can find some support, in the context of US fiscal policy expectations being priced out of the greenback (Figure 5).
Finally, we expect the RBA (Tuesday), Norges Bank (Thursday) and CNB (Thursday) to keep policy settings unchanged, while China PMI data (Tuesday) will likely further improve, reflecting strong growth momentum. We expect the RBA to maintain a relatively neutral stance on rates while keeping its cash rate at 1.50%. With markets concerned with the broader effect of commodities on the economy and fiscal position of the government, we continue to project further AUD downside. In Norway, we expect Norges Bank to keep its deposit rate unchanged at 0.5% and make little changes to its forward guidance. More dovish Norges Bank rhetoric, however, could pressure EURNOK upon a reversal of the recent oil price dynamic. Finally, a further improvement in China PMI data should favor our recommendation to pay 2y CNY NDIRS.