Ok, well all eyes will be on the U.S. in the week ahead, with PCE, payrolls and the Fed on deck. Call it “America first”.
The econ stateside comes hot on the heels of GDP and ECI, which both came in ahead of estimates and seem to clear the way for the Fed to stick to the proverbial script. We’re coming off a week that saw 10Y yields cross the dreaded 3% threshold for the first time in four years, while short-end rates are the highest since the crisis. With Fed expectations supporting the dollar and the greenback’s correlation with 10Y yields having recently risen, the potential certainly exists for the dollar to remain underpinned coming off its best week in 17 months.
That’s bad news for a number of crowded trades – the dollar short was trimmed slightly last week according to the latest CFTC data, but positioning is still lopsided.
The curve continues to flatten, raising further questions about how close we are to an end-of-cycle dynamic and also about whether the Fed will ultimately overshoot while attempting to ensure the economy doesn’t overheat. Surging crude prices and a commodities complex that, thanks in no small part to geopolitical turmoil, has remained buoyant in the face of the surging dollar are an interesting wrinkle in the inflation expectations story. May 2 is the quarterly refunding announcement, which will be watched closely for obvious reasons.
March payrolls of course disappointed, perhaps raising the stakes for the April report. For their part, BofAML is feeling pretty good about the prospects. To wit, from their preview:
We expect the slowdown in the pace of job growth in March to prove transitory as, in our view, it likely just reflects reversal in hiring activity following an outsized 320k increase in nonfarm payrolls in February. Moreover, recent readings of labor market indicators further support our call for solid job growth in April. For example, employment indicators from the Philly Fed and Empire State surveys remain in positive territory in April, while consumer surveys such as the Conference Board’s consumer confidence report that the labor market differential index remains near its cyclical high.
On wage growth, we expect average hourly earnings to post another solid 0.3% mom gain in April after a similar reading in March, leading the year-over-year comparison to edge up to 2.8% from 2.7%, previously.
They’re at 210k on the headline, and while Barclays (for instance), generally agrees with the notion that last month’s weakness was to a certain extent payback for the blockbuster February number, they’re only at 175K. Credit Suisse has a similar take:
We expect job gains to rebound to 175K in April after a volatile Q1. Payrolls growth slowed to 103K last month, following a multi-year high 326K gain in February. Lead indicators for the labor market have been mixed. The ISM nonmanufacturing employment index has moderated in the past few months after peaking in January, and the Conference Board “labor differential” has gone sideways in the last two reports. Overall, the labor market appears to remain strong, but we expect some moderation in job gains as the economy approaches full employment.
Prior to that, we’ll get core PCE and the YoY rate is likely to be very near target. That’s obviously interesting coming as it will on Monday, just a day ahead of the Fed meeting. We talked a good deal about the Fed earlier in “Why Goldman Thinks The Fed Isn’t Even Halfway There“, but as far as a quick read on the May meeting goes, here are three things to watch for from Goldman:
- Moderating the activity language. We expect the statement will recognize the softer March jobs report by amending the description of strong job gains in recent months with the “on average” qualifier. We also expect the sentence “the economic outlook has strengthened in recent months” to be dropped because the Fed’s outlook has probably not changed materially since the March meeting. Alternatively, they may send a more positive message by for instance indicating that “the economic outlook remains strong”.
- Upgrade of the inflation description. We expect the characterization of headline and core inflation on a 12-month basis to be upgraded from “have continued to run below 2%” to “has increased in recent quarters, near the Committee’s 2 percent longer-run objective.” With the rise in 10-year breakeven inflation rates to 2.18%, we also expect the description of market-based measures of inflation compensation to be upgraded from “low” to “somewhat low”.
- No changes to the balance of risks and the policy stance. The characterization of risks to the outlook as “roughly balanced” is likely to remain in place, partially reflecting inertia and potential concerns about trade policy. The characterization of the stance of current policy as “accommodative” is also unlikely to be dropped next week as the Fed is extremely likely to keep the policy rate unchanged.
BNP reminds you that “growth is still above trend and with this likely to be the weakest quarter of the year, the Committee is on track to deliver three more rate hikes this year.” Obviously, the “important” meeting comes in June, but all the same, the preponderance of data and the market’s increasingly desperate efforts to get a read on Jerome Powell will make the statement perhaps more parse-worthy (if you will) than would otherwise be the case.
There’s a good bit of data on deck from Europe as well including unemployment, GDP, the final print on PMIs, CPI and retail sales. The outlook has deteriorated notably of late across the pond, and that’s raising all manner of questions about whether the ECB might have missed its window to normalize. If the weakness in the data proves to be more than transitory, Draghi and the Governing Council are going to find themselves bumping up against the end of the cycle still mired in NIRP and sitting on a balance sheet that hasn’t even begun to shrink. Where they would go from there is anyone’s guess. You can read more on this here and here.
Geopolitics will continue to influence the mood, and there were more notable headlines out of Pyongyang over the weekend following Friday’s historic summit. Here’s the long and the short of it:
N.KOREA TO INVITE EXPERTS, JOURNALISTS TO SHUTDOWN OF N SITE
N.KOREA SAYS U.S. WILL LEARN IT HAS NO INTENTION TO USE NUKES
N.KOREA TO ABOLISH ITS STANDARD TIME, USE SEOUL STANDARD TIME
N.KOREA TO SHUT DOWN MAIN NUCLEAR TEST SITE IN MAY— Heisenberg Report (@heisenbergrpt) April 29, 2018
Tuesday is the deadline for Trump to extend a temporary exemption for the EU on the steel and aluminum tariffs. That comes after Trump met with Macron and Merkel last week, pow wows which produced a series of cringe-worth moments including the now infamous “dandruff” debacle. Traders will also be listening for any fresh news on Iran. The headlines on that front weren’t particularly encouraging on Saturday and Sunday.
There’s more, but you get the idea and I imagine that’s about the extent of most readers’ attention span. For now I’ll leave you with the calendar from BofAML.
