UPCOMING EVENTS:

  • Monday: European Labour Day Holiday, US ISM Manufacturing PMI.
  • Tuesday: RBA Policy Decision, EZ CPI, US Job Openings.
  • Wednesday: US ISM Services PMI, FOMC Policy Decision.
  • Thursday: ECB Policy Decision, US Jobless Claims .
  • Friday: US NFP.

Monday: The US ISM Manufacturing PMI is expected to tick to 46.7 vs. 46.3 prior. Last month it surprised to the downside probably because of the mid-March banking woes and it will be interesting to see if it contracted further or it will confirm the pickup seen in the S&P Global PMIs.

Tuesday: The RBA is expected to keep rates unchanged although it should keep its hawkish message that they may hike rates if inflation doesn’t come down as expected. The recent Trimmed Mean CPI Y/Y, which is the RBA’s favourite inflation measure, missed expectations and should keep the central bank on hold.

Inflation in the Eurozone remains very high, and the ECB left the door open for a 50 bps hike if the data goes against their expectations. The CPI Y/Y is expected at 7.0% vs. 6.9% prior and the M/M reading at 0.9% vs. 0.9% prior. The Core CPI Y/Y is seen unchanged at 5.7%, while the M/M measure is expected at 1.1% vs. 1.3% prior. Still really ugly numbers across the board. Higher than expected data should seal a 50 bps hike while lower than expected will see a 25 bps move.

Last time US Job Openings missed expectations and caused some big moves across the board in the markets. This is due to a major focus on the employment data rather than inflation at this point. The Fed will bring the FFR to 5.00-5.25% this week and finally have a real positive interest rate across the whole curve. This should be enough to bring inflation back to target, but they will also need a higher unemployment rate. If the labour market remains tight, they will need a higher rate to loosen the labour market. The recent Atlanta Fed Wage Growth Tracker and ECI reports showed renewed wage inflation, which isn’t good news for the Fed. Anyway, the data is expected at 9.683M vs. 9.931 prior.

Wednesday: The US ISM Services PMI, as its Manufacturing counterpart, missed big expectations the last month and the market may want to see if it was just a blip due to the banking woes or activity is indeed tanking. The expectation is for an increase to 51.8 vs. 51.2 prior. The S&P Global PMIs, if one wants to use those as proxy, surprised to the upside.

The Fed is expected to hike by 25 bps and bring the FFR to 5.00-5.25%. After this hike the market expects the Fed to pause. This is justified by the fact that the Fed will finally have a positive real FFR, which is the ultimate restrictive level, and it may be enough to bring inflation back to the 2% target. It’s hard to envisage such a scenario with a tight labour market though as a slow disinflation might still change people’s expectations about future inflation and make it hard for a return to the 2% yearly rate. Recently, consumer inflation expectations in the University of Michigan Survey rose, which is another bad news for the Fed. Powell once signalled that they look at those numbers. Some expect the Fed to signal a pause already at this meeting, but I think they’ll keep their data dependent message and probably state that they are “much closer to the end of the tightening cycle”.

Thursday: The ECB is expected to hike by 25 bps at the moment, but in my opinion it’s the inflation numbers on Tuesday that will decide between the 25 and the 50 bps move. The ECB surprised with a bigger than expected hike the last time citing persistently high inflation.

The US Jobless Claims keep being an important report due to the market’s focus on the labour market. Consensus sees Initial Claims at 240K vs. 230K prior and Continuing Claims at 1878K vs 1858K prior. Last week Jobless Claims beat expectations after several weeks of misses.

Friday: The NFP is expected at 180K jobs added vs. 236K prior. The unemployment rate is expected to tick up to 3.6% vs. 3.5% prior. The average hourly earnings are expected to remain unchanged at 4.2% for the Y/Y figure and 0.3% for the M/M one. Recent labour market data has been mixed but skewed to the downside which might point to the first miss after several months of beats. The rates market will certainly love a miss across the board with yields expected to fall and the US dollar with them especially against the JPY and the CHF. A strong report should see a reverse reaction, especially if the average hourly earnings tick up.

This article was written by Giuseppe Dellamotta.