In the absence of further banking turmoil, it has been relatively calm waters in financial markets over the last two weeks. VIX volatility has traded at fairly low levels and yields have started to edge higher again, as focus turns away from risk of a banking crisis and back to data. Back in risk-on mode we have seen further USD weakening also supported by soft US data releases.
On balance, US data released during the Easter week was to the soft side with a decline in job openings and ISM data indicating slowdown in both manufacturing and the service sector. This does not square well with the more upbeat PMI reading from March, though. Thus the jury is still out on the current growth momentum. The jobs report was more or less as expected showing continued elevated wage pressures. Inflation declined in March taking some of the pressure off consumers, however underlying price pressures remain too high.
The inflation relief was short-lived, though, as higher oil prices once again dig into consumers’ purchasing power after OPEC+ announced that they will cut oil production by more than 1 million barrels per day starting next month. We think weaker USD and reports that the US could start to rebuild strategic reserves has further driven oil prices to 2023 highs.
Euro area retail sales declined a further 0.8% in February and we continue to see the picture of a two-speed economy with the service sector being the clear growth driver. Economic data mostly pointed to an ongoing gradual recovery, see Euro Area Macro Monitor. In the Nordics, we got more modest core inflation prints in both Denmark and Sweden, than expected. Particularly Swedish inflation remains way too high, though, and we continue to expect a 75bp hike later this month.
With a completely new leadership at the Bank of Japan, markets were listening in on governor Ueda’s speech at an inaugural news conference. He reiterated his intention to maintain monetary stimulus. This weakened JPY following considerable tailwinds through March. We do not read too much into Ueda’s message, though, as a move to loosen the grip on the yield curve cannot be announced beforehand.
Next week, April PMIs will be the key releases from both the euro area and the US. In the former, services will probably remain the main growth (and inflation) driver for now, but it will be interesting to see whether manufacturing finally shows some positive spill-over effects from the Chinese re-opening. The US data will shed some light on economic activity after a blurry March picture. Generally we look for slow, yet still positive growth for Q2. From China we get Q1 GDP figures, which will show a post-Covid rebound. We will also keep an eye on Japanese March inflation figures. Inflation excl. fresh food and energy, now at 3.5%, has increased steadily for more than a year and has so far reached the highest level in over 40 years.
