Next week’s market movers
- In the US, the FOMC is forecast to stand pat. We expect policymakers to maintain a balanced tone, with risks skewed towards a more cautious narrative than previously.
- The RBA is anticipated to remain on hold as well. Considering the improvement in economic data since the last meeting, the accompanying statement could be more upbeat.
- In Norway, the Norges Bank policy decision will be in focus. We think that this Bank will take no action either, despite slowing inflation.
- As for the US data, the employment report for April could prove critical to market expectations regarding the timing of the next Fed rate hike.
- We also get key economic indicators from the US, the UK, New Zealand and Canada.
On Monday, we get loads of US data. Let’s kick off with personal income and spending for March. Personal income is expected to have slowed, while personal spending is forecast to have accelerated. The income forecast is supported by a slowdown in average hourly earnings, while we see the risks surrounding the spending forecast as skewed to the downside. We base our view on the fact that retail sales slid during the month.
We also get the core PCE price index for the month, though no forecast is available for the yoy rate yet. However, the mom rate is expected to have turned negative, at -0.1% mom, which based on our calculations, could bring the yearly rate down to +1.6% yoy from +1.8% yoy. Coming on top of the disappointing CPI data for the month, a slowdown in the Fed’s favorite inflation measure could amplify the case for a cautious Fed on Wednesday (see below).
Finally, we get the ISM manufacturing PMI for April, and then on Wednesday, the non-manufacturing index for the month. Expectations are mixed, with the manufacturing figure forecast to have declined and the non-manufacturing index to have risen. Despite a potential pullback in the manufacturing index, given that both of these indices are expected to have remained at healthy levels, they could be a first sign that the US economy entered the second quarter on a decent footing, and that the softness in economic growth during the first quarter may have been only transitory.
Elsewhere, markets will remain closed in the UK, Germany, France, Switzerland, Sweden, Norway, and China, in celebration of Labor Day.
On Tuesday, during the Asian morning, the RBA will announce its rate decision. When they last met, policymakers highlighted the softness in labor market indicators, and that the recently announced supervisory measures with regards to lending could ease financial stability risks. Back then, this led us to understand that once these measures take effect, officials would be more flexible to cut rates again if needed. Nevertheless, we don’t expect them to take any action at this gathering. The latest jobs report showed a strong recovery in March, while the nation’s inflation data for Q1 showed that the headline CPI rate returned back within the RBA’s inflation target range of 2-3%. The trimmed mean rate rose notably as well, to just a tick below the lower band of the target range. Having these in mind, we think that the statement accompanying the decision may be relatively more upbeat than previously.
From the UK, we get the manufacturing PMI for April. On Wednesday, we get the construction PMI for the month and then on Thursday, we get the services index. All of these figures are forecast to have declined somewhat. Given that the 1st estimate of Q1 GDP showed a notable slowdown, the market may pay extra attention to these indices to see how the economy entered Q2. Was this weakness temporary or not?
As for the BoE, we don’t expect any shift in language anytime soon. The Q1 slowdown is in line with the Bank’s current stance to overlook above-target inflation and keep interest rates unchanged in order to support growth. Even if the PMIs foreshadow a rebound in economic activity in the beginning of Q2, we don’t expect them to change market perception with regards to BoE policy. We believe that investors want to see much more data supporting an economic recovery, and the election uncertainty to start dissipating, before they start pricing in a decent probability of a rate increase.
On Wednesday, all eyes will be turned to the FOMC rate decision. The forecast is for the Committee to keep borrowing costs unchanged, following a 25bps rate hike at the latest meeting in March. The case for no action this time is also supported by market pricing, which indicates less than 5% probability for a hike. Bearing also in mind that this meeting does not include updated economic forecasts or a press conference by Chair Yellen, market action will most likely come from the phrasing of the statement accompanying the decision.
The latest comments from Chair Yellen and the rest of the officials suggest that they remain on track to raise rates gradually, perhaps even another two times this year in line with the "dot plot". However, these were before the latest slowdown in the nation’s headline and core CPIs for March. From a growth perspective, economic activity slowed notably in Q1, but the Committee may look-through some of this softness as being transitory, something already mentioned in the March meeting minutes. On the bright side, the labor market appears quite robust overall, with the unemployment rate currently at 4.5%, in line with the Fed’s target of full employment. Bearing these mixed data in mind, we expect the Committee to maintain a more or less balanced tone, with the risks tilted towards a slightly more cautious narrative than previously. Policymakers may prefer to wait for a rebound in the economic data, and even some clarity surrounding the future path of fiscal policy, before clearly communicating that further near-term normalization is on the cards.
As for the US data, we get the ADP employment report for April. The private sector is expected to have added 190k jobs during the month, less than the 263k in March, but still a solid number that could raise speculation for the NFP print to also meet, or even exceed, its forecast of 178k.
We also get the nation’s ISM non-manufacturing PMI for April, as we already outlined above.
From New Zealand, we get the employment report for Q1 and the forecast is for the unemployment rate to have remained unchanged. We think that the risks surrounding that forecast may be skewed to the downside, if one looks at the ANZ job ads figure. Already at a high level, job ads rose further throughout the quarter, which suggests that the labor market likely continued to tighten in Q1.
On Thursday, the Norges Bank rate decision will be in the spotlight. In the absence of a forecast, we see the case for the Bank to remain on hold once again. Policymakers shifted to a slightly more dovish tone when they last met in March, indicating that there are prospects that inflation will be lower than previously expected. Since then, data showed that both the headline and the core CPI rates have indeed declined further. Having said that, we do not expect the Bank to ease policy for two key reasons: the unemployment rate is already very low, and any further rate cuts would likely boost house prices in Norway even more, thereby amplifying financial stability risks. The latter factor is something that officials have been paying close attention to for a while now, and we think it is likely to deter them from pulling the easing trigger. We expect the tone of the accompanying statement to remain as is, with the risks being skewed towards a more downbeat assessment.
On Friday, the main event will the US employment report for April. The forecast is for nonfarm payrolls to have risen by 178k, more than the somewhat disappointing 98k in March, and a strong number that is consistent with further tightening in the labor market. The unemployment rate is forecast to have ticked up, while average hourly earnings are expected to have accelerated slightly in monthly terms. Despite a potential uptick in the unemployment rate, this looks like another solid report overall that could bring forth market expectations regarding the timing of the next rate hike. Currently, the next hike is fully priced in for September according to the Fed funds futures. Solid jobs data could bring that forward, perhaps towards the summer meetings. However, as we outlined above, we would first like to see a rebound in critical economic data like the CPIs and GDP, before we assume that the Committee will implement further hikes in the near term.
We also get Canada’s employment data for April.
