Longer dated yields edged a bit lower in a week with few data surprises and no surprises from the Fed. In FX markets, yen trading has been the most action packed with USD/JPY touching 160 for the first time since 1990, triggering what looks like intervention from Japanese authorities on several occasions. Data suggests the Bank of Japan has bought close to JPY9 trillion to support the currency, which finally caught some tailwind by the end of the week not least from the oil market. The oil price fell to its lowest level since mid-March, likely triggered by weaker demand and perhaps a reduction of the geopolitical risk premium in the absence of further escalation of the conflict in the Middle East. Also, industrial metal prices corrected a bit lower following the very steep price surge we have seen through April.
Inflation data confirmed that euro area price pressures have muted in the spring after Easter effects blurred the picture somewhat in the promising March data. Core inflation edged lower to 2.7% but the ECB will continue to worry about service price growth, which corresponds to above 5% annual service inflation. The first estimate of GDP-growth came in a bit stronger than expected at 0.3% for Q1 aiming nicely with the soft-landing scenario playing out but of course also increasing the risk of new inflation headaches.
At the FOMC meeting, the Fed kept rates unchanged and chairman Powell provided few new clues on the policy outlook. He made it clear that the Fed remains in a good place with its current policy and he did not go into speculation on a potential rate hike, sparking a modest dovish reaction in markets. The Fed decided to taper the pace of QT, which came as no surprise. Q1 productivity growth slowed down sharply offering some explanation behind the recent broad-based increasing price pressures. Job openings declined more than expected in March, which points to easing wage pressures over the next few months.
Chinese manufacturing PMIs were robust and are overall still in line with a moderate manufacturing recovery. Strong export orders highlight the improvement in growth on export markets in line with our case for a rising global manufacturing cycle. This is also supported by the surge in global metal prices lately. Service PMIs on the other hand were weaker than expected.
Over the coming two weeks, we have lots of interesting data releases. Markets will pay particularly close attention to US CPI data where we expect a slight moderation in core price momentum following the last couple of months’ hot prints. We expect the Bank of England to keep the Bank Rate unchanged next week. Overall, we expect softer communication priming markets for a rate cut in June.
From China we will get another badge of inflation data. It will likely catch some headlines as China is flirting with sub-zero inflation rates. Retail and home sales will also be interesting to gauge developments in the housing crisis and the domestic economy.
