The three key news releases of the last week all occurred on Thursday and Friday:
- Real GDP in the United States grew at a lethargic 1.1% annualized rate in the first quarter versus the expected 1.9% rate. Digging deeper, however, final sales to private domestic purchasers rose at a 2.9% annualized rate in the quarter versus a flat reading in the prior quarter. The big negative swing factor in the GDP report was inventories which subtracted 2.3 percentage points from the quarter’s GDP. Bottom line: The most important aspect of the report was that consumption was strong despite sharp monetary policy tightening.
- The US Employment Cost Index (ECI) rose 1.2% in the first quarter versus consensus of a 1.1% increase. We typically assess the ECI data alongside Average Hourly Earnings and Atlanta Fed Wage Growth Tracker data. Over the last 9 – 12 months, all three have decelerated. The Fed’s objective is to see this metric continue to decelerate
3. The Bank of Japan held its first meeting under the leadership of Governor Kazuo Ueda. The meeting was relatively uneventful with the only change being the end of forward guidance. Investors continue to debate when and how the BoJ might end Yield Curve Control (YCC). The debate over when focuses on June 16 versus July 28. The current YCC is to target a 0% plus or minus a range of 50 basis points. Some investors expect the next step to be expanding the range of allowed variation from 50bps to 75bps or even 100bps. Others expect that at some point YCC simply will end. The latter group is shrinking in size (and conviction) as Ueda to date has proven to be more cautious about exiting the BoJ’s extremely accommodative stance, especially with US banking challenges and debt ceiling concerns lurking in the background. When the BoJ exits YCC, it could have material implications not only for currency rates but also for global risk markets as the BoJ has been a key source of liquidity into global markets through early 2023.
The most important scheduled events next week will be:
US FOMC meeting (5/3): Markets are pricing a 25bps increase in the Fed Funds rate to 5.00 – 5.25% at the Wednesday FOMC meeting. Futures indicate this will be the final hike in the rate cycle. As of March
8th, prior to Silicon Valley Bank’s announcement of its balance sheet restructuring that led to its demise,
the market was expecting at least two additional rate hikes after the May 3rd meeting. I continue to believe the market is too dovish and that the Fed will hike rates again after this meeting. More importantly, futures also indicate 100bps of rate cuts by March 2024. I believe the Fed will be constrained in its ability to cut rates by elevated inflation through year-end.
If I’m correct about rates in the near-term, we should see upside in rates across the 2- to 5-year segment of the yield curve over the next 6 – 12 months.
2. ECB monetary policy decision (5/4): The ECB is expected to hike rates by 25 – 50bps on Thursday. A 25bps hike is priced with certainty with ~10% chance of a 50bps hike. Given recent inflation metrics andpublic sector union wage increases agreed in Germany, I would not discount the chances of 50bps. The key to the meeting will be Christine Lagarde’s commentary in the press conference regarding the outlook for the economy and rates. The market currently sees three more 25bps hikes before the cycle ends in the Eurozone. I believe this expectation is a bit too dovish and suspect we could see the deposit rate approach 4% before the cycle ends.
3. US labor market data with the Job Opening and Labor Turnover Survey (5/2) and the monthly payroll report (5/5). The JOLTS data will be released on Tuesday and the monthly payroll on Friday. The US needs on the order of 140k jobs per month to maintain a constant unemployment rate relative to population growth (assuming a constant labor force participation rate). In the first quarter, the US economy created ~345k jobs per month. The consensus is for nonfarm payroll growth of 180k, the lowest total since December 2020 when the US was enduring another wave of COVID-19, with the unemployment rate ticking up 10bps to 3.6% and average hourly earnings being constant at 0.3% month-on-month and 4.2% year-on-year. The job openings level is anticipated to be reported at 9.69 million on Tuesday which would imply 1.6 – 1.7 openings per unemployed person in the United States, a level far above the record high 1.25 ratio just before the pandemic.
