After the “goldilocks” US jobs data on Friday (resilient job gains and benign wage growth ie. not too hot, not too cold), the “will they, wont they” debate around the Fed raising rates at its next meeting at the start of next month will be further informed by fresh US CPI data released on Wednesday. The headline number has fallen for the last eight reports and more declines are expected. But the core month-on-month number will be key. Economists reckon the forecast 0.4% remains more than double the rate required over time to bring inflation back to the Fed’s 2% target.
Markets have been a lot more sensitive to soft data recently as growth and recession concerns have increased. Central banks around the globe are either pausing their rate hike cycle or getting close to the end. Those banks like the ECB and BoE who have signalled a readiness to continue have seen their currencies make strong year-to-date gains. This is highlighted by crosses like EUR/AUD and GBP/AUD which pushed to new cycle highs last week.
Focus will turn to the Bank of Canada meeting on Wednesday where policymakers are also expected to stand pat. Elevated wage data will likely bother the BoC who have noted previously that high earnings growth is inconsistent with regaining control of inflation. But the downside risks to global growth after the banking stress means interest cuts could be on the horizon. Guidance around the banking turmoil could inform on the BoC’s next move. The recent drop in USD/CAD stalled around key trend support in the low 1.34s. Resistance sits at 1.3526.
Major risk events of the week
12 April 2023, Wednesday:
-US CPI: The market median forecast for headline CPI is 0.3% in March, down one-tenth from the previous month. The annual reading is expected to remain unchanged at 6%. Analysts say shelter remains the key component with the gap between market measures and the CPI index continuing to widen.
-Bank of Canada Meeting After signalling a “conditional pause” at its meeting in March, the bank is expected to keep the policy rate at 4.5%. The labour market remains tight, with this week’s upside surprise in job gains while wage growth is still around 4-5%. But inflation fell more than expected due to lower energy costs.
-FOMC Minutes: The Fed voted unanimously to lift rates by 25bps. But policymakers softened their forward guidance and Powell said a tightening of credit conditions could weigh on activity. Any new insights into this shifting assessment of the economic backdrop will be crucial for the May Fed rate decision.
13 April 2023, Thursday:
–UK GDP: Analysts expect an expansion of 0.1% m/m in February after the 0.3% increase in January. Economists say weaker construction and manufacturing growth weighed, but surveys picked up and retail sales rose robustly. That means many no longer expect a recession. In fact, some have recently raised their GDP forecasts for 2023. GBP has been the best performing major this year. But cable is battling with the 12.5 barrier with the December and January highs around 1.2446/47 adding to the resistance.
–ECB Meeting Minutes: The bank hiked rates by 50bps at its March meeting, amid the banking sector turmoil. It emphasised a data dependent approach but said inflation was projected to remain too high for too long. Focus will be on the path for future policy tightening and the debate between the hawks and doves. EUR/USD has been strong since the mid-March low at 10516. Dips are being bought but 1.10 is the key level to beat for bulls.
14 April 2023, Friday:
–US Retail Sales: Consensus forecasts a second straight fall of 0.4% in March, with core also seen falling. Last month’s decline was led by vehicles and furniture stores, while the sole services category also dipped. But spending is still being supported by the tight labour market which is seeing solid wage growth.