Financial markets lacked clear direction this week, although negative sentiment strengthened towards Friday. The recovery in equity markets stalled, while bond yields turned lower. EUR/USD continues to hover near 1.10, but in our latest FX Forecast Update, 19 April, we still see the cross turning lower in H2. April Flash PMIs continued to show a picture of a two-speed economy, with euro area manufacturing index remaining on contractionary territory, but with services sector driving the composite index to a 11-month high (54.4). We think the ECB is more concerned about the latter due to the close link to wage dynamics, and continue to look for a 50bp hike in the May meeting.
Chinese GDP growth surprised to the upside in Q1 at 2.2% q/q. Positively, the recovery was driven by stronger consumer sentiment, illustrated by retail sales rising 10.6% y/y in March. Getting the private consumption engine started is essential for making the recovery more sustained, rather than just stimulus-driven. The release creates some upside risks for our Chinse GDP growth forecast of 5.5% this year.
The political situation around the US debt ceiling remains tense, and the lower-than-expected tax revenues around the April ‘Tax Day’ this week could suggest that the time for coming up with a resolution is running short. The ‘X-date’, when the US Treasury will not be able to cover its expenses anymore due to the debt ceiling, could come as early as June. Meanwhile, House Speaker McCarthy presented a proposal for the spending cuts republicans demand in return for supporting a USD 1.5 trillion raise to debt ceiling this week. The proposal did not receive a warm welcome from the senate democrats, with the Majority Leader Schumer saying it has ‘no chance of moving forward in senate’. Read our thoughts from Research US – X-date looms closer as ‘Tax Day’ disappoints, 20 April.
Japanese inflation came out largely in line with expectations. Consumer prices excl. fresh food rose by 3.1% y/y in March, but excluding energy as well, inflation continued to accelerate to 3.8% y/y – the fastest since 1980s. Next week, we do not expect Bank of Japan to make changes to their monetary policy in the meeting ending on Friday, even if we think BoJ is still moving towards loosening the grip on the yield curve. BoJ likely wants confirmation on broad based wage hikes before they move at the June or July meeting.
We expect Rikbank to hike rates by 50bp, read more in the Nordic section below.
On the data front, Q1 flash GDP figures will be released from the euro area and the US. In the euro area, we look for a decline of -0.1% as a strong rebound in private consumption is not yet in sight. We also get Ifo (Monday) and EU Commission sentiment indicator (Thursday), which will give more insights how the economy started into Q2. German CPI figures on Friday will also be watched closely by the market, especially for signs of moderating underlying inflation pressures ahead of ECB’s May meeting.
US GDP likely continued its modest recovery in Q1, supported by brisk consumer spending especially in the first two months of the quarter. We look for +0.8% q/q AR, although risks are likely to the upside given that the economy still appears resilient to the banking sector uncertainty, which began in March.