The markets are tuning in for a very exciting central bank week. Both the Fed and the ECB continue their tightrope walking, weighing stubborn inflation against rising financial stability risks. This week provided a sharp reminder of the latter, as the share price for First Republic bank plunged to record lows after their Q1 earnings report showed depositors had withdrawn more than USD 100bn. Maintaining the balance of central bank concerns, though, German public sector reached a wage agreement where the average increase is estimated at a whopping 11.5% over the next two years.
In the context of persistent core price pressures and in the absence of a systemic crisis, we keep our central bank calls unchanged and expect the Fed to deliver their final 25bp hike, see Fed preview: One more hike – cuts still far away, 27 April. Powell is unlikely to close the door for further hikes, but even with nominal rates on hold, we expect the monetary policy stance to continue tightening towards H2 as lower inflation expectations drive higher real rates. The JOLTS jobs openings will be released just ahead of the FOMC and it will be interesting to see whether labour demand has continued to ease. As we have highlighted before, recent job gains have been more driven by a recovery in labour supply, not by a further uptick in demand. We get a fresh snapshot on Friday when the US jobs report for April is released. Our call is for a slightly moderating but still solid jobs growth of 200k.
The ECB on Thursday is likely to deliver a 50bp hike unless bank lending survey and loan growth data due on Tuesday change the picture dramatically, see ECB Preview – The art of compromise, 27 April. We believe it will be a compromise deal with no specific forward guidance (nor guidance on balance sheet normalisation in H2 yet), but repeating a data-dependent approach to future policy decisions.
Not that big central banks would take their cues from the little ones, but this week, Riksbank opted for a cautious approach, and while hiking by 50bp as expected, signalled a softer rate path going forward. The dovish surprise sent the krona sharply weaker and has left EUR/SEK hovering around 11.40 level (our 12M forecast). For now, we keep our call for another 50bp hike in June but recognise that risks are tilted towards a smaller hike, including the possibility of extending the hiking cycle into September, see Flash comment Riksbank – Dovish hike, 26 April. The Bank of Japan, in turn, kept its yield curve control policy unchanged as expected. We continue to expect BoJ to loosen the grip on the yield curve at the June or July meeting.
Next week, we expect the Chinese PMIs for April to paint a mixed picture with a recovery in Caixin manufacturing after the big drop in March, while the official PMI is likely to correct lower after reaching a very high level in March. The convergence in the two is in line with our view of a recovery in the Chinese economy. Note that as a result from a very strong Q1 performance, we have raised our growth forecast and now expect the Chinese GDP to expand by 6.2% in 2023 (prev. 5.5%). Our estimate for 2024 is lowered to 5.0% from 5.2%. Read more on China Macro Monitor – 2023 growth revised up to 6.2%, 24 April.
