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U.S. Highlights

• Headline inflation rose 0.1% m/m in March, while core rose by a strong 0.4% m/m. The 12-month change on headline slipped to a near two-year low of 5%, while core ticked higher to a still uncomfortable 5.6%.
• Retail sales (-1.0% m/m) slipped again in March, falling for a second consecutive month after an unusually strong start to the year. Declines were seen across most categories, leaving a weak handoff heading into Q2.
• Though there are tentative signs the economy is cooling, the Federal Reserve likely has one more 25 basis-point rate hike to follow through on in May, before pausing to better assess the full impact of rate hikes.

Canadian Highlights

• The Bank of Canada held the policy rate at 4.50% for a second straight decision. Markets believe interest rate cuts are on the docket in 2023, but Governor Macklem has pushed back against that notion.
• The Bank of Canada revised up 2023 GDP growth yet again in its latest Monetary Policy Report (MPR). The Canadian economy continues to power forward and expectations for 2023 growth are now at 1.4%, revised upward by 0.4 ppts from the January MPR.
• Canadian CPI inflation data is on watch for next week, where we expect a cooling in both headline and core measures.

U.S. - Calm Prevails As Economy Shows Tentative Signs of Cooling

Rounding the corner into earnings season, a sense of calm seemed to descend across financial markets this week. But with earnings season not officially in full swing until Friday morning, investor focus fell squarely on the economic data. The two headliners this week were the March readings of CPI inflation and retail sales, though the release of the FOMC meeting minutes also garnered some attention.

The latest move by the Federal Reserve occurred during the recent regional banking crisis, which ultimately forced the FOMC to rethink its trajectory for the federal funds rate. The uncertainty was on full display in the minutes, where several participants thought it was appropriate to hold the target range steady last month in light of recent events. This was an abrupt U-turn from what policymakers had communicated just a few weeks prior to the interest rate announcement, where the thought was rates needed to move both higher and faster relative to what had been assumed in the December’s Summary of Economic Projections. But perhaps the most noteworthy takeaway from the minutes was an explicit mention that considering the recent banking crisis “… the staff’s projection included a mild recession starting later this year, with a recovery over the subsequent two years”. Indeed, participants agreed that the actions taken by the Federal Reserve and other government agencies helped calm conditions in the banking sector but deemed that it was still too early to assess the confidence and magnitude of the effect of credit tightening on the real economy.

This morning’s retail sales gave a first glimpse into the impact that tighter credit conditions may already be having on households. Both nominal and real spending fell 1.0% m/m in March, marking the second consecutive month of declines. But even after accounting for the pullback, consumer spending is still tracking a robust 4.2% for Q1. However, the weak handoff from March suggests last quarter may have been the “last hurrah” as the cumulative effect of higher interest rates alongside the recent tightening in lending standards appear to be bearing down on the consumer.

From an inflation standpoint, the softening in demand has yet to manifest in any significant easing in core consumer price pressures. Indeed, headline inflation slipped to 5% y/y – a near two-year low – thanks to lower food and energy prices (Chart 1). However, core CPI rose 0.4% m/m, leaving the 3-month (annualized) and 12-month rates of change at 5.1% and 5.6%, respectively. Underpinning the gains was an acceleration in goods prices alongside continued strength in shelter (0.6% m/m) and non-housing services (0.3% m/m).

For a central bank who has become increasingly data dependent, the continued persistence in core inflation alongside the recent uptick in inflation expectations is unlikely to sit well (Chart 2). Provided there are no further flare-ups in financial markets, it is likely that the FOMC will need to raise the benchmark rate by another 25-bps in May, before pausing to better assess the full impact of the 500-bps of rate hikes.

Canada – Bank of Canada Versus Markets

The spotlight was on the Bank of Canada's (BoC) interest rate decision this week. As was widely expected, the Bank left the policy rate unchanged at 4.50% for a second straight decision. However, where markets and the Bank differ is how long this policy pause will last.

Markets are still maintaining their conviction that the policy rate will be cut later this year. But, when asked about the potential for near-term rate cuts, Governor Macklem's answer was explicit, "that doesn't look today like the most likely scenario to us". Markets caved a touch, shifting out the timing of a 25-basis point cut from September to December. As the dust settles, we too would lean against markets, and expect the 4.50% policy rate is here to stay for the remainder of the 2023.

At this meeting, the BoC struck out the reference to its 'conditional hold' and skewed its language toward a bias for potential further tightening. The BoC acknowledged that the return to the 2% inflation target could prove to be more difficult than expected. Inflation is cooling, and our forecast calls for Canadian inflation reaching 3% year-on-year (y/y) by the summer. This is progress, but it's not the 2% level the BoC is striving to achieve. The message was cemented by Macklem at an IMF meeting the following day where he stated, "that band, it’s not a zone of indifference. You need to aim for the middle if you want to be in the band most of the time".

As inflation continues to rein itself in, the BoC will take a narrower lens in assessing if easing price pressures are sustainable. Core inflation has been trending downward (Chart 1), but they will also continue to watch inflation expectations and wage growth, which are proving to be a bit stickier.

The Canadian economy is still showing signs of resiliency, forcing the BoC to revisit growth estimates yet again. The April MPR shows GDP growth for 2023 revised upward to 1.4%, 0.3 percentage points (ppts) higher than in the January MPR (Chart 2). A consumption led slowdown through the remainder of 2023 provides a weak hand off to 2024, leading to a downward revision to the growth forecast to a modest 1.3% (1.8% in the January MPR).

A smattering of Canadian data this week added further support to a strong first quarter. Manufacturing sales gave back some of January's 4.5% gain in February (-3.6% m/m), but sales are still tracking positive for the quarter. Existing home sales and prices were up in March, 1.4% and 2.0% m/m, respectively. This reinforces that housing markets are finding their bottom.

Next week’s highlight is the March inflation (CPI) release, where we expect a further cooling in headline and core inflation measures. We see headline inflation pulling back for a fifth straight month to 4.6% year-on-year (y/y) and core to moderate to 4.5%. Also on tap, retail sales for February are tracking another gain, following strong consumer spending in the last two months.

US

The first few banks are delivering a strong start to earnings season, reigniting soft landing calls, while large parts of Wall Street remain confident that the economy is recession bound as expectations remain that banking turmoil will persist.  Fed rate cut bets for later in the year have steadily increased and that has kept the dollar under pressure.

Investors will pay close attention to see if the regional Fed survey’s show minor improvements, if a few key housing readings show signs of stabilizing, and if the flash PMIs show the manufacturing activity remains stuck in contraction territory and as the service sector continues to soften.

In addition to a plethora of Fed speak, investors will closely pay attention to the Fed’s Beige Book.  The Beige Book will be released on Wednesday, the last time it highlighted a resilient economy. Fed’s Bowman will talk about central bank digital currencies on Tuesday. On Wednesday, Fed’s Goolsbee and Williams speak. On Thursday, Fed’s Waller talks about financial innovation, Mester discusses the economic and policy outlook, Bowman attends a Fed Listens event and Bostics talks about economic conditions.  On Friday, Fed’s Cook will talk about economic research.

Earnings season heats up as we hear from the rest of the banks and larger parts of the economy.  Key earnings for the week include results from Abbott Laboratories, American Express, ASML Holding, AT&T, Bank of America, Bank of New York Mellon, Blackstone, Charles Schwab, China Telecom, CSX, Discover Financial Services, DR Horton, Heineken, IBM, J&J, Lockheed Martin, Morgan Stanley, Nasdaq, Netflix, Philip Morris International, Procter & Gamble, SAP, Schlumberger, Taiwan Semiconductor Manufacturing, Tesla, Travelers, Union Pacific, US Bancorp, and Volvo.

Eurozone

Next week has a few standout economic releases, several central bank speeches, and a handful of big earnings. The eurozone outlook has improved even as Germany still appears to be headed for a shallow recession.

The euro has been rallying against the dollar on expectations the ECB will deliver a lot more tightening than the Fed going forward.  Investors will pay close attention to ECB President Lagarde’s comments on Monday. Tuesday’s release of the German ZEW survey is expected to show expectations modestly improve while the current situation remains deeply in negative territory and nowhere near the 10-year average of about 5.  ECB’s Elderson speaks on Tuesday in New York. On Wednesday, we get the second reading of euro area inflation and hear from ECB’s Schnabel, ECB’s Lane  and ECB’s de Cos.  On Thursday, traders will dissect the ECB March meeting account for any hints about future rate hikes and look to see if Eurozone consumer confidence contains anything larger than a minor improvement. On Friday, the April flash PMI readings for the eurozone will closely be watched as they reflect some of the banking turmoil that has hit the region; they are expected to show manufacturing activity improved, while service sector activity softened.

Key earnings to watch include ASML, Heineken, Nokia, and SAP.

UK

The upcoming jobs and inflation report will most likely impact bets on how much more tightening the BOE will deliver. The jobs report might look mixed as it could show the unemployment rate holding steady at 3.7%, while wages start to come down.  The main event for the UK is the inflation report.  Last month had a rather shocking hot headline print of 10.4%, but that is expected to ease towards 9.8%.  Inflation is widely expected to ease going forward, but any hot readings could keep the pressure on the BOE remaining aggressive. The March retail sales reading is expected to disappoint given the pressure on incomes and the wettest March in over 40 years. The flash PMIs are also expected to show manufacturing activity improved, while service sector activity was mostly steady.

Russia

Western sanctions are having little impact on Russian oil exports as they rise above pre-Ukraine war levels.  Pressure from the West will likely intensify.  Economic data is limited to a PPI release and the weekly gold and forex reserve totals.

South Africa

Following a larger-than-expected rate rise at the end of last month, traders will pay close attention to see if inflation remains elevated.  The headline YoY reading is expected to tick lower from 7.0% to 6.9%, still well above the 3-6% inflation target range.  Retail sales will also be released.

Turkey

Turkey will hold an important election on May 14th. Voters will decide if they want to keep President Erdogan, who has been in power for over two decades, or vote for a change.  Traders might start paying closer attention to polling which some are showing an edge to the main opposition.

Switzerland

Another very quiet week which contains only Money Supply data on Friday.

China

China is in the spotlight this week.  It starts with the one-year policy rate, which should remain unchanged on Monday, paving the way for commercial banks to keep their prime lending rates steady later in the week.  The biggest release of the week is first quarter GDP as it should see a major recovery as the economy reopened from its COVID lockdowns.  China Q1 GDP is expected to accelerate from 2.9% to 4.5%.  In addition to GDP, traders will dissect industrial output, investment and retail sales data releases, all of which are expected to show improvements.

India

Wholesale prices in March are expected to decline from 3.85% to 1.60%, further adding support to disinflation trends and supporting the RBI’s case to keep rates on hold.

Australia

Australia will have multiple economic releases along with the release of the RBA minutes of the April policy meeting.  Household spending, Westpac leading index, and the preliminary PMI readings will be released.

New Zealand

New Zealand’s key release of the week will be first quarter inflation.  The Q1 release is expected to show quarterly pricing pressures eased from 1.4% to 1.3%, while prices from a year ago softened from 7.2% to 6.7%.

Japan

Japan inflation is expected to continue to come down, softening from 3.3% to 3.2%.  The BOJ anticipates core inflation to fall over the next 12 months towards the 1.6% level, which is below the 2.0% target.

Singapore

The April policy decision by the Monetary Authority of Singapore did not go as expected as policymakers kept monetary policy settings unchanged. The upcoming week contains the March non-oil domestic export Y/Y reading which is expected to weaken from -15.6% to -18.2%.

Markets

Energy (Oil and Gas)

Oil’s fourth weekly advance has been mostly relentless as the OPEC+ output cut has sent global oil markets to a very deep supply deficit. The risk of a couple million barrel deficit in the second half of the year should keep prices supported.

Over the weekend, the G7 climate ministers gather in Japan to discuss climate change and investments in natural gas supplies. Energy giants, Baker Hughes and Schlumberger will post earnings.  Energy traders will pay special attention to China’s major economic releases that include first quarter GDP, industrial production, fixed-asset investment, and retail sales.

Natural gas is still looking oversupplied and with summer cooling demand a few weeks away, prices could remain heavy a little while longer.

Gold

Gold’s attempt at record territory failed after both core retail sales readings declined less than expected and hawkish Fed comments raised the risk that the Fed could do more tightening beyond May and that rates might need to stay higher for longer.

Over the short-term, gold could remain very volatile in both directions here. The start of earnings season has been relatively upbeat for the outlook for and that has boosted soft landing calls. For inflation to be conquered, we will need to see economic pain and that should support the bullish case for gold.

Crypto

Bitcoin and Ethereum are breaking out here.  Bitcoin has recaptured the $30,000 level, a pivotal level that was an entry level for many institutional investors in 2021. Ethereum is above $2,100 after a successful Shanghai upgrade.  Ethereum is now fully Proof-of-Stake and this milestone did not trigger a sell the news type reaction.  The next driver for crypto will likely stem from a return of banking turmoil that emerges from bank earnings and whether we see any updates on regulation or actions by authorities.

Saturday, April 15

Economic Data/Events:

• China property prices
• First day of Group of Seven energy, climate and environment ministers meeting in Japan

Sunday, April 16

Economic Events:

• China was expected to impose a no-fly zone north of Taiwan. They have denied these reports.
• Orthodox Easter is celebrated in Ukraine, Russia, and Greece

Monday, April 17

Economic Data/Events:

• India wholesale prices
• Italy CPI
• New Zealand food prices
• Singapore trade
• BOE’s Cunliffe delivers keynote speech at Innovate Finance Global Summit
• Fed’s Barkin speaks before the Richmond Association for Business Economics.

Tuesday, April 18

Economic Data/Events:

• US housing starts
• Canada CPI
• China Q1 GDP Q/Q: 2.1%e v 0.0% prior; Y/Y: 3.8%e v 2.9% prior, retail sales, industrial production
• Germany ZEW survey expectations
• Italy trade
• Mexico international reserves
• New Zealand home sales
• UK jobless claims, unemployment
• Big Bank Earnings from Goldman Sachs and Bank of America
• RBA minutes of April policy meeting
• Norges Bank Deputy Governor Pal Longva speaks on digital currency at an event organized by Polyteknisk Forening.

Wednesday, April 19

Economic Data/Events:

• Fed’s Beige Book
• Canada housing starts
• Eurozone Final CPI, new car registrations
• Japan industrial production
• South Africa CPI, retail sales
• UK CPI
• ECB’s Schnabel lectures at Leibniz-Zentrum für Europäische Wirtschaftsforschung in Germany
• SNB Maechler speaks at Fund Experts Forum in Rueschlikon
• SNB Schlegel speaks at event in Winterthur.
• BOE’s Mann speaks about “the economics of climate change” near Boston
• ECB’s de Cos speaks at Bloomberg’s New Economy Gateway Europe

Thursday, April 20

Economic Data/Events:

• US initial jobless claims, existing home sales, index of leading economic indicators
• China loan prime rates
• Eurozone consumer confidence
• Japan tertiary index, trade
• New Zealand CPI
• Spain trade
• Taiwan export orders
• ECB Minutes on March policy meeting
• ECB’s Visco speaks in London at the Official Monetary and Financial Institutions Forum event.
• ECB’s Holzmann makes opening remarks at Schumpeter lecture in Vienna.
• Fed’s Waller speaks at event hosted by Global Interdependence Center in Sarasota, Florida.
• Fed’s Harker speaks on “monetary policy and housing” a University of Pennsylvania/Wharton School event.
• Fed’s Mester discusses the economic and policy outlook at University of Akron in Ohio.
• Fed’s Bostic discusses regional and national economic conditions at Eastern Florida State College.
• Fed’s Bowman and Logan participate in a “Fed Listens” event on the Permian Basin at Odessa College in Texas.

Friday, April 21

Economic Data/Events:

• Canada Canada retail sales
• European Flash PMIs: Eurozone, Germany, France, and UK
• Hong Kong CPI
• Japan CPI

Sovereign Rating Updates:

• Greece (S&P)
• Italy (S&P)
• Netherlands (S&P)
• United Kingdom (S&P)
• France (Moody’s)
• Ireland (Moody’s)
• United Kingdom (Moody’s)

Growth in the Canadian consumer price index likely slowed sharply in March. We expect a deceleration to 4.1% year-over-year growth. That would be a full percentage point down from February and the lowest headline CPI reading since August 2021. Much of that decline is coming from lower energy prices. The price of gasoline was down 13% from March of last year, when the Russian invasion of Ukraine sent oil prices soaring. Food price inflation is still running hot (+9.7% year-over-year in February) but appears to be past its peak with annual growth likely to edge lower for a second straight month. But the breadth of price growth across other products and services has also been narrowing. And growth in the Bank of Canada’s preferred median and trim core CPI measures has slowed to a ~3.5% annualized rate over the three months ending in February (from a peak of 8% in summer of 2022). By our count, a little more than half of the goods and services in the CPI basket were still seeing inflation above the BoC’s 1% to 3% target range over that period, but that’s down from a peak of almost 90% last year.

Inflation is expected to drift even lower. Labour markets (and consumer demand) remained exceptionally firm early in 2023—but rising interest rates and elevated prices are increasingly cutting into household spending power. Delinquency rates on consumer loans are still low but on the rise. A preliminary estimate from StatCan was for a 0.6% decline in retail purchases in February, partially reversing a bigger 1.4% increase in January. And industry reports point to another decline in auto sales in March. Our own tracking of RBC debit and credit card spending has shown early signs of softer spending on discretionary goods. Services spending held up better but data from the Bank of Canada’s latest consumer survey suggests sentiment is softening there as well. We expect the easing in domestic inflation to persist–and for the Bank of Canada to hold the line on further interest rate increases through this year.

Week ahead data watch

We expect Canadian retail sales to edge down 0.6% during that month, in line with StatCan’s early indicator—due mainly to a price-related sales drop at gas stations. StatCan’s advance estimate suggested wholesale trade fell by 1.6% in February, largely driven by a sales decline in the motor vehicle and parts sector.

Canadian housing starts likely increased to 253,000 units in March from 244,000 units in the previous month. Residential building permit issuances have been slowing, with a 3-month rolling average of 248,000 units in February.

In the absence of further banking turmoil, it has been relatively calm waters in financial markets over the last two weeks. VIX volatility has traded at fairly low levels and yields have started to edge higher again, as focus turns away from risk of a banking crisis and back to data. Back in risk-on mode we have seen further USD weakening also supported by soft US data releases.

On balance, US data released during the Easter week was to the soft side with a decline in job openings and ISM data indicating slowdown in both manufacturing and the service sector. This does not square well with the more upbeat PMI reading from March, though. Thus the jury is still out on the current growth momentum. The jobs report was more or less as expected showing continued elevated wage pressures. Inflation declined in March taking some of the pressure off consumers, however underlying price pressures remain too high.

The inflation relief was short-lived, though, as higher oil prices once again dig into consumers' purchasing power after OPEC+ announced that they will cut oil production by more than 1 million barrels per day starting next month. We think weaker USD and reports that the US could start to rebuild strategic reserves has further driven oil prices to 2023 highs.

Euro area retail sales declined a further 0.8% in February and we continue to see the picture of a two-speed economy with the service sector being the clear growth driver. Economic data mostly pointed to an ongoing gradual recovery, see Euro Area Macro Monitor. In the Nordics, we got more modest core inflation prints in both Denmark and Sweden, than expected. Particularly Swedish inflation remains way too high, though, and we continue to expect a 75bp hike later this month.

With a completely new leadership at the Bank of Japan, markets were listening in on governor Ueda's speech at an inaugural news conference. He reiterated his intention to maintain monetary stimulus. This weakened JPY following considerable tailwinds through March. We do not read too much into Ueda's message, though, as a move to loosen the grip on the yield curve cannot be announced beforehand.

Next week, April PMIs will be the key releases from both the euro area and the US. In the former, services will probably remain the main growth (and inflation) driver for now, but it will be interesting to see whether manufacturing finally shows some positive spill-over effects from the Chinese re-opening. The US data will shed some light on economic activity after a blurry March picture. Generally we look for slow, yet still positive growth for Q2. From China we get Q1 GDP figures, which will show a post-Covid rebound. We will also keep an eye on Japanese March inflation figures. Inflation excl. fresh food and energy, now at 3.5%, has increased steadily for more than a year and has so far reached the highest level in over 40 years.

Full report in PDF.

There are no major central bank decisions scheduled for next week, but that doesn’t mean markets will be quiet as there’s a ton of data releases that can fuel volatility. The highlight will be China’s economic growth, which will reveal exactly how powerful the reopening boost was. Meanwhile in Europe, the latest business surveys could decide whether the euro’s rally still has some miles left in the tank.

China set for growth rebound

The world’s second-largest economy has been battered and bruised over the last year, grappling with a double whammy of draconian lockdowns and the meltdown in the nation’s property sector. Luckily both problems have eased in recent months, as the anti-covid measures were lifted and the real estate market has started to heal.

Next week, the ball will get rolling with China’s GDP growth numbers on Tuesday. Business surveys painted a mixed picture during the first quarter, signaling that the services sector continues to enjoy a reopening boost but manufacturing has started to lose momentum.

Accordingly, forecasts from economists suggest economic activity picked up steam in Q1. Economic growth is expected to have risen by 1.2% from the previous quarter, after a flat reading in Q4. Hence, the situation seems to be improving, but it’s questionable whether this will last once the reopening boom fades.

Overall, the outlook for China is still worrisome. The global economy is slowing and manufacturing demand has been hit particularly hard, spelling bad news for China’s manufacturing-heavy model. In addition, the real estate sector is recovering mostly because the government is boosting infrastructure spending again, which is a dangerous strategy as it can reinflate the property bubble.

In the FX market, the most sensitive currencies to Chinese data are the Australian and New Zealand dollars. While encouraging GDP numbers could provide a short-term lift to these currencies, it’s tough to be optimistic in the bigger picture, with storm clouds gathering over the global economy.

Eurozone braces for business surveys

Crossing into Europe, the main event will be the latest round of PMI surveys on Friday, which will showcase what’s next for economic activity now that the energy shock has receded.

This sharp decline in energy costs helped the Eurozone economy stage an impressive recovery in recent months, with the business surveys for March signaling that recession risks have diminished for now. Traders will be searching for clues around whether this encouraging phenomenon persisted in April.

However, that’s doubtful considering the recent rally in oil prices after OPEC cut supply and the turbulence in the banking system. On top of the relentless increase in borrowing costs, business leaders might have turned less optimistic entering the second quarter.

As for the euro, it has gone on a rampage since the banking panic subsided. Behind this stunning rally was speculation that the Fed will be forced to slash rates later this year, which wounded the US dollar. In contrast, market pricing suggests the European Central Bank will keep raising rates throughout the year to deal with elevated inflation.

Therefore, the quality of the upcoming dataset will be critical in shaping these expectations and hence decide whether euro/dollar has enough juice to break above the $1.10 zone that rejected the pair back in January.

Barrage of UK data on tap 

In the United Kingdom, there’s a storm of economic data coming up, starting with employment numbers on Tuesday. Then on Wednesday, inflation figures will enter the spotlight, before the week concludes with retail sales and the latest business surveys on Friday.

Similar to the Eurozone, the economic landscape in the UK has turned a little brighter lately, with business surveys rebounding and the labor market staying tight. The problem is that inflation continues to rage, having crossed back above 10% in February. Consumption is struggling too, with retail sales falling from last year as the cost of living crisis continues to haunt people.

As for sterling, it has returned back to its old habits of tracking stock markets. The one-month correlation between Cable and the S&P 500 has risen to 84%, which suggests that the main driver of the pound is the global investment mood. This explains why sterling has performed so well this year, but it also implies that any turnaround in equities could be particularly damaging.

In this sense, the risk of a selloff in stock markets seems high, as earnings have started to decline while valuations are quite expensive. Earnings will be in focus next week with Tesla, Netflix, Johnson & Johnson, TSMC, and Lockheed Martin being among the biggest names to report results.

Japan, Canada and New Zealand await inflation updates

The yen came under fire lately as the Bank of Japan pushed back against speculation about further tightening. Governor Ueda essentially signaled he’s not in a rush to remove stimulus because inflation is likely to fall soon. In this sense, the latest batch of inflation stats on Friday could attract special attention.

Likewise, Canadian inflation numbers for March will be released Tuesday, ahead of retail sales for February due out on Friday. In New Zealand, the inflation report for Q1 will hit the markets Thursday.

Last but not least, it’s going to be a quiet week in the United States, although the S&P Global business surveys on Friday will provide crucial insights about the economy’s health.

With inflation in double digits, the BoE is among the few major central banks that are not expected to push the cut button during 2023. With that in mind, pound traders may pay close attention to the UK CPI figures for March, due out on Wednesday at 06:00 GMT. Will the March numbers add credence to expectations of more hikes by the BoE? And what will they mean for the pound?

Investors expect more hikes by the BoE and no cuts at all

Following the February CPI numbers, where headline inflation accelerated to 10.4% y/y, BoE policymakers did not hesitate to push the hike button one more time when they met on March 23. They raised interest rates by 25bps and noted that since the February meeting, inflation has surprised significantly on the upside and that the near-term path of GDP is likely to be stronger than previously expected. More importantly, they appeared willing to raise rates further if there was evidence of more persistent price pressures.

With all that in mind, investors are likely to lock their gaze on the CPI numbers for March next week, as they try to figure out how the BoE may proceed with monetary policy henceforth amidst expectations of rate reduction by other major central banks, like the Fed and the BoC. Currently, investors assign a 65% probability for another quarter-point hike in May, with the remaining 35% pointing to a pause. They are also seeing another increase of the same size beyond May before the Bank steps to the sidelines. That said, the interesting part is that market participants do not expect the BoE to proceed with any rate reductions before the end of this year.

Small slowdown unlikely to alter hike expectations

According to the S&P Composite PMI, prices charged by UK firms continued to ease as softer cost pressures have started to pass on to consumers. However, many businesses suggested that ongoing wage inflation and uncertainty about energy costs had limited their ability to discount prices. Thus, although this implies downside risks to Wednesday’s data, a small slowdown may not be enough to dramatically alter expectations around the BoE’s future course of action. What’s more, with the year-over-year change in oil prices hovering into negative territory, a bigger slide in the headline rate than in the core will not come as a surprise.

Pound may continue to outperform the dollar

Combined with Governor Bailey’s recent remarks that he now expects the UK to avoid a recession this year, a headline CPI rate near double digits and a core one at around three times the BoE’s objective may allow market participants to continue pricing in more rate increases. The pound could stay supported, especially against currencies whose central banks are anticipated to start cutting interest rates later this year. With the Fed seen reducing US rates by around 50bps by year end, one of them may be the US dollar.

From a technical standpoint, pound/dollar remains in uptrend mode, currently hovering near the high of April 4 at 1.2525. A break above that zone would confirm a higher high and may encourage the bulls to climb towards the high of May 27, 2022, at around 1.2670. If there are no sellers to be found near that zone, a move higher may carry larger bullish implications, perhaps setting the stage for advances towards the 1.2975 area, which acted as key support between March 14 and April 20, 2022.

On the downside, the move signaling that the bears have woken up may be a dip below the low of April 10 at 1.2340. Such a move would confirm a lower low on the daily chart and could initially allow declines towards the low of March 24, at around 1.2190. If that hurdle also gets broken, the decline may then continue until the pair hits the 1.2025 area, which offered support on March 15 and 16.

On Tuesday, the market will have the opportunity to see the true pace of the much-talked Chinese reopening as we get a plethora of key Chinese economic data. While a stronger set of data releases will be positive for the global growth outlook, are central banks ready for news that could potentially mean that the acute inflationary pressures might be resurfacing?

Is the world ready for a rapidly expanding China?

It has been an interesting period over the past two years as developed economies have been trying to recover from the Covid pandemic impact with China being hamstrung. The much-talked and eagerly expected Chinese reopening has been more gradual than most have anticipated, with its full impact yet to be seen. However, there is a troubling dichotomy regarding China’s growth outlook. A rebound in the Chinese economy is clearly beneficial for the entire world.

The recent IMF forecasts show global growth slowing considerably in 2023, with the situation likely to have been much worse if China was not expected to almost double its growth rate from 2022. Certain commodity-exporting nations like Australia would likely be the first ones to enjoy the increased demand for resources from China, boosting the slowing local economies. This will potentially give time to the local central banks to evaluate the impact of their aggressive recent rate hiking cycles and map out their rate cutting strategies.

Over the past two months we have noticed an interesting phenomenon. On the back of lower oil prices, headline inflation has been aggressively dropping in most major economies, with the latest example being Wednesday’s CPI release in the US. However, core inflation, which includes the less volatile components, has proved more stubborn and it is currently hovering at unsustainably high levels. This situation is complicating the monetary policy outlook.

Now, add to this mixture a rapidly growing China with its commodity-hungry economy. An increase in oil prices will probably lead to a jump in the headline CPI that will most likely drag core inflation even higher. And then central banks would be faced with a massive dilemma: whether to opt for even higher rates risking a proper recession as demand crashes under the higher price of money or allow their economies to be ravaged by another inflation wave that is bound to have second and third round effects on wages and the public perception of inflation.

Data galore on Tuesday

IMF economists have penciled in a 5.2% year-on-year GDP increase for 2023 in their latest projections. This is slightly higher than the 5% economic growth target set by the Chinese government in early March. This is one of its lowest targets in decades, thus leaving substantial room for an upside surprise this year. On Tuesday, we will get the growth figures for the first quarter of 2023. While the initial market forecasts point to a slower quarter, on the back of the recent disappointing manufacturing business surveys, most acknowledge that there is sizeable risk of a stronger-than-expected print considering the latest trade balance data.

If the forecasts for a weaker quarter are confirmed, the market would quickly assume that further interventions by the central government and the PBoC could be on the cards, in order to help the economy pick up pace. Another reserve requirement ratio cut could be an easy option as inflation remains very low compared to the West and the PPI YoY% change remains in negative territory for the past six months.

What also needs some boosting is the struggling retail sector. The great transformation of China to a consumer-driven economy appears to have stalled during the Covid years and hence renewed effort from government officials is required. Retail sales rebounded in February, but it has been a very weak 18-month period with the dataset showing unprecedented weakness. Another weak point on Tuesday is bound to increase the pressure on the PBoC to act more forcefully.

Euro/aussie at 20-month high

The euro/aussie pair has completed a 20-month round trip from the August 20, 2021 high of 1.6435 to the August 26, 2022 low of 1.4280 and back again to the highs. This movement is partly reflecting the divergent economic outlook over the past two years with the euro area economy shooting down the recession expectations and the Australian economic growth moving down a notch.

Euro bulls would enjoy another rally, but the overall picture appears to be toppy, particularly when examining the RSI and the stochastic oscillator indicators. On the other hand, aussie bulls would love a strong show from Tuesday’s Chinese data, despite the possible complications for the RBA down the line. A break below 1.6250 and a push towards the busy 1.5831 area would allow the aussie bulls to declare a short-term victory, but they must be fully aware that it will not be the end of the war.

Japan's new central bank governor, Kazuo Ueda, isn't planning drastic ultra-low interest rate policy changes. He's all about maintaining stability in prices and financial systems in the world's third-largest economy. And why not? According to Ueda, Japan's financial institutions aren't facing the same turmoil as their counterparts in the US and Europe. Plus, he's taking over from his predecessor, Haruhiko Kuroda, whose work he's determined to continue. On the charts, however, we have seen currencies like the Pounds and the Euro outperforming the Yen - can we expect any changes soon?

GBPJPY - Daily Timeframe

GBPJPY is trading within a rising channel while approaching a rally-base-drop supply zone. We also see the price action to the left presenting a strong case of an AMD (Accumulation-Manipulation-Distribution) pattern. I expect a bearish price reaction from the intersection of the trendline resistance and the supply zone.

Analysts’ Expectations:

• Direction: Bearish
• Target: 164.674
• Invalidation: 168.900

CADJPY - Weekly Timeframe

In the case of CADJPY, we see a consolidation inside the descending channel, and the price is currently approaching a rally-base-drop supply zone which aligns perfectly with the trendline resistance of the channel. When we consider the fact that the price has only recently created a lower low after surpassing the previous low at 94.739; I believe there should be some bearish reaction from the supply zone.

Analysts’ Expectations:

• Direction: Bearish
• Target: 96.070
• Invalidation: 100.948

EURJPY - Weekly Timeframe

EURJPY was a bit troublesome to look at. Too many wicks made it difficult to figure out the exact area of the supply zone. However, I've had to make do with the pivot zone on the weekly timeframe, which I confirmed based on the Fibonacci retracement levels. Based on this scarcity of multiple confluences, I would scan for a clear break of structure, in whatever direction, on the lower timeframes (4 Hours and Daily).

Analysts’ Expectations:

• Direction: Bearish
• Target: 141.997
• Invalidation: 148.530

USDJPY - Daily Timeframe

The market structure (lows and highs) on the USDJPY chart says one thing, whereas the momentum is visibly rebelling against that direction. I'm saying this because the price action following the most reaction from the trendline support failed to deliver impressive momentum. As a result, I have marked out the demand zone that intersects the trendline support, and I will be taking special interest in the reaction at or within that demand zone. This means a clear breakout in either a bullish or bearish direction would be my trade trigger.

Analysts’ Expectations:

• Direction: Bullish
• Target: 130.154
• Invalidation: 136.100

CONCLUSION

The trading of CFDs comes at a risk. Thus, to succeed, you have to manage risks properly. To avoid costly mistakes while you look to trade these opportunities, be sure to do your due diligence and manage your risk appropriately.

The Swiss Producer and Import Price Index rose by 0.2% in March, slowing the annual growth rate to 2.1% from 2.7%. Producer price pressures are easing faster than expected (2.7% y/y expected). Easing inflation is a long-awaited signal for the SNB, which has raised its rate by 225 percentage points since the middle of last year to 1.5%, the highest since 2008.

Consumer inflation in Switzerland accelerated unexpectedly in January and February. Still, a continued slowdown in producer and import prices will likely keep a lid on consumer inflation in the coming months.

The Swiss franc exchange rate is also playing its role in easing inflation. From its peak in November to Thursday’s low, the USDCHF exchange rate has lost more than 12.5%, taking prices back to February 2021 levels. The current rate of 0.8880 is quite close to multi-year lows near 0.8800.

Switzerland is now entering a situation where inflation is on a steady downward path, and the franc is close to historically uncomfortable levels for the SNB.

The central bank may start to change its rhetoric to a more dovish one, satisfied with the policy tightening that has already taken place and fearful of tightening the screws too much on the economy. This is all the more true after the Credit Suisse story exposed banks’ vulnerability.

Markets

What can’t go up, must come down! US Treasuries attempted two straight sessions to rally on disappointing US eco data. On Wednesday following a small downward headline CPI deviation and yesterday on a similar negative surprise coming from PPI figures. Wednesday’s rally still ended with gains, even if they closed off intraday highs. Yesterday’s leap higher was already weaker in magnitude with signs of fatigue immediately emerging and (longer term) Treasuries even closing with losses. Today’s downward surprise from import/export prices and retail sales (-1% m/m in March vs -0.5% m/m expected; control group better than feared though at -0.3% m/m) triggered negligible spike higher before investors decided to square some positions. The profit taking move pulled US Treasuries lower. US yields currently add 4 bps (30-yr) to 10.7 bps (2-yr). The latter tries to settle back above the psychologic 4% mark. Comments by Fed Waller give the move some additional momentum. He is giving some hawkish counterweight to both market positioning and more dovish comments from other Fed members. He wants to tighten monetary policy further because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight and inflation is far above target. Waller would welcome signs of moderating demand, but until they appear and he sees inflation moving meaningfully and persistently down toward the Fed’s 2% target, he believes there is still work to do. He interprets this week’s inflation data as having not made much progress on the inflation goal. The US yield comeback stopped USD weakness. EUR/USD traded above 1.1050 going into today’s figures, to currently changes hands at 1.1025. The YTD low in the trade-weighted dollar (100.82) was tested, but stood its ground. US stock markets opened slightly positive with European indices outperforming (+0.5%). German yields add up to 6.3 bps at the front end of the curve. The likes of ECB Wunsch, Holzmann, Nagel, Vasle, Kazaks and Scicluna yesterday and overnight floated the idea of sticking with 50 bps rate hikes in May. ECB Lagarde confirmed that underlying inflationary pressures remain strong. Finally; Reuters reported that more and more ECB governors like the idea of stopping bond reinvestments all together after Q2. A hard stop this year would imply around €58bn worth of maturities compared to sticking to the current pace of €15bn/month. The “sources” article will get more traction as we approach May and June ECB policy meetings.

News Headlines

The International Energy Agency warned that the output cuts announced by OPEC+ last month risk exacerbating an oil supply deficit that in the second half of the year. OPEC+ described the unexpected move as a precautionary one. It triggered a sharp oil price increase of which the IEA says it could hurt consumers and the global economic recovery, potentially induce a recession. The agency estimates that global oil supply will fall by 400 000 barrels per day as the 1.4m OPEC+ output cut would be partially compensated by increased production outside the cartel. Oil prices today eke out a small gain of about 0.5%. Brent oil is currently trading at around $86.45/b. Before the OPEC production cut, one barrel was sold for less than $80.

Swedish inflation cooled slightly more than expected in March. Headline prices rose a monthly 0.6% (vs 0.9% expected) to be up 10.6% on an annual basis. That’s down from 12% in February and slightly lower than the 11% consensus estimate. The headline gauge using a fixed interest rate (CPIF) eased from 9.4% to 8% (vs 8.3%). Core CPIF (ex. energy) printed 0.6% m/m and 8.9% y/y. It’s the first time since January 2022 that the latter measure has eased. But although missing the a 0.8% m/m and 9.1% y/y analyst forecast, it is it well above the Riksbank’s own 7.5% projection made in February. This also goes for the headline CPIF, which the Riksbank forecasted at 7.8% for March. It keeps the central bank on track for the flagged spring rate hike (April 26). This may well be another 50 bps move, to 3.5% given today’s inflation numbers and the fact that the Swedish krone – which recently became a matter of concern for the Riksbank – barely left the recent lows. EUR/SEK today changes hands at around 11.34. This compares to the highs seen earlier this year just above 11.40. The only time the SEK traded weaker still which in the wake of the GFC, when EUR/SEK temporarily rose beyond 11.50. Swedish swap yields rise between 0.8 and 3.1 bps today.