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EUR/AUD recovered last week after edging lower to 1.6216. Initial bias remains neutral this week and more consolidations could be seen. But further decline is expected as long as 1.6494 resistance holds. Fall from 1.6742 is seen as the third leg of the corrective pattern from 1.7062. Break of 1.6216 will turn bias back to the downside to 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of deeper fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5962) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF turned into sideway consolidations last week but overall outlook is unchanged. Initial bias remains neutral this week first. Fall from 0.9835 is seen as the third leg of the corrective pattern from 0.9847. Risk will stay on the downside as long as 0.9835 resistance holds. Below 0.9728 will target 0.9563. But strong support is expected from 50% retracement of 0.9252 to 0.9847 at 0.9550 to complete the pattern.

In the bigger picture, as long as 0.9563 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Break of 0.9847 resistance will target 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even as a correction to the down trend from 1.2004.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 1.0095 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

U.S. Highlights

• The Federal Reserve Senior Loan Officer Opinion Survey showed that most banks tightened lending standards further in the first quarter, with demand for loans falling in concert.
• Growth in U.S. consumer credit slowed materially in March as the upward trend in rates through the first quarter weighed on volumes.
• Federal Reserve officials reiterated their expectations that interest rates would need to remain higher for longer to ensure inflation returns sustainably to their 2% target.

Canadian Highlights

April’s jobs report defied expectations with the largest job gain in 15 months. Equally strong labour force growth left the unemployment rate steady. This supports our view that the Bank of Canada can wait until July to cut interest rates.

The Bank of Canada’s Financial Stability Report noted ongoing concerns about debt serviceability amidst high interest rates and renters experiencing high delinquency rates.

The economic challenges are more acute for small businesses, where insolvencies have risen due to higher borrowing costs, slower economic activity and the end of pandemic support.

U.S. – Credit Conditions Tighten as Fed Remains Vigilant

After last week’s Federal Reserve decision and employment report, the second week of May was comparatively lighter on data releases. First quarter reports for lending activity and consumer credit showed that tighter lending standards continue to weigh on credit demand. However, financial markets were more attentive to the comments of Federal Reserve officials as they sought insights on the potential path of monetary policy moving forward. As of the time of writing, the S&P 500 was up 2.1% on the week, while Treasury yields were roughly unchanged.

Starting things off on Monday, we received the updated Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) for the first quarter. Survey responses showed that banks continued to tighten lending standards and report weaker demand for loans across all business and consumer loan categories. Relative to the fourth quarter of 2023, more banks tightened lending standards for consumer credit, fewer tightened commercial and residential real estate credit, and roughly the same number of banks tightened commercial & industrial credit. Within consumer credit, tighter lending standards pushed the net share of banks reporting stronger demand for credit cards to its lowest level since mid-2020 (Chart 1).

Looking at the monthly breakdown for consumer credit, the March data showed consumer credit growth decelerated considerably through the first quarter as interest rates trended higher (Chart 2). While consumer credit still expanded 3.2% (annualized) in the first quarter, the gains were largely front-loaded in the earlier months and tapered off as financial conditions tightened. With interest rates continuing to push higher through the first half of the second quarter, it seems likely that a further softening in consumer credit growth will occur over the coming months. Combined with depleted pandemic excess savings, weakening consumer credit growth is expected to lead to moderating consumption growth in 2024. While this should aid the Federal Reserve in their attempts to return inflation to their 2% target, officials emphasized their vigilance in recent remarks.

Vice Chair and New York Fed President John Williams noted this week that monetary “policy is in a very good place, and we have the time to collect more [data], so steady as she goes”. This sentiment was echoed by Richmond Fed President Barkin who stated his optimism that “today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target”. Most members noted that they did not expect further policy tightening to be necessary, with Minneapolis Fed President Kashkari stating that “the bar for us raising is quite high, but it’s not infinite”. While the prospect for higher rates is unlikely at this time, Fed officials are expected to remain vigilant against the potential for upside risks to inflation.

April’s Consumer Price Index report next week will offer the next barometer on inflation trends as the Fed prepares to update their Summary of Economic Projections ahead of their next meeting on June 11-12th.

Canada – Jobs Surge Delays Rate Cut Bets

This week’s economic update is centered on the jobs report released earlier today. April saw an unexpectedly large gain of 90k jobs, but since the labour force expanded by an equally substantial amount, the unemployment rate held steady. Wage growth slowed relative to March but was slightly above the consensus estimate. The Canadian dollar saw an uptick on the news as markets pared back bets on the extent of rate cuts this year.

Today’s employment surge exceeded expectations by a sizeable margin after March’s setback, marking the largest gain in 15 months. Notably, the jump was driven by the private sector and with relatively balanced gains between part-time and full-time employment (Chart 1). This signals robust second quarter GDP potential, contrary to consensus forecasts. Such labour market strength may heighten inflation concerns, potentially influencing consumer spending and complicating the Bank of Canada’s (BoC) strategy.

The blockbuster jobs report makes the BoC’s annual Financial Stability Report (FSR), which typically focuses attention on risks to the financial system, seem less worrisome. However, the unemployment rate has risen above the pre-pandemic average. The FSR highlighted that unforeseen increases in unemployment as a potential risk that could destabilize the currently smooth transition to higher interest rates. The Bank continues to express concerns regarding debt serviceability, especially as borrowers face renewals at higher rates.

As it stands today, renters are a particularly vulnerable group. They are experiencing elevated delinquency rates, with the Senior Deputy Governor pointing out that high inflation over the past few years have strained budgets. The good news is that Canadian households still have “financial flexibility” in the form of liquid reserves that could help them absorb higher mortgage payments or cushion them in case of an economic downturn (Chart 2).
Chart 1 shows the month-on-month change in employment, broken down by full-time and part time jobs. April's 90,400 change in employment was balanced between by part-time (+50,300) and full-time (40,100) gains.

The disparity between large and small businesses was also called out by the FSR, with smaller entities feeling the brunt of rising rates more severely. The recent spike in business insolvencies is concentrated among small businesses and partially reflects the phase out of pandemic support programs. Given that these businesses employed nearly 47% of Canada’s workforce in 2022, their struggles could impact the labor market.

At the press conference following the FSR release, Governor Macklem noted a still-healthy level of business creation within this segment but emphasized continued vigilance for signs of stress. When questioned about the possibility of an interest rate cut given these pressures, the Governor remained noncommittal. In light of today’s strong jobs gain, we continue to expect that the BoC can afford to wait until July to cut rates. Financial markets seem to have aligned with our view, with the inflation report on May 21st likely to be the next key influence on rate expecations ahead of the June 5th decision.

Summary

United States: The Calm Before the Storm

• Was it an unwillingness to share the limelight with the world's central banks or just a quirk of the domestic economic calendar? Either way, it was an extraordinarily light week for U.S. economic data.
• Next week: Consumer Price Index (Wed.), Retail Sales (Wed.), Industrial Production (Thu.)

International: Another Busy Week for Foreign Central Banks

• It was a busy week for foreign central banks. The Bank of England, Reserve Bank of Australia and Banxico all held their policy rates steady, though the Bank of England offered a dovish outlook in contrast to the hawkish outlooks from Australia and Mexico. Sweden's Riksbank cut its policy rate by 25 bps to 3.75%, as expected, while Brazil's central bank slowed the pace of its monetary easing, with a 25 bps Selic rate cut to 10.50%.
• Next week: U.K. Average Weekly Earnings (Tue.), Japan GDP (Thu.), China Retail Sales and Industrial Output (Fri.)

Credit Market Insights: Give Me Some Credit

• Credit card debt is expanding at double its average annual growth in 2019. The strong rise is concerning, given the backdrop of record-high credit card APRs and generally elevated borrowing costs. Have households shown signs of stress?

Topic of the Week: The Fed's Balance Sheet Begins Its Next Chapter

• Last week, the FOMC announced a plan to begin slowing the pace of its balance sheet runoff program, commonly known as "quantitative tightening" (QT). Starting on June 1, the monthly redemption cap on Treasury securities will drop to $25 billion. The monthly redemption cap for mortgage-backed securities (MBS) will be left unchanged at $35 billion.

Full report here.

Monday, May 13, 2024

Tuesday, May 14, 2024

Wednesday, May 15, 2024

Thursday, May 16, 2024

Friday, May 17, 2024

All eyes will be on U.S. April inflation numbers on Wednesday after a string of upside surprises made earlier expectations for interest rate cuts from the Federal Reserve in the near term unlikely. We expect to see some softening in price growth in April. Headline consumer price index growth is expected to be up 3.5% from a year ago, which is unchanged from March despite an uptick in energy price growth. Core (excluding food and energy) price growth is expected to slow to 3.6% from 3.8% in March.

Some signs of slower price growth (if materialized) would be welcomed by Fed officials, but the details of earlier price increases have been concerning. It will take more than one softer price report to calm inflation fears. The surge in price pressures in Q1 also came with a broadening out in pressures across a wider array of goods and services—particularly in the non-shelter services components that the Fed views as a better indicator of domestically driven price growth. Our view is that inflation pressures will ease over the second half of this year, but that is contingent on economic growth slowing and unemployment edging higher. We expect the Fed will stick to a wait-and-see approach over the summer while watching the data closely. We think the Fed will move to cut interest rates in December if domestic demand and inflation readings gradually move lower over the remainder of this year.

In Canada, data reports should confirm a softer economic backdrop at the end of Q1. Both manufacturing and wholesale sales contracted in March, according to preliminary estimates from Statistics Canada. Retail was little changed, and total hours worked (among private industries) fell by 0.3% from February. That leaves Q1 GDP on track for a seventh consecutive decline on a per-capita basis despite what increasingly looks like a temporary jump in output growth in January. In April, early reports on the housing market showed new listings picking up in major markets. That was, however, not met by an increase in demand, leaving overall resale activities at subdued levels at the start of Q2. The softer Canadian economic backdrop continues to call for earlier and more interest rate cuts from the Bank of Canada than the Fed this year.

Week ahead data watch

• We expect April Canadian housing starts were little changed at 243,000 units in April from 242,000 units in the prior month. Building permits have been slowing, with an annualized three-month rolling average value of 230,000 in February, down from the 233,000 units in January.
• We expect the April U.S. retail sales to tick up by 0.6%, mainly driven by higher auto sales and the price-related sales increase at gas stations.
• U.S. industrial output likely edged up 0.1% in April, led by an output gain in the utility sector, partially offsetting lower output in the mining sector.

• Fed rate-cut speculators rest hopes on US inflation data
• After dovish BoE, pound traders turn to UK job numbers
• Will a strong labor market convince the RBA to hike?
• More Chinese data on tap amid signs of slow Q2 start

Spotlight turns to US CPI numbers

At last week’s meeting, the Fed appeared less hawkish than expected, with Chair Powell ruling out rate hikes and hinting that they are still leaning towards cuts. The softer-than-expected jobs report for April corroborated that view, which was echoed by more policymakers this week.

The only official expressing a different view was Minneapolis Fed President Neel Kashkari, who said that interest rates may need to stay at current levels all year and that the bar for a rate hike, although quite high, is not infinite.

With all that in mind, next week, traders will turn their attention to the US CPIs for April, due out on Wednesday. According to the S&P Global PMIs, output prices increased again at a solid but slower pace during April compared to March, suggesting that the risks surrounding Wednesday’s numbers may be titled somewhat to the downside. On top of that, the y/y change in oil prices declined and got closer to zero, which adds to the downside risks of the headline rate.

Therefore, if the data suggests that the latest stickiness in consumer prices was just temporary and that inflation has started to cool again, traders may lower their implied path a bit more, which could thereby prove negative for Treasury yields and the US dollar.

That said, market participants may get an earlier glimpse of where inflation headed in April on Tuesday, when the PPIs for the month are scheduled to be released. The US retail sales are also coming out at the same time as the CPI numbers, and they could also impact the market’s perspective on where the Fed may be headed.

Will UK jobs data seal the deal for a summer BoE cut?

The Bank of England (BoE) appeared more dovish than expected yesterday, leaving interest rates unchanged but with two members voting for a 25bps cut. In the statement accompanying the decision there was an addition saying that they will consider forthcoming data releases and how these inform the assessment that the risks from inflation are receding.

Combined with the downward revisions in the inflation projections, this suggested that officials believe inflation will continue softening. The pound slid somewhat at the time of the release as investors became more convinced that the first 25bps reduction will be delivered in August.

On Tuesday, the UK releases employment data for March, where investors may pay extra attention to wage growth to see whether it further softened, something that may allow inflation to slow as the Bank has projected. Thus, if wages decelerate, the pound may extend its BoE-related slide as traders may start examining whether a June cut is a better option.

Aussie may benefit from increasing RBA hike bets

After being disappointed by the RBA’s decision to maintain a neutral stance, aussie traders will now turn their gaze to Australia’s wage price index on Wednesday and the nation’s employment report on Thursday.

With inflation proving stickier than expected in Q1, they are not expecting rate cuts by the RBA anymore. On the contrary, they are assigning a decent 20% chance for a quarter-point hike by September.

Although the Bank reiterated that they “not ruling anything in or out” at this week’s decision, further acceleration in wages, which have been trending north since Q3 2020 and a strong rebound in employment could well enhance the probability for a September hike at a time when other central banks are thinking when to start lowering rates. This could prove positive for the aussie, which may also benefit from further improvement in risk appetite if the US inflation data on Wednesday encourage investors to add to their Fed rate cut bets.

How did the Chinese economy begin Q2?

Speaking about the aussie and the broader market sentiment, another variable in this equation next week will be China. On Friday, the world’s second-largest economy will release its industrial production, retail sales, and fixed asset investment data for April.

The nation’s official PMIs showed that growth slowed in both the manufacturing and services sectors, suggesting that activity cooled at the start of the second quarter after sizable gains in March. However, China’s exports and imports grew in April after contracting in March, pointing to improving domestic and overseas demand.

Having said all that, even though a solid GDP growth for Q1 lowered the need for Chinese policymakers to urgently ramp up stimulus measures, if next week’s data adds to the notion of a slow start of Q2, concerns about the stability of the economic recovery may resurface. This may weigh on the aussie and kiwi, with the former giving back some of any employment-related gains.

Japan’s GDP also on tap

On Thursday, during the Asian morning, Japan will publish the first estimate of its GDP for Q1, and it will be interesting to see whether the economy remained in growth or whether it slipped back into contraction. If the latter is the case, the yen is likely to continue falling and get closer to the 160-per-dollar zone that triggered last week’s first round of intervention.

Nonetheless, even if Japanese authorities step in again near that zone, a trend reversal would still be unlikely as another quarter of contraction could raise speculation that the next hike by the BoJ would be delayed even more. For the yen to stage a decent recovery, GDP data may need to reveal accelerating growth, encouraging market participants to ramp up their summer hike bets.

The Canadian labour market gained 90.4k positions in April, with full-time employment up 40.1k and part-time employment up 50.3k.

The unemployment rate was unchanged at 6.1% and the participation rate rose 0.1 percentage point to 65.4%.

Employment by sector showed gains in professional, scientific and technical services (+26k), accommodation and food services (+24k), health care and social assistance (+17k), and natural resources (+7k).

Lastly, total hours worked jumped 0.8% month-on-month, while wage growth slowed to 4.7% year-on-year (from 5.1% in March).

Key Implications

What?!! Following March's slight contraction, today's big jump was more than 4x the consensus expectation. Even for this notoriously volatile data, this was a shocker. Our own Chief Economist's immediate reaction was that "this is bananas!" Bananas indeed. This was the largest employment gain in 15 months. And with the cyclically sensitive private sector driving the increase alongside a huge jump in hours worked, it looks like second quarter GDP won't have too much of a drop off from the above-trend expectation for the first quarter.

This report is likely to raise eyebrows at the Bank of Canada. The central bank has been looking for evidence that inflation will continue moving towards the 2% target. With the labour market showing renewed strength, there is potential for consumer spending to rise in the coming months, forcing inflation higher. This will be a concern for the BoC, which has seen this narrative play out in the U.S. over 2024. Financial markets have reacted, moving more decisively towards July as the start date for rate cuts (instead of June). We'd agree as this would give the BoC a little more time to ensure inflation remains on the right track.

Daily Pivots: (S1) 1.0742; (P) 1.0764; (R1) 1.0803; More...

No change in EUR/USD's outlook and intraday bias stays neutral. Further rally is expected as long as 55 4H EMA (now at 1.0742) holds. On the upside, above 1.0810 will resume the rebound from 1.0601 to 1.0884 resistance next. However, firm break of 55 4H EMA will argue that the rebound has completed, and turn bias to the downside for 1.0648 support instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Daily Pivots: (S1) 1.2471; (P) 1.2499; (R1) 1.2552; More...

Intraday bias in GBP/USD stays neutral for the moment. Strong bounce from current level will retain near term bullishness. Further break of 1.2633 will resume the rebound from 1.2298 to 1.2708 resistance next. However, firm break of firm break of 1.2445 will indicate that this rebound has completed, and revive near term bearishness. Retest of 1.2298 should then be seen in this case.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.