• Tuesday: Japan
  Industrial Production and Retail Sales, Australia Retail Sales, China
  PMIs, China Caixin Manufacturing PMI, Eurozone CPI, Canada GDP, US ECI, US
  Consumer Confidence.
• Wednesday: New
  Zealand Jobs data, Canada Manufacturing PMI, US ADP, Treasury Refunding
  Announcement, US ISM Manufacturing PMI, US Job Openings, FOMC Policy Decision.
• Thursday:
  Switzerland CPI, Swiss Manufacturing PMI, US Challenger Job Cuts, US
  Jobless Claims.
• Friday:
  Eurozone Unemployment Rate, US NFP, Canada Services PMI, US ISM Services
  PMI.

Tuesday

The Chinese Manufacturing PMI is expected
to tick lower to 50.3 vs. 50.8 prior,
while the Services PMI is expected at 52.2 vs. 53.0 prior. The Chinese PMIs
have been very volatile in the past few years making it hard to gauge the state
of the economy. Nonetheless, they picked up well recently improving
the risk sentiment around the Chinese economy. As long as they are not too
bad, we can expect the market to be positive about it, especially with the
promised policy support from the officials.

The Eurozone CPI Y/Y is expected at 2.4%
vs. 2.4% prior,
while the Core CPI Y/Y is seen at 2.6% vs. 2.9% prior. The ECB has already
telegraphed a rate cut in June and it will likely take two hot reports
and a disappointing Q1 2024 wage growth data to force them to abort the mission.
The market expects three rate cuts this year, and while it’s unlikely that this
week’s report can change much the probability for the June move, it can change
the market’s pricing for the rest of the year.

The US Q1 Employment Cost Index (ECI) is
expected at 1.0% vs. 0.9% prior.
This is the most comprehensive measure of labour costs, but unfortunately, it’s
not as timely as the Average Hourly Earnings data. The Fed though watches
this indicator closely. Wage growth has been easing in the past two years,
but it remains relatively elevated. Hot data is likely to trigger a hawkish
response from the market considering the recent shift in the Fed’s stance.

This is because even if it might not cause
a second inflationary wave, elevated wage growth with a tight labour market
can keep inflation higher for longer risking a de-anchoring of expectations
and make it hard to return to target sustainably. Conversely, soft data can
lead to some positive risk sentiment with less fears about inflation and more
focus on growth.

The US Consumer Confidence is expected to tick
lower in April to 104.0 vs. 104.7 in
March. The Chief Economists at The
Conference Board highlighted that over the last six months, confidence has
been moving sideways with no real trend to the upside or downside either by
income or age group. Moreover, they added that consumers remained concerned
with elevated price levels but in general complaints have been trending
downward. Recession fears have also been trending downward and the assessments
of the present situation improved in March, primarily driven by more
positive views of the current employment situation. The Present Situation
Index will be something to watch as that’s generally a leading indicator
for the unemployment rate.

Wednesday

The New Zealand Q1 Labour Market report is
expected to show a 0.3% change in employment vs. 0.4% prior
with the Unemployment Rate rising to 4.3% vs. 4.0% prior. The Labour Costs Q/Q
is expected at 0.8% vs. 1.0% prior, while the Y/Y measure is seen ticking lower
to 3.8% vs. 3.9% prior. The RBNZ continues to expect the first rate cut in
2025, while the market sees the first move in August 2024. This might be
just the central bank’s strategy to avoid a premature easing in financial
conditions, especially after seeing what happened with the Fed’s pivot. A
sustained deterioration in the labour market though might not only make the
market to confirm the rate cut in 2024 but also increase the number of cuts.

The US ISM Manufacturing PMI is expected
to tick lower to 50.1 vs. 50.3 prior. Last
month, the index jumped into expansion for
the first time after 16 consecutive months in contraction with generally upbeat
commentary. The latest S&P
Global US Manufacturing PMI returned back
into contraction after the Q1 2024 expansion. The commentary this time has
been pretty bleak with even mentions of strong layoff activity, although there
was also good news on the inflation front. The ISM report is generally
considered more important by the market, so it will be used to confirm or
deny the S&P Global result.

The US Job Openings is expected at 8.680M
vs. 8.756M prior. This will be the first major US labour market report of
the week and, although it’s old (March data), it’s generally a market
moving release. The last
report we got a slight beat with negative
revisions to the prior readings highlighting a resilient although normalising
labour market. The market will also focus on the hiring and quit rates as they
both fell below the pre-pandemic trend lately.

The Fed is expected to keep interest rates
unchanged at 5.25-5.50% with no major changes to the statement except possibly
an acknowledgement of the recent setback in the disinflationary impulse. The
focus will be mostly on Fed Chair Powell’s Press Conference and possible
updates on the QT taper. Overall, it’s hard to expect something new given the
recent hawkish Fedspeak with Fed’s
Williams even opening the door for a rate
hike in case the progress on inflation were to stall or worse, reverse. The
market is now fully pricing just one rate cut in 2024, which is incredible
given that it was pricing SEVEN! at the start of the year.

Thursday

The Switzerland CPI M/M is expected at
0.1% vs. 0.0% prior, while there’s no consensus for the Y/Y measure at the time
of writing although the prior
report missed forecasts once again falling
to 1.0% vs. 1.3% expected. The market has already priced in a rate cut in
June and for the rest of the year, so another marked fall could at the
margin increase the magnitude of the cuts from 25 bps to 50 bps.

The US Jobless Claims continue to be one
of the most important releases to follow every week as it’s a timelier
indicator on the state of the labour market. This is because disinflation to
the Fed’s target is more likely with a weakening labour market. A resilient
labour market though could make the achievement of the target more difficult.
Initial Claims keep on hovering around cycle lows, while Continuing Claims
remain firm around the 1800K level. This week Initial Claims are expected at 212K
vs. 207K prior,
while there is no consensus at the time of writing for Continuing Claims
although the prior release showed a decrease to 1781K vs. 1814K expected and
1796K prior.

Friday

The US NFP report is expected to show 243K
jobs added in April vs. 303K in
March with the Unemployment Rate seen
unchanged at 3.8%. The Average Hourly Earnings M/M is expected at 0.3% vs. 0.3%
prior, while there’s no consensus for the Y/Y figure at the time of writing
although the previous release showed an easing to 4.1% vs. 4.3% prior. The
general expectations into the report will be shaped but other jobs data
throughout the week. We got some mixed signals recently with strong Jobless
Claims but weakening data in the NFIB Hiring Intentions and the S&P Global
PMIs. The focus will also be on wage growth as a good report with falling wage
growth might trigger some positive risk sentiment, while an uptick will likely
result in a hawkish reaction.

The US ISM Services PMI is expected at
52.0 vs. 51.4 prior. Last
month, the index missed expectations with
some general weakness in the sub-indexes, especially the prices component which
fell to the lowest level since March 2020. The latest S&P
Global US Services PMI missed expectations. The
commentary has been downbeat with even mentions of strong layoff activity,
although there was also good news on the inflation front. The most
important data to watch will be the price and employment sub-indexes.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

1) Rate differentials are the driver. You
can buy a 10-year Japanese government bond and get 0.9% per year or buy a US 10
and get 4.7%. Add in the weakening currency and there is a tidal wave of money
chasing this trade, which is a classic carry trade.

2) Intervention is an option but the
long history of intervention shows that it only helps when fundamentals are
improving. The Japanese government – which order the intervention – waved a bit
of a white flag this week in saying that it wasn’t currently weighing
intervention. That was a blunder because it gave the market the green light to
push further.

3) There was some hesitancy to push the
yen lower ahead of the Bank of Japan. In March they hiked rates for the first
time in 17 years and there was some angst they could tee up another move but
the decision was benign. They laid out an indeterminate timeline on hiking if
economic forecasts unfold as they hope.

4) Inflation isn’t rising. Somehow
Japan avoided the inflationary perfect storm that hit the rest of the world and
now prices are moderating. Today Tokyo reported CPI at 1.6% compared to 2.2%
expected. Now the miss was largely due to a one-off change to high school
tuition rates and the market picked up on that but it’s a headline that won’t boost
inflation expectations.

So what are
the options? The Japanese government can spend more to boost growth but that’s
hasn’t worked and the country is enormously indebted. There have been some
positive wage indications this spring but those will take 2-3 years to become
ingrained and hiking now would send the wrong signal.

So the
relief valve is the currency and it’s tough to see a floor.

What Japan –
and much of the world – is hoping for is a turn in the US dollar and global
inflation. If other central banks begin cutting then those rate differentials
narrow. Alternatively, if a recession looks like it’s on the horizon, there
will be a surge in the yen.

With a
carry trade, the money moves steadily and slowly but when there is trouble, it’s
a race to the exits. Back just before the financial crisis, there was this same
dynamic and money was flowing into the high-yielding AUD and NZD it unwound at
breakneck pace, including days with 10% currency moves.

But all they
can do right now is wait.

What’s driving the US dollar side of the trade

The dollar
bid right now is driven by inflation fears and specifically the fear that the
Fed will have to hike again. I think we’re close to the point of maximum
pessimism on that front.

The market
initially focused on this week’s US inflation numbers – which were hot – but eventually
pivoted to focusing on growth. If you look at good’s prices, they’re flat y/y
and Wal-Mart on Thursday emphasized that and was even talking about lowering meat
and vegetable prices.

The US
government is also running a deficit at 7% of GDP (compared to 1.4% in Canada).
I think the US dollar ultimately turns when the fiscal belt tightens, which isn’t
going to be until late 2025 at the earliest, though maybe the market starts to
price it in after the election, depending on the results.

This article was written by Adam Button at www.forexlive.com.