Market Briefing: Trading Turns Subdued Ahead of Busy Week
Risk-sensitive currencies and equity markets are trading with a modestly weaker bias this morning as traders brace for US economic activity, wage growth, and consumer inflation numbers in the back half of the week. Growing anxiety over the upcoming debt ceiling deadline seems to be putting upward pressure on the front end of the yield curve, but longer-term rates are ticking lower. The dollar is weaker against most of its major counterparts, and the commodity complex is on the defensive.
The British pound spent the weekend trying but failing to break above the 1.25 mark against the greenback. Last week brought surprisingly-strong employment and inflation numbers, a sharp improvement in private sector sentiment levels, and an outlook upgrade from Standard & Poor’s - but stagflationary fears remain embedded in the exchange rate, limiting topside gains.
The Canadian exchange rate remains largely unchanged ahead of this week’s gross domestic product numbers and minutes from the central bank’s last meeting. Growth in February could come in slightly below Statistics Canada’s initial 0.3-percent reading, and a preliminary estimate for March isn’t likely to show much improvement. That said, along with the usual hockey-and-Tim-Horton’s discussion at the Bank’s meeting, we think policymakers may have taken a slightly more optimistic view on the economy’s longer-term resilience, meaning that the minutes could provide some lift to the currency.
There are no major US data releases in the docket today, and with Federal Reserve speakers now in pre-meeting purdah, there should be no new news on the policy guidance front. Absent any major exogenous surprises, this should mean that markets maintain directional momentum in coming days, but fail to break out of pre-established trading ranges.
First quarter US gross domestic product figures might provide the week’s biggest fireworks, with still-robust underlying activity levels suggesting that the US economy remains relatively unscathed after undergoing the most violent tightening cycle in a generation. Growth is seen decelerating to a 2 percent annualized pace, down from 2.6 percent in the previous quarter, but with stronger consumer spending helping offset slower trade and weaker inventory accumulation, the details below the headline level should prove more encouraging - for “soft landing” optimists, and rate hawks alike. We think markets could react by adding another rate hike to the Fed’s projected trajectory, diminishing the odds on a “pause” signal at next week’s policy meeting.
Inflation data could also prove meaningful for markets, with two of the Fed’s preferred price indicators set for release in the latter half of the week. An acceleration in wage inflation is likely to show up in the employment cost index for the first quarter, bolstered by minimum wage increases in several states and lagged private sector pay raises. Similarly, the core personal consumption expenditures index is seen climbing 0.3 percent from the prior month in March, up 4.5 percent year over year. Taken in combination, these levels aren’t likely to deliver “clear and convincing evidence” of abating inflation pressures.
Data out on Thursday morning should show the euro area remaining remarkably resilient through the first quarter, avoiding recession as governments shielded businesses and consumers against a war-related energy price shock. Quarterly growth is seen topping 0.2 percent, with sharp improvements in sentiment helping to boost spending and overall activity levels - and helping to support expectations for interest rate hikes at the European Central Bank’s May and June policy meetings.
Few expect the Bank of Japan to change course at this week’s meeting. In recent speeches and interviews, newly-minted Governor Ueda has repeatedly stressed the need to maintain accommodative monetary policy settings, even as wage and price measures have risen. In Parliamentary testimony this morning, he said “Trend inflation is still below 2 percent so we need to continue monetary easing," saying price growth would likely fall below the central bank's target in second half of the fiscal year ending March 2024. Implied volatility levels around the meeting look elevated, but with bets on a more hawkish policy shift gradually being unwound, the yen is almost 2 percent weaker against the dollar year to date.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
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