- Eurozone preliminary April CPI was much stronger than expected
- French and UK Q1 growth disappointed; the US also reports Q1 GDP
- Japan’s end of the month data dump shows why many expect the BOJ to lag behind the ECB
- Central Bank of Russia is expected to cut rates 25 bp to 9.5%; Poland April CPI is expected to remain steady at 2.0% y/y
The dollar is mostly softer against the majors as the week and the month wind down. The euro and Nokkie are outperforming, while the yen and dollar bloc are underperforming. EM currencies are mostly firmer. ZAR and the CEE currencies are outperforming, while KRW and INR are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.3% on the day. MSCI EM is down 0.1%, with China markets falling 0.2% on the day. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is up 1 bp at 2.31%. Commodity prices are mostly higher, with WTI oil up 0.7%, copper flat, and gold up 0.2%.
Equity markets are stalling into the end of the month. MSCI Asia-Pacific Index is snapping a six-day advance, but the week’s gain was sufficient to extend the advancing streak for the fourth consecutive month. The Dow Jones Stoxx 600 is trading off for the second consecutive session, after rallying for six consecutive sessions. Its 2.4% rally this week ensures a higher close for the month. This European benchmark has risen for three consecutive months and five of the past six. The S&P 500 has gained 1.1% so far this month, coming into today’s session. Last month the S&P 500 slipped 0.4%, which broke a three-month advance.
Bonds also rallied this month. The US 10-year yield is off 12 bp, with Gilts off 10 bp, and the Bund yield down six bp. On the month, French premium narrowed about four basis points. The 10-year JGB yield slipped almost five basis points to almost zero. Italy is the only major bond market to see rising yields. Fitch downgraded Italy last week (to BBB). Note that the PD has an open primary this weekend. Renzi is expected to win, after the left-wing and some old guard broke away from the PD.
The US dollar is mixed on the day. On the month, the dollar has risen against most currencies except sterling and the euro (and the Danish krone). The dollar-bloc currencies fell out of favor this month, and are off around 2%. Sterling is the best performer, with the surprise election announcement a major prop.
Many in Europe and Asia will enjoy a long holiday weekend with May Day celebrations and the bank holiday in the UK at the start of next week. Perhaps that could help explain the subdued market reaction to a series of economic reports.
The main exception to this generalization is the eurozone preliminary April CPI. It was much stronger than expected. The headline rose to 1.9% from 1.5%, and the core rate jumped to 1.2% from 0.7%. The data appears to have been flattered by the calendar effect of Easter and trip packages, for example, are included in the core. It is the highest level since mid-2013. The CPI report followed news of a stronger gain in M3 than expected, and an improvement in lending to both households and non-financial businesses.
The euro has rallied toward the week’s high. However, since the sharply higher opening on Monday after the first round of the French elections, the euro has chopped around the same one cent range of $1.0850-$1.0950. Recall the $1.0935 area corresponds to the 61.8% retracement of the euro’s decline since the US election last November. And $1.0980 is the 50% retracement objective of the decline from last year’s high near $1.1615. Large option strikes at $1.09 (1.8 bln euros) and $1.0950 (2.4 bln euros) roll-off later today.
Draghi was upbeat about the region’s growth, which he seemed to acknowledge was mostly based on survey data. He was less sanguine on inflation, and due to the distortions with the April CPI, the May figures will be awaited for a cleaner read. The next ECB meeting is on June 8, and new staff forecasts will be available.
However, as we have noted, it appears the survey data is running ahead of actual activity. This concern materialized today. France reported a 0.3% expansion in Q1 17, which was a little softer than expected, weighed down by a 0.7% decline in net exports and household spending that practically stagnated. That said, Q4 16 growth was revised higher.
The UK also disappointed. The economy expanded by 0.3% in Q1. It is the weakest growth in a year. Services grew by 0.3%, their poorest showing in nearly two years. Industrial output rose 0.3%, arguably helped by stronger exports and a weak pound. Manufacturing output rose 0.5%. Construction rose a more modest 0.2%. Separately, the UK reported that mortgage approvals and consumer credit growth slowed in March.
Sterling shrugged off the news and is making new highs since early last October. It approached $1.2960. The $1.30 area is of psychological importance, but chart-based resistance is seen in the $1.3050-$1.3070 area. It may require a break of $1.2860 on the downside to stymie the bulls.
Japan’s end of the month data dump shows why many expect the BOJ to lag behind the ECB. March CPI was a touch softer than expected at 0.2%, and the core rate was steady at 0.2%. However, excluding food and energy, CPI slipped back into negative territory (-0.1% vs. 0.1%). Although retail sales ticked up in March (0.2%), overall household spending disappointed. It fell 1.3% year-over-year, which was more than twice the expected pace, though not as deep as the decline in February.
Industrial output was also weaker than expected, falling 2.1% in March, which gives back more of February’s 3.2% gain than expected. The median expectation was for a 0.8% decline. Lastly, unemployment was unchanged at 2.8%, though the jobs-to-applicant ratio increased to 1.45 from 1.43.
The dollar is consolidating in narrow ranges against the Japanese yen. Today’s range is about a third of a yen above JPY111.00, and inside yesterday’s range, which was inside Wednesday’s range. The dollar has been resilient even though US 10-year Treasury yields are struggling to re-establish a foothold above 2.30%. Yen sales against sterling and the euro may have bolstered the greenback’s resilience.
The US reports Q1 GDP. The median forecast in the Bloomberg survey is for a 1.0% annualized gain. We suspect the risk is on the downside. Beginning in 2010, Q1 growth in the US has averaged 1.1%, but our back of the envelope calculation warns that Q1 17 was likely weaker than average. Outside of the headline shock, it has no implications for monetary policy. The Federal Reserve hiked rates in March, rendering Q1 data moot. The FOMC meets next week, and the statement is likely to look past the setback in Q1. The US jobs report at the end of next week may be of greater importance than the FOMC meeting.
The US also sees the Chicago PMI for April and the final University of Michigan consumer confidence and inflation expectations survey. It is important that the US Congress approves a spending authorization bill or some stop gap measure. Otherwise, government closure cannot be ruled out. Separately, although press reports suggest progress on health care, a resolution still seems elusive. To appease the wing of the Republican Party (Freedom Caucus) that blocked the previous attempt appears to be alienating the moderate wing (e.g. Tuesday Group).
Canada reports February GDP (expected to have risen by 0.1%). The weekend sees the EU summit on Brexit. Reports suggest the EU may press for considering a united Ireland within the EU. Merkel’s speech earlier this week underscores the EU’s interest in first agreeing to the terms of exit before a new, even if temporary, arrangement, can be made. Also, ASEAN countries hold a summit as well.
Central Bank of Russia is expected to cut rates 25 bp to 9.5%. A small handful of analysts look for a 50 bp cut to 9.25%, but we think the bank will remain cautious. Lower than expected inflation of 4.3% y/y in March will allow the bank to continue cutting rates this year, especially as the ruble remains firm.
Poland April CPI is expected to remain steady at 2.0% y/y. Some members of the MPC are starting to push back against the dovish forward guidance of no hikes until 2018. We believe the first hike is likely to come in H2 of this year, with rising wages another key driver. Next policy meeting is May 17, no action is seen then and it may be too early to expect a change in its forward guidance.