Everyone on Wall Street is trying to figure out if the peak in Treasury yields will stick for a while now that the US is approaching peak growth. The best expansion since World War 2 is being accompanied with a Fed that remains committed to supporting the economy until a complete recovery. The playbook for many traders appears to be the Fed could announce at the June FOMC or at the Jackson Hole Symposium that they are ready to start talking about tapering, paving the way for a gradual reduction of the $120 billion per month in asset purchases.
Another busy week ahead has several key economic releases, central bank speak, and a couple of big interest rate decisions. In the US, traders will closely watch the ISM Manufacturing reading and Market PMIs, durable goods, factory orders, and the nonfarm payroll report, which could show over a million jobs were created in April. We will hear from ECB’s Lagarde, Fed Chair Powell and his colleagues Daly, Kashkari, and Kaplan.
The main event of the trading week will be the BOE rate decision, which could show policymakers are ready to talk about tapering asset purchases. The RBA decision will also be closely watched as tame inflation could warrant a potential tweak to the 3-year bond target.
The US economic recovery continues to impress after a very successful vaccine rollout, an outstanding start to earnings season, stellar economic data, and despite brewing price pressures. With 30% of the population being fully vaccinated and roughly 43% having at least one dose, the US is poised to reach herd immunity by the end of May. As the country reopens and stimulus checks kick in, the US is poised for some amazing economic readings over the next couple of months.
The main economic release of the week is the April nonfarm payroll report. The April change in nonfarm payrolls is expected to show another robust round of hiring, the consensus estimate is for 950,000 jobs created, with some analysts eyeing a gain of 1.5 million jobs.
The big question on Wall Street is whether the reflation rally will continue and send Treasury yields higher. The market is somewhat divided on path and trajectory for bond yields. As the economic recovery accelerates, Treasury yields should continue to rise, but if they do not this market could quickly aggressively become bullish bonds.
Europe is now winning the fight against COVID and that is doing wonders for risk appetite. COVID cases are now declining across most Western European countries and it should only get better now that vaccinations are picking up the pace.
Looking at this week’s economic data, Germany releases March Retail Sales on Monday. The consensus is 3.1% (MoM) v. 1.2% prior, and -1.6% (YoY) v -9.0% prior. Germany was under lockdown in the month of March, which had a significant negative impact on consumer spending.
Manufacturing has been a bright spot in the eurozone economy. Preliminary Manufacturing PMIs for April showed strong growth, with Germany coming in at 66.4 and the Eurozone at 63.3 points. The final readings, which will be released on Monday, are expected to confirm the preliminary releases. The neutral 50-level separates contraction from expansion.
German Industrial Production contracted in February, with readings of -1.6% M/M and -6.4% Y/Y. The March data will be published on Friday.
The highlight of the week is the Bank of England policy meeting on Thursday. The bank is expected to maintain its Official Bank Rate at 0.10%. HSBC said that it is prepared for the BoE to announce a reduced purchase pace for its quantitative easing program at the upcoming meeting. An announcement of a taper, even a small one, would be a major shift in policy and could boost the British pound. Taper talk is coming and should happen either this week or by June meeting.
The Czech central bank (CNB) will meet on Thursday for a policy meeting and the bank is expected to maintain interest rates at 0.25%. Vojtech Benda, a CNB board member, has said that due to the lingering impact of Covid on the economy, the central bank will likely hike rates fewer times than official projections.
Poland’s central bank (NBP) holds a policy meeting on Wednesday. The bank is expected to maintain interest rates at 0.10%, where they have been pegged since May 2020.
With inflationary pressures rising, there are calls for a reappraisal of ultra-low interest rates. Eugeniusz Gatnar, a member of the MPC, suggested in an interview last week that the MPC change its rhetoric and hike interest rates by 10-15 basis points in response to higher inflation. Gatnar suggested that the central bank immediately raise the mandatory reserve rate as a first signal of normalization.
US President Joe Biden made good on an election campaign promise and formally recognized the Armenian genocide in a speech last Saturday. This was a major shift in US policy as it marked the first time that a US president used the term ‘genocide’ in reference to the mass murder of Armenians in the Ottoman Empire during the First World War. In an attempt to mitigate the political fallout with Turkey over the dramatic move, Biden called Turkish President Tayyip Erdogan ahead of his speech and informed him of his decision. Still, the move is likely to worsen the already chilly relations between the US and Turkey.
Following raised inflation projections, Turkey’s central bank is poised to keep rates steady following Governor Kavcioglu’s pledge to maintain a tight monetary stance with great determination and patience.
The Turkish lira continues to hit new lows. The currency is among the worst performers in emerging markets this year and dropped to 8.425 against the US dollar on Monday. The lira is closing in on its record low of 8.58, recorded in November 2020.
China’s Mainland markets are closed from Monday to Wednesday for the Labour Day holiday. Hong Kong will post GDP on Monday and Retail Sales on Tuesday. Retail Sales will continue its strong rebound, and sentiment has turned upward with the Singapore travel bubble to open in mid-May. More attention is likely to be focused on the China tech-heavyweights listed in Hong Kong as the Government announced more anti-monopoly measures on 13 large cap technology companies on Friday. That may keep the Hang Senf under pressure next week.
Thursday sees the Caixin Services PMI which will be market moving if its underperforms like the official Manufacturing and Services PMI’s today. Officials noted that semiconductor shortages and logistic bottlenecks impacted the data, suggesting the problem is quickly becoming global.
China releases Balance of Trade on Friday which is likely to be drowned out in the US non-Farm Payroll data later that day. China’s “national team” continues to support equity markets on any sharp sell-off, and may be called into action again if the BoP is less than hoped.
India’s Covid-19 disaster continues to grab headlines, although data this week suggested a glimmer of hope for new cases in Mumbai and New Delhi. That was enough for foreign investors to pile back into the Indian Rupee and the Sensex on a “buy-the-dip” recovery play. The Sensex is Asia’s best performer the past week, and the Rupee has recovered all of its Covid-19 losses.
Further progress from here will be more challenging as markets approach levels on the currency associated with RBI QE-based losses. Also the Covid-19 situation is murky to say the least, with intelligence on the ground suggesting the situation is vastly worse than official pronouncements. That could yet bite the hand of the pandemic dip-buyers.
India’s Manufacturing and Services PMIs, and its Balance of Trade are expected to fall sharply for April on the pandemic hit and will add more risk to the India recovery play seen this week.
Australia & New Zealand
The Australian and New Zealand Dollars continued to rally hard this week as risk-sentiment recovered globally. As proxies for the Asian economic rebound, both may stay range-bound with China away most of the coming week. The technical picture remains positive though and only the US bond market is likely to undermine that outlook.
Australia releases PMIs and its Balance of Trade on Monday and Tuesday with both expected to add to the stream of positive data of late. The week will be dominated though, by the RBA rate decision on Tuesday afternoon. The RBA will leave policy unchanged and may signal an extension to its QE program, equities positive.
As ever, all eyes will be on the statement and whether it will surprise markets by changing its dovish outlook and signaling rate increases sooner, as opposed to extending the QE and focusing on wage growth. In that scenario, equities will fall sharply, while AGB yields will spike and the AUD/USD will move quickly higher.
Japanese markets are closed until Thursday for a series of public holidays. The data calendar is very light as a result with only the BOJ Monetary Policy Meeting Minutes on Thursday which will not be market morning.
USD/JPY has recovered from its 107.50 lows to 109.00 as the US/Japan yield gap shrunk slightly this week. USD/JPY’s direction from here will be dictated by the trajectory of the US 10-year Note yield. If US yields spike higher next week, USD/JPY should reclaim the 110.00 handle. US Non-Farm Payrolls next Friday will be critical.
Japanese markets are ignoring the Covid-19 states of emergency for now. JPY FX pairs could see greater than normal volatility in Asian hours in the coming week due to the long short week for Japan markets.
Crude prices have mostly rallied as an improving demand outlook offsets COVID-19 cases in Brazil, India, and Japan. OPEC+ is sitting pretty now that US shale production may have peaked. OPEC+ was able to skip a ministerial meeting and if US production continues to slide, a further ramping up output could be justified.
WTI crude and Brent still probably a lot left in the tank for this reopening rally.
On Friday, the weekly Baker Hughes rig count will be released.
Gold is back to a tug-of-war with Treasury yields. The bond market selloff returned, sending Treasury yields higher as inflation expectations rise and economic data impresses. Gold almost rallied above the $1,800 level after the Fed stuck to its guns that inflation will be transitory. Financial markets will look to prove the Fed wrong over inflation, but that will take time.
The $1,800 level remains critical resistance for gold, followed by $1,850 region. Strong support should remain at the $1,747.90 level.
Bitcoin appears to be at a pivotal moment that could see some cryptocurrency traders begin to diversify into other altcoins. Many technical analysts are expressing warnings that a choppy period could be in place if prices continue to fail to recapture the 50-day SMA, which hovers around the $57,000 region.
Most of the social media buzz has shifted from Bitcoin to Dogecoin, Safemoon and Solana. The rise of altcoins are part speculative bubble and mostly a bet against Ethereum. No one is doubting that Bitcoin will remain the store of value trade, but many retail traders are becoming convinced that it’s the other altcoins that will trigger the next meteoric rise.
Key Economic Events
Saturday, May 1
-Berkshire Hathaway releases first-quarter earnings, followed by the company’s annual shareholders’ meeting.
– President Biden’s senior US officials to meet with four nations in the Middle East.
Sunday, May 2
– No events
Monday, May 3
– Fed Chair Powell and Senator Warren to speak at National Community Reinvestment Coalition’s “The Just Economy Conference.”
– Norges Bank Governor Olsen and sovereign wealth fund CEO Tangen speak at Norway Parliament’s Standing Committee on Finance and Economic Affairs
- US Apr ISM manufacturing: 65.0e v 64.7 prior, construction spending, Markit Manufacturing PMI:
- Canada Manufacturing PMI:
- Mexico Manufacturing PMI
- Eurozone Manufacturing PMI
- Germany Manufacturing PMI
- India Manufacturing PMI
- Australia Manufacturing PMI
- South Africa Manufacturing PMI
- Hungary Manufacturing PMI
- Czech Manufacturing PMI
- Sweden Manufacturing PMI
- Switzerland Manufacturing PMI
- Norway Manufacturing PMI
- Turkey CPI, manufacturing PMI, PPI
- Singapore purchasing manager’s index
- Australia CoreLogic house prices, Melbourne Institute inflation, commodity index
- Germany retail sales
Tuesday, May 4
-G-7 foreign and development ministers meet in London, UK Foreign Secretary Raab. Raab to host Australia, India, Korea, South Africa and the head of ASEAN.
-ECB Governing Council Member Villeroy speaks at a European Investment Bank event.
– San Francisco Fed President Daly speaks in a virtual Q&A moderated by Minneapolis Fed President Kashkari and hosted by the Economic Club of Minnesota.
– Earnings results from Pfizer and CVS Health
– Open hearing held by Swedish Parliament’s Finance Committee on the Riksbank’s “Account of monetary policy 2020.”
- US trade balance, factory orders, durable goods
- Reserve Bank of Australia (RBA) Interest Rate Decision: To keep rates on hold, but may shift three-year bond target
- Canada building permits, international merchandise trade
- Australia trade balance
- K. mortgage approvals, money supply
- Finland unemployment
- UK Manufacturing PMI
- Russia Manufacturing PMI
- Poland Manufacturing PMI
- Denmark foreign reserves, change in currency reserves
Wednesday, May 5
-Chicago Fed President Evans speaks
– Cleveland Fed President Mester delivers a virtual speech to the Boston Economic Club.
-ECB Chief Economist Lane speaks at an Official Monetary and Financial Institutions Forum virtual panel on the current status of the ECB’s monetary policy strategy review.
-EU-U.S. Future Forum convenes leaders to discuss regional cooperation.
- US. ADP employment change
- Eurozone Services PMI
- Germany Services PMI
- Sweden Services PMI
- India Services PMI
- Australia Services PMI
- Singapore PMI
- Thailand PMI
- New Zealand unemployment, ANZ commodity prices
- Australia AiG performance of construction index, building approvals
- Poland rate decision: To keep Base Rate steady at 0.10%
- Singapore retail sales
- Sweden industrial orders
- Thailand CPI
- Russia CPI
- Switzerland CPI
- Thailand rate decision: To keep Benchmark Interest Rate steady at 0.50%
- K. new car registrations
- EIA Crude Oil Inventory Report
Thursday, May 6
-Bank of England rate interest rate decision: To keep rates steady, maintain asset purchase program and upgrade growth forecasts
-Scotland parliamentary elections. A big win with the pro-independence Scottish National Party could put further pressure to have another independence referendum.
-The UK holds elections for the Welsh parliament.
-Reserve Bank of Australia Deputy Governor Debelle speaks in Perth
-Norway rate interest rate decision: To keep key interest rate at zero.
-ECB publishes its Economic Bulletin.
– IMF Managing Director Georgieva, ECB President Lagarde, and WTO Director-General Okonjo-Iweala to speak at the European University Institute’s annual State of the Union gathering, with the theme of “Europe in a Changing World.”
-Dallas Fed President Kaplan participates in a discussion hosted by Bard College.
– Cleveland Fed President Mester speaks at a virtual conversation hosted by the University of California, Santa Barbara.
– German Chancellor Merkel, UK PM Johnson, and UN Secretary General Guterres speak at Petersberg Climate Dialogue
- US initial jobless claims
- BOE Interest Rate Decision: Expected to keep Bank Rate unchanged at 0.100% and Gilt Purchase Target at GBP875b and Corporate bond target at GBP20b
- Norway Central Bank (Norges) Interest Rate Decision: Expected to keep Deposit Rate steady at 0.00%
- Turkey Central Bank (CBRT) Interest Rate Decision: Expected to keep One-Week Repo Rate unchanged at 19.00%
- Czech Central Bank (CNB) Interest Rate Decision: Expected to keep Repurchase Rate at 0.25%
- Eurozone Retail sales
- Czech Retail sales
- Germany factory orders
- Japan Vehicle sales
- New Zealand building permits, ANZ business confidence
- Thailand consumer confidence
- UK Services PMI
- Russia Services PMI
- Russia gold and forex reserves
- Norway industrial production
Friday, May 7
- US April Change in Nonfarm Payrolls: 950K estimate v 916K prior; unemployment rate: 5.8% estimate v 6.0% prior, wholesale inventories, Baker Hughes rig count
- China trade, foreign reserves, Caixin services/composite PMI
- Switzerland Unemployment
- Canada Unemployment
- Mexico CPI
- Russia Apr CPI M/M: 0.6%e v 0.7% prior; Y/Y: 5.6%e v 5.8% prior
- Italy Retail sales
- Australia RBA statement on monetary policy, AiG performance of services index
- Japan cash earnings, monetary base, Services/composite PMI
- Australia Foreign reserves
- Thailand Foreign reserves
- Singapore Foreign reserves
- New Zealand RBNZ inflation expectation
- Germany Trade, industrial production
- Hungary Trade balance
- South Africa gross and net reserves
- Switzerland foreign currency reserves
- Sweden budget balance
- Czech Republic industrial output
Sovereign Rating Updates:
– Austria (Fitch)
– France (Fitch)
– Denmark (Moody’s),
– Italy (Moody’s)
– South Africa (Moody’s)
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.