Threat of > 107 in DXY has receded but still likely to hold in a 104 – 107 range in Q2 and well into Q3’2024  

A slightly above consensus YoY March core PCE makes July cut more likely

• USD: In data released Friday, US core PCE inflation rose 0.32%MoM in March and on a year-on-year basis was up 2.8%, matching the Fed’s forecast. Following the US Q1 GDP data (refer below) a day earlier on Thursday that saw the quarterly Q1 core PCE sharply above consensus at 3.7% YoY versus 3.4% YoY expected, markets had expected Friday’s monthly March core PCE to be significantly higher than consensus. So when the March core PCE data on Friday saw an at-consensus 0.3% MoM and a slightly above consensus 2.8% YoY versus 2.7% YoY expected, markets both US stock and fixed income markets were relieved. Instead, the result of the much stronger quarterly core PCE on Thursday translated to January’s core PCE inflation revised higher from 0.45%MoM to 0.50% while February was revised up only modestly from 0.26% to 0.27%, adding weight to the theory that residual seasonality typically tends to distort the data at the start of the year.
   
• USD: Meanwhile, the other components of Friday’s data saw personal income in March rise a solid 0.5%MoM with a strong 0.8% increase in spending while real spending was up 0.5%MoM and revised higher to a similarly strong 0.5% in February. But this followed revisions lower to real spending to start the quarter in January, down 0.3%MoM and the savings rate remained low, falling from 3.6% in February to 3.2% in March. And while the spending data was strong in March, strength in services looks increasingly vulnerable as it is increasingly supported by only a few sectors like health care. Looking ahead, all six main drivers of the 2021-to-22 inflation surge suggest the outlook is benign - wage growth is slowing, margins are under pressure, supply chains have normalized, leading indicators point to slowing rent increases, and global food and energy prices pose no significant threat. The bottom line for the Fed however is that with just one month of inflation data for April before the June FOMC meeting, officials will likely have to wait until July to gain “greater confidence” that inflation is slowing.

Thursday saw calls grow for US stagflation following the strong quarterly core PCE data but soft Q1 GDP

• USD: In US data released on Thursday, a day prior to the monthly March core PCE, US Q1 GDP rose 1.6%QoQ SAAR, much softer than consensus expectations for 2.5% with consumption up 2.5% supported by services spending up a strong 4.0% but with goods spending falling 0.4%. Overall, private final domestic demand slowed from Q4 at 3.1%. However, it was the much stronger-than-expected quarterly Q1 core PCE inflation at 3.7% (vs 3.4% YoY expected) that set off alarm bells about the next day’s monthly core PCE release which would likely be much stronger than consensus leading to the US entering a period of stagflation. That turned out not to be true.
   
• USD: The Q1 GDP details however, showed fading support from fiscal stimulus and softer goods spending. Government spending also slowed relative to previous quarters at 1.2% and net exports weighed on growth by 0.9pp while inventories also presented a drag of 0.4pp. However, private demand was stronger than expected but even here, a sharper slowdown looms, given that real after-tax personal income rose by just 1.1% in Q1 and probably will increase at an even slower pace over the coming quarters as payrolls growth weakens.
   
• USD: Meanwhile, business investment rose 2.9% with residential investment up a strong 13.9%, leaving half of the increase in private fixed investment in Q1 driven by the jump in residential investment, facilitated by the decline in new mortgage rates in Q4’23 and relatively mild weather in Q1. However, the recent backup in US yields will likely weigh on residential investment in Q2, given that the average 30-year fixed mortgage rate has risen by more than 70bp, to 7.4%, since the end of 2023.

BoJ’s April board meeting – Yen weakness not enough to spur higher rates

• JPY: BoJ’s April monetary policy meeting unanimously decides to leave policy unchanged, as expected but as has been the case with earlier meetings, the details are dovish with respect to expectations of JGB purchasing cuts and comments against Yen weakness with Governor Ueda stating that Yen depreciation to date has not had a major impact on underlying inflation. It also looks as if the BoJ is cautious on the pass-through of wages to prices even as many board members believe risks are skewed to upside for the FY2024 inflation outlook.
   
• JPY: Meanwhile, the BoJ indicates it will keep buying bonds in line with its March policy decision, though it removes the footnote about a monthly purchasing amount of JPY6T. The brief policy statement also does not mention JPY, which hits 156 against the dollar after the announcement. However, the BoJ raises its forecast for consumer inflation excluding fresh food for the current fiscal year to 2.8%, from 2.4% in the January outlook report, while cutting its real GDP growth forecast to 0.8%, from 1.2% and expects the recent rise in international oil prices and the ebbing effect of government energy subsidies to drive up inflation this year, before slowing to 1.9% in fiscal years 2025 and 2026.
   
• JPY: The BoJ still believes that Japan is a year and a half or two years from reaching the sustainable inflation target underpinned by domestic demand rather than driven by high import costs. The upgraded inflation forecast for this year is still underpinned by cost-push inflation. The Bank views underlying inflation as still below its 2% target and expects it to rise only gradually, as a virtuous wage-price inflation spiral takes hold, reaching the price target "around late 2025 through 2026”. Governor Ueda points out that the recent rise in import prices is not as strong as in 2022 to explain why recent Yen depreciation has not had a major impact on underlying inflation. But he also says that if it can be predicted that Yen weakness will push up inflation enough to affect next year's spring wage hikes, then it may lead to interest rate hikes. However, the inflation referenced in 2025 spring negotiation is CY2024 CPI inflation and it may probably not be possible to gauge its impact on spring wage hikes until year-end.
   
• JPY: Citi Research outlook unchanged — if the global economy, including the US, remains firm this year, Citi Research expects the BoJ to hike to +25bps in October, followed by 25bp hikes in April and October 2025. But if the US enters a recession, it could be harder to hike this year. Given Governor Ueda’s remarks, it seems the hurdle for a weaker yen to prompt a rate hike by July is now higher in any case. However, as BoJ assumptions for the pass-through from wages to prices are quite conservative, stronger wage and price data could lead to a rate hike sooner than expected, which also serves as a countermeasure against Yen weakness.

Week Ahead:

US – FOMC meeting and jobs focus this week

• USD: Fed FOMC meeting - recent stronger-than-expected inflation data likely has market participants expecting a hawkish FOMC meeting this week. However, the Fed will likely still want to preserve optionality and Chair Powell might not rule out June as a live meeting even as consensus in the Committee has shifted towards a later start of cuts. The Fed does not have an incentive to sound very hawkish given the repricing in interest rates markets and the main event of the meeting might well be the Fed announcing the start of balance sheet reduction taper in June after Chair Powell indicated in March that the taper would start fairly soon.
   
• USD: US April Nonfarm Payrolls – Citi: 215k, median: 246k, prior: 303k; Private Payrolls – Citi: 160k, median: 200k, prior: 232k; Manufacturing Payrolls – Citi: 5k, median: 10k, prior: 0k; Average Hourly Earnings MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; Average Hourly Earnings YoY – Citi: 4.0%, median: NA, prior: 4.1%; Unemployment Rate – Citi: 3.8%, median: 3.8%, prior: 3.8% - the trend of monthly job growth has been remarkably strong recently and leads Citi Research to forecast another strong 215k increase in payroll employment in April. A rise in employment in the household survey in March helped to close the abnormally large gap between household and establishment (payroll) employment. But the divergence between these two measures, as well as a number of other indicators, suggest downside risks for consistently strong payrolls and accordingly, Citi Research attach (potentially large) downside risks to payrolls in any given month. Meanwhile, average hourly earnings should rise 0.3%MoM in April and moderate to 4.0%YoY, with risks tilted slightly to the upside. Citi Research also expect the unemployment rate to remain unchanged at 3.8% in April with a modest increase in employment and an essentially unchanged participation rate.
   
• USD: US Q1 Employment Cost Index – Citi: 1.0%, median: 1.0%, prior: 0.9% - Citi Research expect a 1.0%QoQ increase in the employment cost index in Q1, stronger than the 0.87%QoQ increase in Q4 last year. Wages and salaries in ECI should remain strong with a larger than usual increase in average hourly earnings to start the quarter in January. But there are some downside risks to wages and salaries in ECI as measures like the Atlanta Fed wage tracker have slowed somewhat further, albeit only very gradually. Atlanta Fed wages, unlike average hourly earnings, will control for the composition of employment and thus measure wage growth more similarly to ECI. Citi Research see modest downside risks of another ECI increase that rounds to 0.9%.
   
• USD: US March JOLTS Job Openings – Citi: 8700k, median: NA, prior: 8756k - job openings should fall to 8.7 million in March and continue to decline over the coming months in line with high frequency data on job postings from Indeed.com. Falling openings in Q2 especially could reflect softer demand for workers and less than usual hiring at a time of year when hiring typically picks up. Critically, the hiring rate in the JOLTS survey, which has fallen steadily over the last year but stabilized at relatively lower levels recently, may lead continuing jobs less claims to rise into the summer. Layoff rates in the JOLTS survey remain low, consistent with still-low initial jobless claims. But if layoffs start to pick up, this would be the final step of a broadly weakening labor market and more sharply rising unemployment this year.
   
• USD: US April ISM Manufacturing – Citi: 49.5, median: 50.1, prior: 50.3 - manufacturing diffusion indices increased above 50 (expansionary level) in recent months with strength from the main sub-indices of production and new orders which had some market participants expect a manufacturing sector rebound. However, the rebound has been very limited and S&P Manufacturing PMI has dipped just below 50 in the April preliminary release. This would be consistent with other manufacturing data which shows durables goods orders excluding transportation moving sideways to down on a 3-m average basis. Citi Research expect ISM Manufacturing to fall to 49.5 from 50.1 in April. Apart from the overall index, markets will be paying close attention to the employment details that have been weaker. Citi Research also expect ISM manufacturing employment to remain in contraction.
   
• USD: US April ISM Services – Citi: 51.6, median: 52.0, prior: 51.4 - unlike manufacturing indices that have been mostly in contraction over the last 12 months, services indices have remained above 50 levels although on a 3-month average basis at somewhat lower levels than the typical pre-pandemic average. This has been consistent with services consumption continuing to grow in real terms and being the main driver of growth at the start of 2024. Citi Research expect only a modest increase in the ISM Services Index to 51.6 from 51.4 in April but see downside risks after the decline in S&P Services PMI in the preliminary release. In particular, the employment index in S&P PMI dropped sharply and that may lead to the employment sub-index in ISM services dropping further too in April.
   
• USD: US April Conf. Board Consumer Confidence – Citi: 105.7, median: 104.0, prior: 104.7 - consumer sentiment indices have remained rangebound in recent months as consumers remain concerned about inflation. This has been reflected in inflation expectations in the Conference Board report as well as the University of Michigan report picking up recently albeit modestly. Citi Research expect that the Conference Board Consumer Confidence index will increase modestly to 105.7 from 104.7 in April with some downside risk. One of the details that markets will be watching closely in the Conference Board report will be the labor market differential (% of people saying jobs are plentiful - % saying jobs are hard to get) which increased somewhat in March. This differential should to fall in coming months as the labor market loosens further.

Euro area and UK – euro area flash CPI, Swiss CPI and Norges Bank board meeting in focus this week

• EUR: Euro area April flash HICP — key inflation data ahead of the June ECB meeting should see inflation easing further. Citi Research expect a significant drop in core YY rate driven by services due to Easter-related base effects, from 2.9% to 2.6% and headline easing marginally from 2.4% to 2.3% YY. Euro Area: HICP Inflation, April – Citi Forecast 2.3%YY, Consensus 2.4% YY, Prior 2.4% YY; HICP Core, April – Citi Forecast 2.6%YY, Consensus 2.6% YY, Prior 2.9% YY.
   
• EUR: Euro Area growth – Q1 GDP growth at the country level forecast point to upside risks to Citi Research’s 0.1% QQ call, but investment could throw some negative surprises. Citi Research see a growth rebound caused by falling inflation and expect less labor intensive growth ahead, but ECB hawks who have been looking for reasons to be cautious on disinflation may pick up on any upside surprises in the week ahead. Euro Area Economic Sentiment Index, April – Citi Forecast 97.0, Consensus 96.7, Prior 96.3.
   
• CHF: Switzerland CPI Inflation, April – Citi Forecast 1.1% YY, Consensus 1.2% YY, Prior 1.0% YY; CPI Core, April – Citi Forecast 0.9% YY, Consensus 1.0% YY, Prior 1.0% YY; Switzerland: PMI Manufacturing, April – Citi Forecast 44.5, Consensus 45.5, Prior 45.2; PMI Services, April – Citi Forecast 49.5, Prior 47.6.
   
• NOK: Norges Bank: keeping ‘high for longer’, for now – only one new CPI print since the last meeting (March, which undershot by 30bp the NB forecast) will not be enough to alter the ‘high for longer’ message from the central bank, especially at an interim meeting. Further weakness in the krone and higher oil prices also call for a hawkish tone. Citi Research expect no hint of rate cuts for the near future and the depo rate to stay at 4.50%. Norges Bank Deposit Rate – Citi Forecast 4.5%, Consensus 4.5%, Prior 4.5%.

Commodity Bloc – NZ labor force data in focus this week

• AUD: Australia March Retail Trade - Citi MoM forecast; 0.5%, Previous; 0.3% - Australia’s retail sales likely expanded further in March.
   
• NZD: NZ Q1 Labor Market - Citi QoQ Employment change forecast; 0.1%, Previous; 0.4%; Citi QoQ Unemployment Rate forecast; 4.2%, Previous; 4.0%; Citi QoQ Participation Rate forecast; 71.8%, Previous; 71.9%; Citi QoQ Private Sector Wages forecast; 0.7%, Previous; 1.0% - ongoing high interest rates, slowing activity and weaker business confidence point towards slower employment and a pick-up in the unemployment rate. Citi Research forecast QoQ employment growth to ease to 0.1%. The unemployment rate is forecast to increase from 4.0% to 4.2% and would have been higher expect for a likely slight moderation in the participation rate from 71.9% to 71.8%. Hiring indicators also point to labor market moderation and slower private sector wages growth. This should slow to 0.7%, the slowest QoQ growth in two years.

Asia EM – China’s official manufacturing PMI in focus this week

• CNH: China Manufacturing PMI April – Citi Forecast 50.3, Prior 50.8 – Citi Research expect China’s manufacturing PMI to edge down in April but remain expansionary at 50.3. Looking at high frequency data, the average operation rate of cement mills has shown a gradual pickup since mid-March while the steel inventory shrank in the first three weeks of April, both signaling that industrial /construction activities are holding up. The policy push to stabilize the economy could also be coming through, if gradually.