Another strong US jobs report, but Fed cut in June still possible

No sign of slowing in US employment but watch the next few months

• USD: The US economy adds 303k new jobs in March, much stronger than consensus for 214k which leaves the three-month moving average at 276k and sees the fastest full quarter growth rate in jobs since 1Q 2023 with the goods sector adding 42k jobs and services hiring 190k for a second consecutive month. Household survey employment also rebounds 498k but continues to lag establishment payrolls significantly. The participation rate also edges up to 62.7% from 62.5%, meaning the unemployment rate falls only slightly from 3.86% to 3.83% and is not statistically significant. Meanwhile, wage growth technically rounds down to a consensus 0.3%MoM while hours worked climb back up to 34.4 after bottoming at 34.2 in January, making what had been a slowing trend turn more sideways.
   
• USD: Usually much-stronger-than-expected job growth would provoke more hawkish (or at least less dovish) Fed policy. But that is not currently the case. In part, that is because Fed officials are recognizing downside risks to future jobs readings as signs of excessive tightness in the labor market are waning with posted job openings falling and the number of small businesses reporting unfilled job openings declining. Less tightness should be conducive to moderating inflationary pressures from the labor market, and help firms support profit margins. The steep drop in the NFIB survey’s hiring intentions measure (the voice of small businesses) and increase in layoff announcements also points to slower payroll growth in the spring and early summer.

• USD: A mystery in the data that also bears continued watching is how the ISM surveys of both services and manufacturing are signaling employment contraction, while payrolls are booming. This may be partially related to the decrease in job openings, rather than anything to do with actual hiring, but it deserves a watchful eye. But even if hiring holds up, Chair Powell and colleagues have advanced the thesis that this can be sustained without raising inflationary risk due to an expanding labor force and supply-side of the economy. The rise in the participation rate and wage growth that rounds down to an as-expected 0.3%MoM in the March report will be viewed by Fed officials as supporting the idea that the US economy can sustain the faster pace of hiring.

Canada’s unemployment rate up but does not change BoC view for cuts to commence in July

• CAD: Canadian employment in March falls by a modest 2.2k jobs, softer than consensus expectations for a 25k increase with full time employment down by 1.6k while part time employment rises 0.7k. The unemployment rate also rises to 6.1% with the participation rate unchanged at 65.3% with a 90.7k increase in population. Meanwhile, average wages of permanent employees is up modestly to 5.0%YoY. Wages measured in the labor force survey continue to rise at a pace inconsistent with 2% inflation, but BoC officials have recently been encouraged by other measures of wage growth that are slowing more.
   
• CAD: The increase in the unemployment rate to 6.1% in March is counter to other strong activity data in Q1 and a continued weakening trend in the labor market could increase the likelihood of a BoC rate cut as early as June. But one month of volatile labor force survey data is not enough to change the call for July as the start of the BoC rate cut timeline as the unemployment rate around 6% is unlikely to be too concerning to BoC officials especially if it does not continue to trend higher in the coming months. Citi Research still expect stronger Q1 activity will keep officials erring on the more hawkish side, waiting to see more “good” inflation data before cutting rates in July.

Gold lifted by Chinese and Indian buying

• GOLD: The Citi Commodities Strategy team lift their 0-3m price targets for Gold and Silver by 9% and 16%, respectively, to $2,400/oz and $28/oz and further lift 6-12m topside levels towards their bull-case scenarios, to $3,000/oz and $32/oz. It is not demand for duration or a weakening US$ trend that is driving Gold to fresh records in recent weeks. The Gold-real rates relationship remains historically weak—as regularly highlighted since 2H’21—which places greater emphasis on other price drivers. A combination of alternative-fiat demand, geopolitical hedges, macro-overlays on equity and credit portfolios, and financial buying catching up to robust physicals, appear to be working in synch to push the bullion complex higher. The team forecast 232t of official sector gold purchases in 1Q’24 and just over 1,000t for 2024E, representing ~26-27% of annual mine production. But a Fed cycle turn could be a kicker if policymakers proceed with insurance cuts in June/July. The team still believes the Fed is more likely than not to cut policy rates in June, as many officials have noted strong US labor data will not push them to be more hawkish from here. Sub 0.3% (core) inflation might also be sufficient for (insurance) cuts, as policymakers point to supply side improvements. A material jump in initial jobless claims or significantly weaker April/May US payrolls data might enhance the bullish price skew for bullion.
   
• GOLD: After lagging for the past few of years, listed positioning is finally starting to turn constructive - Gold ETF redemptions are beginning to reverse and net purchases could be positive in 2Q’24 for the first time in the trailing 12M. Silver ETF inflows in March/April have been the strongest since the ‘meme stock’ period in 1Q’21 and could quickly tighten s/d balances without a break in the retail demand uptrend. While financial flows can be fickle, the recent gap higher has also lifted price support levels. MM net length is building for both underliers to multi-quarter highs despite a steep contango that makes it expensive to carry longs.

• GOLD: Physical demand is also lifting the Gold price floor and damping downside volatility — PBoC gold purchases are up 9% y/y and Chinese non-monetary gold imports soared to a record (outright and seasonal) 372t int the Lunar New Year. This does contrast with weaker Chinese silver imports (likely linked to the slowdown in 2024 EV/solar growth). The bullion physical story has been coupled with a near doubling of Indian gold imports in 1Q’24 versus 1Q’23. As such, a turn in financial gold inflows on the back of robust physical consumption may be supporting higher trading levels and, for now, further de-linking the gold relationship to nominal and real interest rates.

Week Ahead:

US - Inflation watch and FOMC minutes in focus this week

• USD: Minutes from the March FOMC meeting, out on Wednesday, will likely continue to highlight Fed officials are still gathering more confidence inflation is on trend to slow sustainably to 2% before starting policy rate cuts. Discussions about strong activity and labor market data will be dovishly balanced by emphasis on supply side improvements. More hawkish would be any discussion about the long term neutral rate being higher. Markets will also be paying attention to the discussion about balance sheet reduction after Chair Powell mentioned, and Dallas Fed President Logan confirmed, that consensus among officials was to start tapering reduction fairly soon.
   
• USD: US March CPI MoM – Citi: 0.4%, median: 0.3%, prior: 0.4%; CPI YoY – Citi: 3.4%, median: 3.5%, prior: 3.2%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.4%; CPI ex Food, Energy YoY – Citi: 3.8%, median: 3.7%, prior: 3.8% - Citi Research expect a 0.326%MoM increase in core CPI in March, only modestly softer than the 0.358% increase in February but with largely similar details. Core goods prices should be close to flat on the month after a modest 0.1% increase in February while services inflation should remain strong, with a 0.48% increase in owners’ equivalent rent but a slowing in primary rents to a 0.40%MoM increase. Headline CPI should rise a stronger 0.4%MoM again this month and climb to 3.4%YoY due to stronger energy prices but also a solid increase in food prices.
   
• USD: US March PPI Final Demand MoM – Citi: 0.5%, median: 0.2%, prior: 0.6%; PPI Final Demand YoY – Citi: 2.4%, median: NA, prior: 1.6%; PPI ex Food, Energy MoM – Citi: 0.3%, median: 0.2%, prior: 0.3%; PPI ex Food, Energy YoY – Citi: 2.3%, median: NA, prior: 2.0%; PPI ex Food, Energy, Trade MoM – Citi: 0.3%, median: NA, prior: 0.4%; PPI ex Food, Energy, Trade YoY – Citi: 2.9%, median: NA, prior: 2.8% - PPI final demand should rise a strong 0.5%MoM, based partly on stronger energy prices but markets will also be watching for continued strength in core goods prices. Substantial further upside in PPI core goods could imply upside risks for core goods forecasts in CPI into the middle of the year. Most important in PPI data however will be various components that matter for PCE inflation. Citi Research currently pencil in a solid 0.30% increase in core PCE inflation in March.
   
• USD: University of Michigan Sentiment – Citi: 78.4, median: 78.7, prior: 79.4; 1y Inflation Expectations – Citi: 3.1%, median: NA, prior: 2.9%; 5-10Yr Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.8% - inflation expectations have remained at low levels over the last several months despite energy prices continuing to climb higher and a couple of months of stronger inflation pace. The risks therefore, are biased towards inflation expectations moving higher and expect 1Yr inflation expectations to increase to 3.1% from 2.9% in the preliminary April report and for 5-10Yr inflation expectations to also increase modestly to 2.9%. These would not necessarily be concerningly high levels for the Fed since they would still be close to their pre-pandemic range.

Euro area and UK – ECB board meeting in focus this week

• EUR: ECB deposit facility rate – Citi Forecast 4.0%, Consensus 4,0%, Prior 4.0% - the ECB’s April meeting is ‘live’ this week on paper, and easing may be actively discussed for the first time, but a cut seems highly unlikely, not least with Services price inflation unmoved in March. The real prize for doves to push for in April would be to try to extract an early consensus on rhythm-setting consecutive cuts in June and July before the summer break. Indeed, with a strong signal already given for June, the pace of cuts is likely the active debate. Reaching at least a 3% depo seems uncontroversial, so the ECB could complete the first phase of dialing-back quickly. The policy setting is shifting from insurance against inflation entrenchment to insurance against recession risk. The ECB seems not in the mood to wait for the Fed and the inflation market supports quicker cuts.

Japan – the current account in focus this week

• JPY: Japan’s current account surplus likely narrowed in February – Citi Research expect Japan’s current account balance to generate a ¥3.1686trn surplus before seasonal adjustment and a ¥2.0864trn surplus after adjustment in February (+¥438.2bn and +¥2.7275trn, respectively in January). The surplus after seasonal adjustment likely decreased in February. A production halt at an automaker probably meant weaker exports of goods while import of goods likely rebounded. As a result, Citi Research pencil in a wider trade deficit in February. Meanwhile, Japan’s primary income surplus probably dropped off somewhat but remained elevated on the back of rising overseas interest rates and yen depreciation.

Commodity Bloc – RBNZ and BoC board meetings in focus this week

• NZD: NZ RBNZ OCR Decision - Citi forecast; no change at 5.50%; Previous; no change at 5.50% - NZ activity data has generally underperformed against RBNZ forecasts with the most recent miss coming from the Q4 GDP report. The Bank was expecting a flat Q4 result after the -0.3% result in Q3. Instead, New Zealand slipped back into recession, with a -0.1% Q4 print. Tight monetary policy had rapidly cooled private sector demand while around 55% of mortgage repricing over the coming year would add to effective tightening of financial conditions. Citi Research expect the MPC to keep the OCR at 5.50% on April 10 but think the door is now open to the MPC adjusting the language around how long the OCR needs to remain at the current level. The February 28 policy statement concluded with “the OCR needs to remain at a restrictive level for a sustained period of time”. The next meeting will provide the first opportunity for the MPC to remove the word “sustained” to something closer to the word “further”.
   
• CAD: Bank of Canada Rate Decision – Citi: 5.00%, median: 5.00%, prior: 5.00% - the BoC is very likely to leave policy rates unchanged at 5% this week with generally hawkish risks relative to markets that may be expecting some more hint of upcoming rate cuts after two softer CPI reports. The policy statement (or Governor Macklem) is unlikely to give any signal for an upcoming cut as soon as June. That said, officials are likely to be encouraged by recently softer CPI readings and will likely note further progress towards 2%, with near-term CPI forecasts lowered in the Monetary Policy Report. Citi Research expect forecasts will still imply CPI closer to 3% in the first half of the year (perhaps assuming an upcoming rebound from January/February weakness) before slowing more sustainably in H2. BoC officials will likely want to see more progress on slowing inflation before lowering rates. The most hawkish risks from the April decision are likely to come as a result of upward growth revisions in the MPR with BoC officials likely to react more hawkishly to stronger activity data than Fed officials have recently.

Asia EM – MAS monetary policy meeting, Chinese inflation, trade, money supply and new Yuan loans in focus this week

• SGD: Singapore MAS April Monetary Policy Statement – Citi Research expect MAS to maintain current policy band settings on April 12th (75% probability) on - (1) negative output gap continuing into 1H24; (2) a cooling labor market; and (3) gradually moderating core CPI that is broadly in line with (or marginally lower than) MAS's Jan-24 forecasts, with a preference for keeping the SGD NEER strong (or stronger) within the band. However, risks remain for a 50bp slope steepening to 2% p.a (25% probability) on expected closing of the output gap and a recent increase in core CPI inflation momentum. These risks are likely to persist or increase in July and October, especially if more concrete signs emerge that the output gap is closing (or turning positive), which may risk core inflation overshooting the 2% forecast by early 2025. A steeper terminal slope may also be needed to accommodate structural REER appreciation pressures from widening productivity differentials and economic restructuring.
   
• CNH: China CPI (%YoY) March – Citi Forecast 0.5, Consensus 0.4, Prior 0.7; PPI (%YoY) – Citi Forecast -2.8, Consensus -2.8, Prior -2.7 - food prices turned soft and services price momentum could still soften between holidays despite the strong services PMI. Meanwhile, PPI deflation is dragging on and another dip cannot be ruled out in March. The NBS Mfg PMI survey is not boding well for PPI reflation along with the weakness in ferrous metal prices – rebar prices dropped -7.2%MoM in March.

• CNH: China Exports (%YoY) March – Citi Forecast -1.5, Consensus -2.0, Prior 5.6; Imports (%YoY) – Citi Forecast 1.5, Consensus 0.4, Prior -8.2; Trade Balance (USD $bn) – Citi Forecast 69.1, Consensus 72.2, Prior 39.71 - China’s composite shipping cost index fell -17.5% from February’s high. The deadweight tonnage of ships in 20 major ports (including both arrival and departure) declined -6.2%YoY in March 1-30. South Korea exports also softened to 3.1%YoY from 11.5% in Jan-Feb. Despite the robust manufacturing PMI of new export orders, Citi Research expect exports growth to pull back materially on the higher base.

• CNH: China New Yuan Loans (CNY bn) March – Citi Forecast 3500, Consensus 3725, Prior 4914.3; Total Social Financing (CNY bn) – Citi Forecast 4700, Consensus 4800, Prior 6536.4; Money Supply (M1, %YoY) – Citi Forecast 1.8, Consensus 1.4, Prior 1.2; Money Supply (M2, %YoY) – Citi Forecast 8.7, Consensus 8.7, Prior 8.7 – the property market is still soft despite some early signs of stabilization. Corporate long-term loans should continue to benefit from policy support, but the PBoC’s PSL is now absent for two months. The pace of government bond issuance didn’t pick up either. Meanwhile, M1 growth could rise again with CNY seasonality past, while M2 growth could stay flat at ~8.7% in March, without acceleration of the credit cycle.