Weaker-than-consensus US jobs and no hawkish pivot from the Fed may prove to be a turning point for DXY from its recent strength

US April jobs data soft all round and likely weaker ahead

• USD: Summary - softer-than-expected 175k new jobs and an unexpected rise in the unemployment rate from 3.829% to 3.865% follow Chair Powell’s guidance earlier last week that Fed official focus is shifting toward the employment mandate. The data together with other indicators of jobs point to continued weakness in the US labor market in coming months with the unemployment rate expected to rise well-above 4% this year.
   
• USD: Data – US April employment rises by 175k jobs, softer than consensus looking for 240k with private employment up by 167k, the smallest gain since last November while the government adds just 8k jobs, the smallest increase since December 2022 and a slowing from the recently very strong pace. Average hours worked also pull back to 34.3 from 34.4 and average hourly earnings rise more modestly than expected at 0.20%MoM (versus consensus for 0.3% MoM) and 3.9%YoY. The unemployment rate also rises on a rounded basis to 3.9% versus 3.8% in March. Meanwhile, employment in the household survey rises a very modest 25k.

• USD: The April employment report represents an all-round dovish labor market backdrop for the Fed after Chair Powell at last week’s FOMC meeting had highlighted multiple paths to rate cuts this year, including an unexpected weakening in the labor market. 175k jobs added in April is by no means a weak pace of job growth but more important is the slowing trend of employment growth with the slowdown in private sector job growth spread across both goods and services. With a growing list of labor market data that looks “bad” (ISM manufacturing and services, NFIB plans for hiring, the low hiring and quits rate in JOLTS), the April employment report could be an early sign that the divergence among labor market indicators is beginning to break towards the less favorable ones. Meanwhile, the trend in wage growth also continues to slow, though the monthly numbers are noisy and subject to revisions. Wage gains tend to track the quits rate, which is below its pre-Covid level and still falling.
   
• USD: The April jobs report is nothing like bad enough to trigger a wholesale rethink at the Fed, but things will be different if the July numbers are weaker still. The downshift in payroll growth has come exactly when the NFIB suggested it would. The OCIS team stick to their forecast of 75-100bp easing this year.

Weak ISM services as headline and employment index falls below 50

• USD: Summary – The April ISM Services index released after the US April jobs report on Friday also surprises lower, falling to 49.4 in April from 51.4 and points to a meaningful slowdown in services growth from here. The largest drop comes in the business activity index but the new orders index declines as well. The most important detail in the ISM Services report though is the decline in the employment index to 45.9 from 48.5, which corroborates the decline in the S&P Services employment index out earlier this month. The prices index however, rises more than expected to 59.2 from 53.4.
   
• USD: Data – The US April ISM Services index surprises with a fall to 49.4 from 51.4, weaker consensus expectations for a rise to 52.0. This is the weakest level for ISM Services since a one month plunge in December 2022 and takes the headline to its lowest level since the end of 2022. The largest drop is seen in the business activity index, falling to 50.9 from 57.4, its lowest level since May 2020. The new orders index also declines to 52.2 from 54.4 and the employment index plunges further to 45.9 from 48.5. However, the prices index increases more than expected to 59.2 from 53.4. But the jump in the prices index mostly reverses a similar fall in March and still leaves the index at a level consistent with much weaker underlying services inflation.
   
• USD: ISM services falling into contractionary territory suggests further slowing in activity and clearly contradicts the market narrative of a reacceleration in activity. The main detail in the ISM Services report is the decline in the employment index which corroborates the decline in the S&P Services employment index out earlier this month. The 6 month average of the percent of services industries reporting employment growth has also continued to fall to very low levels. These data add to other data such as NFIB plans for hiring, the low hiring and quits rate in JOLTS and softer employment in the household survey over the last several months which point to further weakening in payroll growth in coming months.

Swiss April CPI – sticky services inflation

• CHF: In data released Friday, Swiss CPI Inflation for April comes in higher than expected at 1.4% YY (Consensus and Citi 1.1% Prior 1.0% YY) as does Swiss core 1 Inflation, edging up 0.2ppt to 1.2% YY (Consensus and Citi 0.9%, Prior 1.0% YY). Core goods prices are up 0.4% MM and services prices are up 0.1% MM. In March, the SNB had forecast a rise in CPI inflation from 1.2% YY in Q1 to 1.4% YY in Q2, so the rise will not immediately challenge the last projections. The main surprises are in volatile energy and industrial goods prices. However, stickier services inflation is still not trending down and at 2.0% YY remains the upper end of the SNB’s inflation target corridor. A different breakdown of the headline CPI shows imported goods deflation has eased, rising from -1.3% to -0.4%. The domestic inflation rate also rises by 0.2pp to 2.0% as it appears the drag from the early-Easter base effects is offset by more intense price hikes.
   
• CHF: The increase in inflation in April is not ideal, but the SNB can continue to ease policy this year. The headline rate has been within the SNB’s “below 2%” target for eleven straight months now. SNB’s wide inflation target band makes it difficult to call the extent of rate cuts as the Bank keeps its cards close to its chest for when to pull the trigger. But Citi Research still expect two more 25bp rate cuts in June and September 2024 from the SNB to a terminal rate of 1.0%.

Week Ahead:

US – Fed speak and University of Michigan consumer sentiment in focus this week

• USD: With little data out this week focus will be on comments from Fed officials. Most interesting should be comments from NY Fed President and Vice Chair of the FOMC Williams who is a relative dove. Other dovish Fed officials such as Collins and Cook might mention that their outlook continues to be for lower inflation and that policy is in a good place to respond to data. More hawkish Fed officials like Kashkari and Bowman will likely sound more concerned about upside risk to inflation.
   
• USD: University of of Michigan Sentiment – Citi: 74.9, median: 77.0, prior: 77.2; 1Yr Inflation Expectations – Citi: 3.4%, median: NA, prior: 3.2%; 5-10Yr Inflation Expectations – Citi: 3.0%, median: NA, prior: 3.0% - the University of Michigan sentiment index has been fairly rangebound in recent months after rising at the end of last year. Consumers continue to be worried about elevated prices with stronger than expected realized inflation during the first quarter of the year and rising gasoline prices. This has been reflected in higher inflation expectations with both 1Yr and 5-10Yr inflation expectations rising in April. Citi Research expect 1Yr inflation expectations to increase somewhat further in the May preliminary release to 3.4% from 3.2%, still well off the highs of recent years and expect the 5-10Yr median to remain unchanged at 3.0% which would be comforting for the Fed.

Euro area and UK – BoE and Riksbank board meetings, UK GDP and Norway’s CPI in focus this week

• GBP: BoE asserting divergence – Citi Research expect to see the MPC hold rates for the fifth meeting in succession with an 8-1 vote split, although with a risk of 7-2. But the market’s focus will be on guidance. Citi Research expect a change in the policy summary, with a further softening of the prior statement that inflationary persistence remains evident. Second, and more important, would be an associated hardening of the cutting bias. BoE Bank Rate – Citi Forecast 5.25%, Consensus 5.25%, Prior 5.25% (signaling a cut in the coming months?).
   
• GBP: UK GDP growth likely overestimating trend — alongside the MPC, this week will see a raft of notable data for the UK, including the KPMG-REC survey and the DMP. Rounding out the week, Q1 GDP data is likely to signal a notable improvement in quarterly growth – with output likely to increase by 0.4% QQ. Citi Research expect this quarter’s improvement to reflect the unwind of some unusual trade weakness in Q4. The implication is Q4 likely underestimated trend growth, Q1 will now likely overestimate it. UK Quarterly GDP, Q1 – Citi Forecast 0.4% QQ, Consensus 0.4%, Prior -0.3%; Monthly GDP, March – Citi Forecast 0.1%MM, Consensus 0.1%, Prior 0.1% (BoE: 0.1%).
   
• EUR: Euro Area Recovery Watch — the Q1 Euro Area growth surprise has attracted central banker focus. After a good start to the year, German factory orders, trade data (Tuesday) and industrial production (Wednesday) for March will likely be on the weak side, however. Surveys do not suggest an acceleration in Q2 either; ECB: Monetary Policy Accounts (April) will be released this week.
   
• NOK: Norwegian CPI – after a significant downside surprise in March, Citi Research expect further weakness in April, with CPI easing to 3.5% YY (March MPR: 3.9%) and underlying CPI-ATE to 4.2% YY (+0.2% MM SA). This should provide further evidence to the Norges Bank that despite the weak krone, inflation is moving towards target. Citi Research expect a more dovish tone to start emerging at the June meeting (20 June), after last week’s maintained “high-for-longer” message. way: CPI Inflation, April – Citi Forecast 3.5% YY, Consensus 3.5% YY, Prior 3.9% YY.
   
• SEK: Riksbank: Kicking Off the Cutting Cycle — Citi Research change their view on the timing of the Riksbank’s first policy rate cut and now expect it at this week’s meeting (previously in June), by 25bp to 3.75%. The economy is clearly in need of an easier monetary stance, despite the lingering risks from a weak krona. Riksbank Policy Rate – Citi Forecast 3.75%, Consensus 3.875%, Prior 4.00%.

Commodity Bloc – RBA board meeting and Canadian jobs data in focus this week

• AUD: RBA Board Decision: Citi forecast; no change at 4.35%, Previous; no change at 4.35% - for the first time since November 2023, when the RBA Board last increased the cash rate target, the Bank has the opportunity to recalibrate policy expectations. This is different to the February meeting where the Board explicitly removed its hiking bias of “a further increase in interest rates cannot be ruled out”. The optionality of re-birthing the hawkish stance comes from the upside surprise to the Q1 CPI data that will require an upwards revision to the CPI forecasts for 2024 in the accompanying May SMP document and probably a small downward revision to the mid-year 2024 unemployment rate forecast. Citi Research expect the RBA to acknowledge the demand/supply balance as being tighter than expected through a continuation of the phrase “the Board is not ruling anything in or out” in the policy statement. This was added to the February statement to temper market expectations that the Board was about to pivot towards interest rate cuts, but instead retain optionality to ensure that inflation returns to the target within what it determines as a reasonable time frame. This is generally seen as no later than December 2025 and the May SMP will probably contain economic forecasts that continue to place headline and trimmed mean CPI just below the top of the target band by this time.
   
• CAD: Canada Net Change in Employment (Apr) – Citi: 18k, median: 17.5k, prior: -2.2k; Unemployment Rate – Citi: 6.1%, median: 6.2%, prior: 6.1%; Hourly Wage Rate Permanent Employees – Citi: 4.6%, median: NA, prior: 5.0% - after a slight decline in employment in March, Citi Research expect a modest rebound in employment of 18k in April but with risks slightly tilted to the downside. The unemployment rate should remain at 6.1% with the labor force participation rate resuming a downward trend after stabilizing over the last few months. But the most important data released ahead of the June BoC meeting will be April CPI on May 21. Citi research expect a reading that remains close to 3%YoY and still-solid activity data (Q1 GDP released just before the June meeting tracking ~2.5%) will have officials erring on the more hawkish side and waiting for two more inflation prints to show “sustained” easing in core inflation before cutting in July. But if April CPI is softer than expected, still-soft April employment data could be further justification to cut in June, especially in the event of a downside surprise.

Asia EM – China’s trade, inflation and money supply/ RMB loans in focus this week

• CNH: China exports growth may reverse to a small positive of 1.0%YoY and imports growth could rebound to 5.5%YoY, with trade surplus at US$76.7bn in April.
   
• CNH: China CPI inflation could stay slightly above zero, at 0.1%YoY in April. April PPI deflation could narrow sharply to -2.0%YoY.
   
• CNH: Citi Research expect China’s M1 growth at 1.2%YoY and M2 growth at 8.3%YoY, both in line with March numbers. Even with the PBoC’s new relending tool, new RMB loans could stay low at RMB800bn in April amid property weakness.