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The major US stock indices have erased their declines of the Israeli territory strike against Iran. The S&P and Dow Industrial Average traded mostly in positive territory. They are trading above and below unchanged at the moment.

Price action remains volatile. The opening is still 40 minutes away.

This article was written by Greg Michalowski at www.forexlive.com.

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Monday

Over the weekend,
Iran launched its retaliatory attack against Israel with drones and ballistic
missiles. There were no casualties and 99% of the attack was neutralised. Iran
eventually said that the matter could be deemed concluded. There was some initial
risk on sentiment, but things turned around pretty soon as Israel pledged to
retaliate. Eventually, Israel did retaliate on Friday night although the attack
seemed limited based on various reports and Iran downplayed the airstrikes.
This should have put an end to this episode, and we should go back focusing on
macro.

ECB’s Villeroy
(neutral – voter) confirmed the incoming rate cuts:

• Barring a surprise, we should decide on the first cut at our next meeting on June 6.
• I’m more confident about the downward trajectory of inflation.
• Our cut early June will have to be followed by other cuts by year-end.

The New Zealand
March Services PMI plummeted back into contraction:

• Services PMI 47.5 vs. 53.0 prior.
• Long-term average is 53.4.

BNZ’s Senior Economist
Doug Steel:

“Combining
today’s weak PSI activity with last week’s similarly weak PMI activity, yields
a composite reading that would be consistent with GDP falling below by more
than 2% compared to year earlier levels. That is much weaker than what folk are
forecasting”.

The PBoC left the MLF
rate unchanged at 2.50% as expected.

ECB’s Simkus (hawk
– voter) said that a rate cut was also possible in July.

The Eurozone
February Industrial Production came in line with expectations:

• Industrial Production M/M 0.8% vs. 0.8% expected and -3.0% prior (revised from -3.2%).
• Industrial Production Y/Y -6.4% vs. -5.7% expected and -6.6% prior (revised from -6.7%).

ECB’s Rehn (hawk –
voter) confirmed that rates could be lowered in June if inflation slows as
expected:

• Inflation is converging towards ECBs 2% target.
• Monetary restraint is continuing to reduce inflation and impact the real economy.
• Although ECB rates are at levels that are making substantial contributions to ongoing disinflation process, we no longer see need to maintain them at current levels for a long duration.
• Provided we are confident inflation will continue converging to our 2% target in a sustained way, the time will be right in June to start easing the monetary policy stance and to cut rates.
• This assumes there will be no further setbacks in the geopolitical situation and thus in energy prices.

ECB’s Kazimir
(hawk – voter) confirmed a rate cut in June but stayed clear from
pre-committing to anything beyond then:

• ECB can cut rates in June given persistent fall in inflation; restriction can be gradually reduced.
• ECB not committing to any policy path beyond June.
• Economic recovery taking hold, will accelerate in H2.

ECB’s Lane (dove –
voter) stressed about the need to get wage growth in check:

• Deceleration in wage growth is necessary to get inflation to target.
• Wage pressures are gradually moderating but remain elevated.
• While services inflation should decline somewhat in the near term, it is expected to remain relatively elevated for most of the year.
• Headline inflation is expected to fluctuate around current levels in the near term.
• It should be recognized that the current phase of disinflation is necessarily bumpy.

The US March
Retail Sales beat expectations across the board by a big margin with positive
revisions to the prior figures:

• Retail Sales M/M 0.7% vs. 0.3% expected and 0.9% prior (revised from 0.6%).
• Retail Sales Y/Y 4.0% vs. 2.1% prior (revised from 1.5%).
• Ex-autos M/M 1.1% vs. 0.5% expected and 0.6% prior (revised from 0.3%).
• Control group 1.1% vs. 0.4% expected and 0.3% prior (revised from 0.0%).
• Retail sales ex gas and autos 1.0% vs. 0.3% expected and 0.5% prior (revised from 0.3%).

Fed’s Williams (neutral – voter) didn’t change his
view about inflation as he still sees a path to the 2% target:

• Overall economy will continue to grow this year around 2%.
• Consumer spending has been strong.
• There are tailwinds from the supply side of the economy.
• I don’t see the recent inflation data as turning point.
• Markets are taking slower inflation progress into account.
• I’m data dependent as always.

The US March NAHB Housing Market Index came in line
with expectations:

• NAHB Housing Market Index 51 vs. 51 expected and 51 prior.

Tuesday

Fed’s Daly (neutral – voter) didn’t add anything new
on the monetary policy front as she just echoed others in supporting a patient
stance:

• Recent inflation data was not surprising.
• Inflation bumps along the way isn’t particularly surprising.
• Don’t want to end up with too-strong, or too-weak policy response.
• Worst thing to do is act urgently when urgency isn’t necessary.
• Inflation above target, need to be confident it’s on the way to target before can react.
• No urgency to cut rates.
• Can’t just look at published information, that’s backwards looking.
• Economy growing at a solid rate, labour market is still strong, inflation above target.
• Our progress on inflation has been significant, but we are still not there yet.
• We don’t know if R-star (more commonly written by the economists as r*) has risen.
• It’s reasonable to think r* is between 0.5 and 1.
• Labor force supply increase would be an upside surprise, but I can’t count on it to make policy.

The Chinese Q1 GDP beat expectations:

• GDP Y/Y 5.3% vs. 5.0% expected and 5.2% prior.
• GDP Q/Q 1.6% vs. 1.2% prior (revised from 1.0%).

The Chinese March Retail Sales missed expectations:

• Retail Sales Y/Y 3.1% vs. 4.5% expected and 5.5% prior.

The Chinese March Industrial Production missed
expectations:

• Industrial Production 4.5% vs. 5.4% expected and 7.0% prior.

The UK Labour Market report missed expectations
although the wage growth figures remained strong:

• Unemployment rate 4.2% vs 4.0% expected and 4.0% prior (revised from 3.9%).
• Employment change -156K vs. 58K expected and -21K prior.
• Average weekly earnings 5.6% vs. 5.5% expected and 5.6% prior.
• Average weekly earnings (ex-bonus) 6.0% vs. 5.8% expected and 6.1% prior.
• March payrolls change -67K vs. -18K prior (revised from 20K).

The Canadian March CPI came mostly in line with
expectations across the board with further easing in the underlying inflation
measures:

• CPI Y/Y 2.9% vs. 2.8% prior.
• CPI M/M 0.6% vs. 0.7% expected and 0.3% prior.
• Core CPI Y/Y 2.0% vs. 2.1% prior.
• Core CPI M/M 0.5% vs. 0.1% prior.
• Core CPI M/M SA -0.1% vs. 0.0% prior (revised from -0.1%).
• Trimmed Mean CPI Y/Y 3.1% vs. 3.2% expected and 3.2% prior.
• Median CPI Y/Y 2.8% vs. 3.0% expected and 3.0% prior (revised from 3.1%).
• Common CPI Y/Y 2.9% vs. 3.1% prior.

The US March Housing Starts and Building Permits
missed expectations:

• Housing Starts.1.321M vs. 1.487M expected and 1.549M prior (revised from 1.521M).
• Housing starts M/M -14.7% vs. 12.7% prior (revised from 10.7%).
• Building Permits 1.458M vs. 1.514M expected and 1.523M prior (revised from 1.524M).
• Building Permits M/M -4.3% vs. 2.3% prior (revised from 2.4%).

Fed’s Jefferson (neutral – voter) didn’t add anything
new but between the lines the Fed is saying that the bar for a rate hike is
very high, so if inflation were to be more persistent, the Fed will just hold
rates steady for longer:

• If incoming data suggest inflation is more persistent than I currently expect, it will be appropriate to hold in place current restrictive stance of policy for longer.
• Outlook is still quite uncertain.
• Recent readings on both job gains in inflation have come in higher than expected.
• In March, headline PCE was 2.7% over past 12 months based on Fed staff estimates core PCE at 2.8%.
• Despite considerable progress in lowering inflation, job not yet done.
• My baseline outlook remains inflation will decline further with policy rate at current level.
• My baseline outlook is also for labour market remaining strong, demand and supply continuing to rebalance.
• Compared to Q4 2023 I expect Q1 economic growth to slow down but remain solid as indicated by February and March retail sales data.
• I am fully committed to getting inflation back to 2%.

The US March Industrial Production came in line with
expectations:

• Industrial Production M/M 0.4% vs. 0.4% expected and 0.4% prior (revised from 0.1%).
• Industrial Production Y/Y 0.0% vs. -0.3% prior (revised from -0.2%).
• Capacity utilization 78.4% vs. 78.5% expected and 78.2% prior (revised from 78.3%).

ECB President Lagarde
(neutral – voter) reaffirmed the commitment to cut rates in June barring any surprise:

• We will cut rates soon, barring any major surprises.
• Geopolitical events impact on commodity prices not very significant so far.
• We are observing a disinflationary process that is moving according to our expectations.
• Subject to no development of additional shock, it will be time to moderate restrictive monetary policy in reasonably short order.
• We are not pre-committing to a path of rate cuts.
• There is still huge uncertainty out there.
• ECB must be cautious and must look at the data to confirm our perspective.
• Declines to comment on market pricing for three rate cuts in 2024.
• We believe that rates are restrictive enough and they are producing an effect on inflation.
• April and May will be a key confidence on inflation.
• The path to 2% inflation will be bumpy. The rate decline is not linear.
• We expect inflation to fluctuate around the line that is currently going lower.
• What is most different between the US and EU is the behaviour of the consumer.
• EU consumers are very cautious and continue to save.
• The American consumer consumes, and the level of savings is less than EU.
• Fiscal policy was significantly higher in the US and targeted toward the consumers.
• We are data dependent; we are not Fed dependent.
• We have to be attentive to exchange rates and the value of the currency.
• Lagarde refuses to comment on whether the EURUSD goes to parity is a good thing or a bad thing.
• We will single-mindedly be focused of price stability and 2% target.
• Growth in Europe mediocre, much slower than in the US.
• We are clearly seen to mid signs of recovery.
• Euro area inflation is a different animal than in the US.
• We monitor the exchange rate.
• It is obvious that exchange rates may have an impact on inflation.

Fed Chair Powell (neutral
– voter) confirmed that the recent inflation data did not give the Fed greater
confidence and therefore they will keep rates steady for longer. There’s a
strong message that the Fed will just keep rates steady for longer if needed
and the bar for a rate hike is very high:

• Recent data shows a lack of progress on inflation this year.
• Twelve-month core PCE was little changed in March, according to estimates.
• Labor market moving into better balance.
• The performance of the US has been quite strong.
• Recent data have not given greater confidence in inflation.
• We took a cautious approach to not overreact to declines last year.
• Restrictive policy needs further time to work.
• The current situation is not the standard case of inflation driven by overheated demand.

Wednesday

The New Zealand Q1 CPI
came in line with expectations:

• CPI Q/Q 0.6% vs. 0.6% expected and 0.5% prior.
• CPI Y/Y 4.0% vs. 4.7% prior.

The UK March CPI beat
expectations:

• CPI Y/Y 3.2% vs. 3.1% expected and 3.4% prior.
• CPI M/M 0.6% vs. 0.4% expected and 0.6% prior.
• Core CPI 4.2% vs. 4.1% expected and 4.5% prior.
• Core CPI M/M 0.6% vs. 0.6% prior.
• Services CPI Y/Y 6.0% vs. 5.8% expected and 6.1% prior.

BoE’s Greene (hawk –
voter) is still a bit worried about high wage growth and doesn’t see any
imminent rate cut:

• We’re closer to target than just a few months ago.
• News has been encouraging.
• Achieving inflation target has been a bumpy ride, it was always going to be, and that last mile is the hardest work.
• What’s going on in the Middle East does pose a risk.
• Latest data shows pretty high wage growth, though moving in the right direction.
• Latest inflation data surprised on the upside a little.
• Wage growth in services price inflation is not consistent with this sustainable return to 2% inflation.
• UK labour market loosening, but still remains pretty tight. We expect inflation to return to target in coming months, but don’t expect it to stay there.
• I don’t think a rate cut is imminent.

ECB’s Cipollone (dove –
voter) didn’t add anything new on the monetary policy front:

• We see some signs of economic recovery (citing PMI data).
• Expects for rest of year inflation at this level more or less.
• Base effects are due to unwinding of cost-of-living measures.
• We expect inflation resuming path to 2% next year, at target by mid-2025.
• If incoming data in June and July confirm that confidence it will be appropriate to remove some restrictive measures imposed in 2023.
• Middle East conflict’s impact on energy costs is a major risk.
• As recovery unfolds, we expect productivity to go up.

ECB’s Nagel (hawk –
voter) supports a June rate cut although he’s less confident than others:

• Price pressure in euro zone could continue for some time.
• Is not completely clear if inflation rate will reach 2% target next year and stay at that level.
• Expect slight growth in the German economy in 2024.
• A June cut is looking increasingly likely, but there are still some caveats.
• Certain inflation data still looks higher than desired.
• Core inflation is still high. Service inflation is high.

ECB’s Schnabel (hawk –
voter) didn’t add anything new on the monetary policy front although she
stressed that they are paying attention to actual inflation not just forecasts:

• Financial market repricing of rates over last few months shows investors expect policymakers, at least for now, to continue to pay more attention to actual inflation outcomes.
• It could be prudent to continue to consider the baseline forecast as just on communication, even as inflation continues to fall.
• Regular inconsistent use of alternative scenarios could better convey the uncertainty facing central banks.

BoE’s Bailey (neutral –
voter) remains confident about the disinflationary path and expects the next
month’s inflation data to show a strong drop:

• We are pretty much on track for where we thought we would be in February on inflation.
• I expect next month’s inflation number will show quite a strong drop.
• The effect of the Mideast conflict is less than feared.

The Federal Reserve
released the Beige Book:

Below are the highlights
of the overall economic activity report:

• Economic Expansion: Activity expanded slightly overall since late February, with 10 out of 12 Districts reporting slight to modest growth.
• Consumer Spending: There was a minimal overall increase in consumer spending, though the results were mixed across different districts and categories.
• Discretionary Spending Weakness: Several reports highlighted a weakness in discretionary spending due to high price sensitivity among consumers.
• Auto Spending: Improved inventories and dealer incentives notably boosted auto spending in some Districts, while sales remained sluggish elsewhere.
• Tourism: Tourism activity modestly increased on average, though the extent varied significantly across reports.
• Manufacturing: There was a slight decline in manufacturing activity, with only three Districts reporting growth.
• Nonfinancial Services and Bank Lending: Nonfinancial services saw slight increases on average, while bank lending was roughly flat.
• Construction and Real Estate: Residential construction and home sales showed some improvement on average, whereas nonresidential construction was flat and commercial real estate leasing declined slightly.
• Economic Outlook: Contacts were cautiously optimistic about the future, on balance.

Below are the summarized
highlights of employment from the report:

• Overall Employment Growth: Employment grew at a slight pace, with nine Districts experiencing very slow to modest increases, while the remaining three reported no changes.
• Labor Supply and Quality: Most Districts observed increases in labor supply and the quality of job applicants, improving the overall employment landscape.
• Employee Retention and Reductions: Several Districts noted improved employee retention, though some also reported staff reductions at certain firms.
• Persistent Shortages: Many Districts faced ongoing shortages of qualified applicants for specific roles such as machinists, trades workers, and hospitality workers.
• Wage Growth: Wages grew moderately in eight Districts, while the others saw only slight to modest increases. It was noted that annual wage growth rates have returned to historical averages in multiple districts.
• Future Expectations: The general expectation is that labor demand and supply will remain relatively stable, with modest job gains continuing and wage growth moderating back to pre-pandemic levels.

Below are the summarized
highlights regarding prices from the report:

• Modest Price Increases: Overall, price increases remained modest and consistent with the pace observed in the previous report.
• Impact of Disruptions: Despite shipping delays caused by disruptions in the Red Sea and the collapse of Baltimore’s Key Bridge, these incidents have not led to widespread price increases.
• Energy Prices: Six Districts reported moderate increases in energy prices, indicating some upward pressure in this sector.
• Insurance Rate Hikes: Contacts in several Districts observed sharp increases in insurance rates for both businesses and homeowners.
• Weaker Pricing Power: Many firms noted a significant weakening in their ability to pass on cost increases to consumers, which has led to reduced profit margins.
• Strain on Nonprofits: Inflation has also strained nonprofit entities, with some reporting service reductions as a result.
• Inflation Expectations: On balance, contacts expect inflation to remain steady at a slow pace, although some manufacturers in a few Districts see potential upside risks to near-term inflation, both in input and output prices.

ECB’s Centeno (dove –
voter) just confirmed the June rate cut and added that the number of cuts will
depend on the incoming data:

• If we have to cut rates before Fed, so be it.
• Number of cuts will depend on incoming data.
• First cut in June is at this point very likely.
• After June we’ll look at data, especially growth and employment.
• Even after 25 or 50 basis points of cuts we’ll still have a tight monetary policy stance.
• I don’t know anybody who says neutral rate is above 3%.
• How fast should we get to neutral? We’ve got time.
• Many shocks we’re facing are deflationary, such as China’s participation in global trade.

ECB’s Vasle (hawk –
voter) is basically in line with market’s expectations of three rate cuts this
year if everything goes to plan:

• We should be much closer to 3% towards the end of the year if everything goes according to plan.
• Cautioned, though, that he saw some worrying developments in the Middle East.

Fed’s Mester (neutral –
voter) echoed her colleagues in saying that if inflation were to persist, they
will just keep rates steady for longer:

• We want to get more information before we can say inflation is on a sustainable path to 2%.
• This year inflation is a little higher than expected.
• We want to be pretty confident inflation is on this downward trajectory.
• We have strong labor markets, solid economic growth.

• I still expect inflation to come down.

• If inflation isn’t moving down to 2% we could keep rates where they are for longer.

• At some point we will start to ease policy.

• We don’t have to ease policy in a hurry.
• Watching risks to both of the Fed’s mandates.

Thursday

Fed’s Bowman (hawk – voter)
continues to question the recent inflation dynamics and whether the current
policy is sufficiently restrictive:

• Progress on inflation has slowed and perhaps stalled.
• Economic conditions are strong.
• Strength of consumer spending tied to ongoing job growth.
• Current monetary policy is restrictive; time will tell if it is “sufficiently” restrictive.
• Consumers may be trading down to lower goods; but also spending large amounts of money on things like travel to see eclipse.

The Australian March Labour
Market report missed expectations although the unemployment rate came in better
than expected:

• Employment Change -6.6K
  vs. 7.2K expected and 117.6K prior (revised from 116.5K).
• Unemployment Rate 3.8%
  vs. 3.9% expected and 3.7% prior.
• Full-time employment
  27.9K vs. 79.4K prior (revised from 78.2K).
• Part-time employment
  -34.5K vs. 38.2K prior (revised from 38.2K).
• Participation Rate 66.6%
  vs. 66.7% prior.

BoJ’s Noguchi didn’t add
much in terms of forward guidance, but he seems to be one of the most dovish
ones:

• Japan is seeing wage hikes unseen in the past via spring wage negotiations.
• Essential to continue to maintain appropriate balance between labour supply and demand through the continuation of its accommodative monetary policy to achieve the 2% price target.
• Japan must achieve positive wage-inflation cycle as soon as possible and for this, service prices must keep rising.
• Last year’s spring labour-management negotiations have triggered an unprecedented wave of wage increases.
• Another factor that is key is for small manufacturers to be able to smoothly pass on rising wage costs to prices.

• If wage hike translates into higher prices, that will show through rise in service prices and this trend is clearly appearing.

• Focus now is on the pace at which the policy rate will be adjusted and at what level it will eventually stabilize.
• Long-term neutral interest rate is highly likely to be lower than that of other countries.

• At some point in future, it’s desirable to start shrinking BoJ’s balance sheet.
• Steps BoJ decided in March is a move toward this direction of future shrinking of BoJ’s balance sheet.

• I dissented to BoJ’s March decision since I thought it would be appropriate to maintain JGB buying under negative rate.

• Rise in service prices not driven mainly by wage hikes yet.
• Japan’s economy in a moderate recovery trend, but recently growth has stalled.
• Some big firms are benefiting from a weaker yen.
• The likelihood of reaching 2% inflation target is rising.
• Main scenario is that future rate hikes are likely to be slow, depends on economic data.
• Prolonged yen weakness could have various impacts on wages and prices.
• Have to take that into account when deciding monetary policy.
• Cannot say whether there will be another rate hike this year.

The US Jobless Claims
beat expectations:

• Initial Claims 212K vs. 215K expected and 212K prior (revised from 211K).
• Continuing Claims 1812K vs. 1818K expected and 1810K prior (revised from 1817K).

Fed’s Williams (neutral –
voter) added more to his previous comments earlier in the week as he said that
if the data called for higher rates, the Fed would hike:

• I don’t feel an urgency to cut rates.
• The Fed is data dependent, and the data has been good.
• We have a strong economy.
• Economic imbalances have been reduced.
• Fed rates haven’t caused the economy to slow too much.
• Monetary policy is in a good place.
• Eventually interest rates will need to be lower.
• Rate cuts will be determined by economic activity.
• Fed rate hike is not my baseline forecast.
• If data called for higher rates, Fed would hike.
• Fed has work to do to lower inflation.
• Fed 2% inflation goal is the right objective.
• Critical for the Fed to achieve its 2% inflation goal.
• Economy back on pre-pandemic growth track.
• Worth watching performance of China’s economy.

The US Leading Economic
Index (LEI) missed expectations in March:

• LEI -0.3% vs. -0.1% expected and 0.1% prior (revised from 0.2%).

“February’s uptick in the
U.S. LEI proved to be ephemeral as the Index posted a decline in March,” said
Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The
Conference Board. “Negative contributions from the yield spread, new building
permits, consumers’ outlook on business conditions, new orders, and initial
unemployment insurance claims drove March’s decline. The LEI’s six-month and
annual growth rates remain negative, but the pace of contraction has slowed.
Overall, the Index points to a fragile—even if not recessionary—outlook for the
U.S. economy. Indeed, rising consumer debt, elevated interest rates, and
persistent inflation pressures continue to pose risks to economic activity in
2024. The Conference Board forecasts GDP growth to cool after the rapid
expansion in the second half of 2023. As consumer spending slows, US GDP growth
is expected to moderate over Q2 and Q3 of this year.”

BoJ’s Ueda said that
there is a risk that the weakening Yen could affect the trend in inflation and
lead to a policy shift:

• There is a chance weak JPY might affect trend inflation and if so, could lead to policy shift.
• Don’t think big picture changed on US inflation, Fed Outlook.

Fed’s Bostic (hawk –
voter) is another member citing possible rate hikes if the progress on
inflation were to stall or worse, reverse:

• The economy is slowing down but slowing down slowly.
• Wage growth is happening faster than the inflation rate.
• I’m grateful of the progress we’ve made on inflation and grateful the economy continues to grow.
• If inflation stalls out, we won’t have any option but to respond.
• I’d have to be open to increasing rates if inflation stalls out or goes in the other direction.
• Getting inflation under control is very important.

Friday

The Japanese March CPI
came in line with expectations with all measures easing further:

• CPI Y/Y 2.7 vs. 2.7% expected and 2.8% prior.
• Core CPI Y/Y 2.6% vs. 2.6% expected and 2.8% prior.
• Core-Core CPI Y/Y 2.9% vs. 3.2% prior.

The UK March Retail Sales
missed expectations:

• Retail sales M/M 0.0% vs. 0.3% expected and 0.1% prior (revised from 0.0%).
• Retail sales Y/Y 0.8% vs. 1.0% expected and -0.3% prior (revised from -0.4%).
• Retail sales (ex autos, fuel) M/M -0.3% vs. 0.3% expected and 0.3% prior (revised from 0.2%).
• Retail sales (ex autos, fuel) Y/Y 0.4% vs. 0.9% expected and -0.4% prior (revised from -0.5%).

The
highlights for next week will be:

• Monday: PBoC LPR, Canada PPI.
• Tuesday: Australia/Japan/Eurozone/UK/US Flash PMIs.
• Wednesday: Australia CPI, Canada Retail Sales, US Durable Goods Orders.
• Thursday: US Q1 GDP Advance, US Jobless Claims.
• Friday: Tokyo CPI, Australia PPI, BoJ Policy Decision, US PCE.

That’s all folks. Have a
nice weekend!

This article was written by Giuseppe Dellamotta at www.forexlive.com.

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