RBC Capital Markets
Week ahead: China data feature prominently this week with March credit & financing data, trade balance and Q1 GDP growth due. There is also US CPI (see USD), Germany ZEW survey, UK March GDP (see GBP), Sweden CPI, Australia employment report (see AUD), and the RBNZ policy decision (see NZD).
USD: Headline CPI inflation (Tuesday) is expected to jump in March in large part due to the drop in energy prices a year ago. Core CPI price growth has been tracking lower lately, but is expected to firm up gradually to around the Fed's target later this year. Retail sales data will also be out on Thursday.
CNY: China March credit & financing data is due sometime in the first half of the week. There is also the March trade balance (Tuesday) and Q1 GDP report (Friday).
GBP: The data has shown that each successive lockdown in the UK has had less impact on economic activity. Although February was still locked down, most high-frequency indicators point to a pick-up in activity. The composite PMI rose to 49.6 from January’s 41.2, and CHAPS payment data showed card transactions climbing month-on-month. We therefore think that March monthly GDP (Tuesday) regained some of January’s losses, expanding 0.8% m/m. With schools reopening, a slight loosening of social restrictions, and preparation by firms ahead of the expected economic reopening, it is likely that activity rose much more meaningfully in March.
AUD/NZD: Australia’s March labour market report (Thursday) should see job creation continue, with lead vacancy indicators at historically strong levels. There is good reason for near-term caution, though, given that the key JobKeeper wage subsidy program ended in March, and hence Q2 employment reports might show a bit more weakness. Still, with the sample period for next week’s report concentrated on the first half of March, we expect a solid 40k of net job creation. Although the number of unemployed could rise a little, we think the unemployment rate should tick up from 5.8% to 5.9%. Meanwhile, the RBNZ is widely expected to keep the cash rate on hold in the Wednesday meeting.
CAD: The Business Outlook Survey has not been particularly useful during the pandemic given the considerable lag between the survey period and release date. That should be the case again today given the recent tightening of restrictions in the largest provinces. The dichotomy between most of the economy being resilient amid the recent outbreaks and the hard-hit services sectors should again be apparent in the BoC’s comments. Board-level data released last week suggests that March was another very strong month for the national housing market after unit sales surged 6.6% m/m to a new record in February. This should be reflected in Thursday’s existing home sales report and Friday’s housing starts.
Inflation, in particularly in the US, will undoubtedly be among the key data under market scrutiny, given the nervousness about the Fed policy path. Following the higher-than- expected payroll gains last Friday, markets initially priced even earlier Fed hikes, but this move faded somewhat during the week, as the Fed minutes confirmed its intentions to let the economy run hot before considering any hikes. In parallel, UST 10y yields declined slightly as inflation expectations and real yields softened, suggesting that markets may be scaling back their expectations for the additional $2.3trn fiscal package (American jobs plan) proposed by the Biden administration last week. N
This week’s US March CPI print will likely be the markets’ next focal point in the tug of war between those believing the Fed may have to tighten much earlier than it is signalling thus far and those, including us, who believe the current market-implied Fed rate path (with first hikes priced for end-2022) is already too aggressive. We expect headline (core) CPI to have risen 2.6% (1.5%) y/y. Its sequential increase (0.58% m/m) driven mainly by core goods prices, where surveys suggest strong pipeline pressures. Base effects should lift headline y/y CPI further in the coming months, with a peak at 3.7% in May but slowing from then on.
To see whether this benign forecast of an only transitory inflation boost can hold true, markets will likely pay most attention to the sequential developments of those components, which are predicted to remain soft: eg, service price inflation is forecasted to follow a weak trend, underpinned by decelerating rent inflation. Surprises in these data in either direction would likely fuel one of the opposing inflation narratives. Similarly, the March data on import prices, retails and IP will become part of the narrative about the US recovery and, possibly, its exceptionalism.
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