The shocking Non-Farm Payrolls report released on Friday put an end to rumors that the Fed might be wrong about inflation. Job growth in April was less than 300K, no more than a third of what was expected. The dollar dived, yields of long-dated bonds in the United States fell, as the threat of accelerating inflation ebbed. There is a chance for equity markets to continue advance, as low rates and moderate growth prospects are the most favorable environment for a yield search.
As it becomes finally clear that no rate hike is expected or priced in before 2023, the markets will likely turn their focus to actions of the Fed peers, such as the ECB or the Bank of England. Considering their less dovish stance on rates, we may start to see development of rumors of early rate hikes in response to economic upturn. To expect that markets would likely need to see signals of economic growth, i.e., strong economic reports. The German ZEW Economic Sentiment Index on Tuesday, and the UK GDP on Wednesday will likely command a spotlight next week. On Tuesday and Thursday, the BoE head Bailey will speak, who may give more details on the Central Bank's plans to raise interest rate or taper QE.
The US April CPI and PPI will be released on Wednesday and Thursday. Of course, the employment report plays a key role in predicting Fed's actions, but downbeat inflation print may intensify worries about US recovery momentum given really weak NFP and could potentially drive US long-dated yields lower, adding pressure to USD.
On Friday, the main reports of the day will be the ECB meeting minutes and retail sales in the US. Given the weak NFP data, there is a growing risk of further weakening of USD next week especially if the data from other major economies will indicate accelerating economic momentum that may shift expectations of rate hikes to closer to the present time, which will lead to faster growth in real interest rates relative to real rates in the US.
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