29 Apr 2019
US: Key events on the horizon
After an Easter lull in markets, last week witnessed a resurgent US dollar, a nervous pound, record levels for the S&P 500 & the NASDAQ and a subsequent rally in safe haven government bond markets. A number of key events this week could add further fuel to the fire.
The FOMC will almost certainly keep the Fed funds target range on hold at 2.25%-2.50% on Wednesday. We note that US money markets are currently pricing in an 80% chance of an easing by end-year and we suspect that Fed Chair Powell will be grilled on what could prompt the committee to consider a rate cut. However we expect ‘Fed patience’ to rule the day and judge that markets are too eager to price in lower rates. Indeed our baseline case is still that the FOMC will raise rates once more in H2 this year as the labour market continues to tighten.
In this respect we note that April’s labour market report is due on Friday. Our forecast is for a 150k gain in non-farm payrolls following the 196k rise in March. We expect the ‘U3’ unemployment rate to remain at 3.8%. As well as the usual run of beginning of month indicators such as the ADP and ISM surveys we would pay attention to Q1’s employment cost index for rigorous official data on pay trends. Q4’s figures showed compensation rising at an annual rate of 2.9%. Lastly, 160 plus S&P500 companies are set to report Q1 results over the week.
UK this week
In the UK, markets are questioning the next steps in the Brexit process. Cross party Tory/Labour talks seem to have got nowhere. Also, attempts by some Conservative MPs to force a change in the party leadership rules, to enable a challenge to Theresa May before December, have fizzled out. Some talk suggests that the government could try to introduce the Withdrawal Agreement Bill (the formal piece of legislation to implement Mrs May’s deal) as soon as this week but there are no indications that the PM has any more support than she had late in March, when a ‘meaningful vote’ on the Withdrawal Agreement was defeated by 58 votes.
It does look as if, much to Mrs May’s chagrin, the UK will be taking part in the elections to the European Parliament on 23 May. Meanwhile a litmus test of the popularity of the various parties will take place on Thursday, thanks to a number of local elections (mainly in English local authorities).
Thursday is also a busy day on the economics front with an MPC announcement and BoE Inflation Report due. We expect the committee to hold the Bank rate steady at 0.75%, but we may see one dissenting voice for a hike. In any case we suspect that the delay to the UK’s EU exit will prompt a more active discussion over the need to tighten policy. Amid a number of indicators, we would point out that we expect a sharp decline in April’s manufacturing PMI (Wednesday) - the March index was supported by strong inventory building and several car companies shut down production during April.
Europe & ROTW this week
This week we begin with the aftermath of Sunday’s general election in Spain, please see our detailed note in the ‘Thought of the Day’ below. On the economics side, first estimates of EZ Q1 GDP for the zone are due on Tuesday – we are looking for a 0.3% quarterly rise. Friday sees ‘flash’ CPI estimates for April. We suspect that the late timing of Easter will push the ‘core’ measure up from March’s outturn of +0.8%. Last and definitely not least, US/China trade talks resume in Beijing on Tuesday. Chinese PMIs for April are also due, after positive outturns in March.
Thought of the Day
Elections took place in Spain yesterday, with the results close to pre-vote polling, providing little by way of surprise for markets. Spanish PM Pedro Sanchez, leader of the Socialists, came out on top gaining 38 seats (123 in the 350 seat Parliament). However this was not sufficient to govern independently and now talks will follow on the shape of any forthcoming coalition which may well be a mix of the left and centre-left. The left-wing Podemos party has already offered to open Coalition talks with Mr Sanchez, though even if the Socialists and Podemos work together, they would still fall around 11 seats short of a majority; the count will be finalised in the first two weeks of May. Mr Sanchez may look to abstentions to try and govern on this basis, he may look to the centre-right Ciudadanos or he may seek support of smaller parties. The new far-right Vox party rose to the political stage with 24 seats secured.
09.10 UK BoE Gov Carney Speaks
10.00 EZ Consumer Confidence
13.30 US Core PCE Price Index