Written by Convera’s Market Insights team
Three thesis for April
Boris Kovacevic – Global Macro Strategist
After the last five inflation prints beat expectations to the upside, all eyes were set on the PCE report closing out last week. A holiday shortened week and thin liquidity on Friday meant that a slight beat of the consensus could rattle markets. However, investors got spared the worst as inflation came in cooler than expected.
The personal consumption expenditure price index increased by 0.3% in February and therefore less than in January (0.4%) and then was expected (0.4%). The annual growth rate edged up slightly from 2.4% to 2.5%. Overall, the last PCE print did change little to nothing when it comes to Fed pricing. The sentiment on markets was echoed by Jerome Powell saying that inflation continues to be in line with expectations and that price pressures will ease on a sometimes bumpy path. The recent outperformance of the US economy is giving policy makers some headroom to wait out the beginning of the easing cycle.
Financial markets are seemingly fine with the status quo. Equity benchmarks across both sides of the Atlantic sit near record highs with cross-asset volatility anchored at historically low levels. The ISM Manufacturing PMI starts the economic week today as the majority of European trading is closed due to Easter Monday. German inflation on Tuesday and Eurozone inflation, the ISM Services PMI and the Fed Chair Powell’s speech on Wednesday continue the streak of tier 1 macro data. The US non-farm payrolls report closes out the week on Friday with the consensus seeing the fourth consecutive above 400k print for March.
We are looking for confirmation of broad theses on multiple fronts. (1) The bottoming of the global manufacturing sector. The US manufacturing PMI is expected to have rebounded in March from 47.9 to 48.4. (2) The continued disinflation in Europe. German inflation could fall from 2.5% in February to 2.2% in March, coming very close to the ECB’s target. (3) The resilience of the US labor market. Another upside surprise on the jobs front would decrease the probability of a cut in June. However, given the large divergence between different labor market indicators, a downside surprise would have investors question the strength of the US labor market momentum. The outcome on these three fronts will drive the dollars price action this week.
One inflation miss away from an April cut?
Boris Kovacevic – Global Macro Strategist
Last week’s downside surprises from French and Spanish inflation are setting us up for an interesting holiday shortened week with German and Eurozone CPI coming up. Inflation in the Eurozone’s second-largest economy fell below 3% for the first time in two-and-a-half years to 2.4%. The continued moderation in goods and food prices are putting downward pressure on headline inflation and will encourage the doves within the European Central Bank to be more vocal about cutting interest rates sooner than later.
We expect Eurozone inflation to fall back below 2% by the middle of the year. And while the April meeting still seems to be a bit too early for policy easing, it could become the first dovish hold that is laying the groundwork for a series of cuts starting in June. The encouraging progress on the inflation front has come to the detriment of the euro as it lifted the priced in rate cuts from the ECB for 2024. Governing Council member Yannis Stournaras even backed the idea of four interest rate cuts coming by year-end as inflation continues to moderate.
EUR/USD fell for a third consecutive week and is now trading at $1.0790, slightly below the average spot rate since 2023 at $1.0820. Monetary policy is unlikely to move in the favor of the common currency in the months ahead. However, the uptick in the global business cycle highlighted by the recent upside surprise in the Chinese purchasing manager index could limit the downside for the currency pair.
CAD stronger across the board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 1-5
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
