Week Ahead for FX, Bonds: U.S. Inflation Data Will Be Keenly Awaited

Below are the most important global events likely to affect foreign-exchange and bond markets in the coming week starting May 13.

U.S. inflation data for April on Wednesday are likely to be the highlight of the week. Markets will be looking to see whether inflation has started to turn lower after three straight months of higher-than-expected readings and whether investors are justified in pricing in a high chance that the Federal Reserve will cut interest rates in September.

Data from the eurozone, U.K., Sweden and Norway will also attract attention.

Australia's budget, Japan's preliminary first-quarter growth data and a China central bank interest-rate announcement are the key items on Asia's data agenda. The week features another central bank decision, this time in the Philippines, with more Chinese data including home prices also on tap, plus final first-quarter growth prints from Malaysia and Hong Kong.

U.S.

Prospects for a U.S. interest-rate cut in the coming months picked up after recent weaker-than-expected U.S. jobs data for April, causing markets to resume pricing in a high chance that the Federal Reserve will cut rates in September.

Inflation needs to move lower for these expectations to be confirmed and in that light, U.S. consumer-price inflation figures for April due on Wednesday will be heavily scrutinized.

Investors will be wary that inflation has failed to mirror the steep decline anticipated at the start of the year and that the last three U.S. inflation reports have come in higher than expected.

Last month, U.S. Treasuries rallied after the monthly payrolls figures but then "turned around in a big way after an upside CPI surprise," said Kit Juckes, currency strategist at Societe Generale in a note, adding: "We have been warned!"

He noted that the slowdown in U.S. jobs creation to 175,000 in April is welcome but remains above the average monthly gain over the past 10 years and won't move the dial for Fed policymakers.

However, Capital Economics' chief North America economist Paul Ashworth said the fundamentals "still point to weaker inflation."

"We still expect inflation to ease again later this year; with shorter supplier delivery times consistent with a resumption of core goods deflation, and a combination of slower wage growth and faster productivity growth consistent with lower non-housing services inflation," he said.

Ahead of this data release, U.S. producer price data for March will give an indication of pipeline inflationary pressures. Retail sales data for April due on Wednesday will provide clues on whether U.S. economic strength is still holding up, followed on Thursday by industrial production and housing starts data for April, and weekly jobless claims.

EUROZONE

Investors will scrutinize upcoming eurozone data in anticipation that the European Central Bank will likely cut interest rates in June.

Markets are pricing in a high chance of a June rate cut following recent signals by ECB policymakers and after Sweden's Riksbank this month began cutting interest rates, though there is uncertainty about how much they will cut rates after that. In that light, data on inflation, wages and the economy will be key.

Investors will also be looking to see whether data confirm that the eurozone's nascent recovery is gathering steam.

Final eurozone inflation data for April are due on Friday May 17, with figures for Germany and Spain due on Tuesday.

The performance of the eurozone's industrial sector has been weak of late and eurozone industrial output data for March on Wednesday will be watched for any signs of activity picking up.

French first-quarter unemployment data will be released on Friday May 17, while the latest German ZEW survey for May released on Tuesday should provide a more up-to-date picture of how the economy is performing currently.

Germany will sell a 2026-dated Schatz on Tuesday and 2053- and 2054-dated Bunds on Wednesday. The Netherlands will hold an auction on Tuesday, while Spain and France will sell bonds on Thursday.

U.K.

U.K. jobs data on Tuesday will give key indications of whether wage growth and employment are slowing significantly to allow the Bank of England to start cutting interest rates in the coming months.

The BOE kept interest rates on hold at 5.25% at its meeting on May 9, though two out of nine policymakers voted to cut rates.

The U.K. is due to auction a March 2073 index-linked gilt on Tuesday and a conventional July 2033 gilt on Wednesday.

SWEDEN

In May, Sweden's Riksbank became the second major European central bank--after the Swiss National Bank--to start cutting interest rates. Focus now turns to the pace of rate cuts after that, with the Riksbank flagging a likelihood of two further reductions in the second half of 2024.

Capital Economics expects the Riksbank to pause in June followed by three more rate cuts by year-end, rather than the two the Riksbank forecasts, given the backdrop of a weak Swedish economy. If inflation data for April and May are below expectations and the krona doesn't weaken further, however, another cut in June would be likely, chief Europe economist Andrew Kenningham said in a note.

On the other hand, analysts point to concerns that weakness in the Swedish krona could stoke inflation and limit rate-cut prospects.

Sweden will sell inflation-linked bonds on Thursday.

AUSTRALIA

In Australia, attention will shift to Canberra with the federal government set to release its budget for 2024-25 on Tuesday amid concerns any additional spending could tip the balance in favor of a further interest-rate increase.

The Reserve Bank of Australia left its official cash rate on hold last week, but Governor Michele Bullock warned that inflation risks remain and an interest-rate increase was discussed.

"Given the RBA meets again next month, I think it was very wise for them to wait and see what the potential stimulus impacts are of the Federal Budget," said Craig Vardy, head of fixed income at BlackRock.

On Thursday, Sarah Hunter, assistant governor (economic) at the RBA will give a speech in Hobart, where she is likely to be asked how seriously the board debated a further interest-rate increase.

"The challenge fiscal policymakers face is that although they are flush with revenue, a cautious approach ought to be taken to additional spending because the economy is still operating at full employment, and inflation is still too high," said Paul Bloxham, chief economist at HSBC Australia.

A risk that the RBA will be alert to is the probability that the government will hold back some of its revenue gains to support added spending closer to the election.

Josh Williamson, chief economist at Citi Australia, said Australian Treasurer Jim Chalmers will likely push new spending into the future to avoid overheating the economy now.

"The government doesn't want to be seen promoting policies that add to the risk of further policy tightening," he said.

This suggests that new spending will be pushed into the government's forward budgetary projections, while measures that directly reduce inflation could be announced virtually immediately, Williamson added.

CHINA

The People's Bank of China announces the rate on its medium-term lending facility on Wednesday, while on Friday May 17, a string of data releases for April will be watched for signs of recovery at the start of the second quarter.

The MLF is a tool the central bank uses to lend to commercial banks and acts as a guide for the benchmark loan prime rate, which is tied to mortgages and other loans.

The rate decision and data releases come as sentiment toward China's economy has turned cautiously more upbeat thanks to positive signals like exports' return to growth in April. However, continued weak spots like in the property sector are tempering optimism about the world's second-largest economy.

Analysts think more policy action is needed to help cement recovery momentum. April's Politburo meeting has fanned hopes that support is coming.

The high-level policy meeting set a notably more supportive tone on fiscal policy and the property market, UBS Investment Bank said.

It expects to see better on-year activity growth in April data, with a low comparison base a year earlier helping flatter some of the headline readings.

"We expect a slightly smaller on-year decline in property sales, continued deep contraction of property investment, robust infrastructure and manufacturing fixed-asset investment growth, and better retail sales," said Dr. Zhang Ning, senior China economist at UBS Investment Bank.

UBS Investment Bank expects industrial production growth to have likely strengthened on year thanks partly to a low base, adding that PMI readings suggest sequential momentum in manufacturing production likely improved.

"Considering continued weakness in property investment, overall FAI growth likely largely stabilized at around 4.5%," it said.

On the monetary front, Christoph Siepmann, senior economist at Generali Investments, expects monetary policy to play a larger role in tackling real-estate debt worries but sees no meaningful quantitative easing on the cards.

"We stick to the view of an L-shaped recovery driven by improving exports and--over time--a decreasing drag of the real estate sector," he said.

Though real estate is expected to remain a weight on growth, its impact is likely to moderate, given government support such as the affordable housing policy, and the targeted fund channeling of the PBOC, Siepmann said.

Generali Investments sees a 10-basis-point cut in the MLF rate by around mid-year.

JAPAN

Japan releases preliminary first-quarter GDP estimates on Wednesday amid heightened attention on a weak Japanese yen and the central bank's policy stance.

Bank of Japan Governor Kazuo Ueda said that the central bank is carefully watching the yen's depreciation for its policymaking. He said the BOJ will take policy measures if the currency's weakness affects underlying inflation.

(MORE TO FOLLOW) Dow Jones Newswires

May 10, 2024 05:14 ET (09:14 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.