Federal Reserve rate decision – 03/05 – a lot has happened since the Fed last raised rates by 25bps in March in the teeth of concern over financial stability and the US banking system.
While this is still reverberating it seems to be being contained and there is little evidence it is materially affecting the US economy. While some of the recent manufacturing data has shown increasing signs of disinflation, the same can't be said to the same extent in services and food prices. This is likely to temper any sort of guidance that Fed officials might deign to offer in the aftermath of this week's decision. The consensus would appear to be that the jobs market is starting to slow but not by enough to suggest that it is likely to see a drag on demand. The recent earnings numbers from the likes of JPMorgan Chase and Bank of America suggest that the consumer remains in decent shape and one year inflation expectations did show a sharp rise in March. This would suggest that we are likely to see a 25bps rate hike this week, with the main challenge facing Powell set to be keeping his options open about further moves. It's unlikely that Powell will row back on his view that there won't be any rate cuts this year.
US non-farm payrolls (Apr) – 05/05 – last month's jobs report reset the bad data narrative of a slowing US economy that had driven US 2-year yields to a low of 3.65% in early April, with the March payroll numbers seeing 236k jobs added, while the unemployment rate fell to 3.5% even as the participation rate rose to 62.6%.
The March jobs data appeared to suggest that people are finally returning to the workforce as the cost of living continues to squeeze consumer finances. It also suggests that the JOLTs numbers will continue to come down, as more people return to the work force, having seen these numbers fall below 10m for the first time since May 2021 in February. Wages data fell from 4.6% to 4.2%. With the Federal Reserve expected to announce another 25bps rate hike this week, the April payrolls report should inform whether we can expect to see another 25bps in June or whether the Fed is done.
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ECB rate decision – 04/05 – Tuesday's EU flash CPI numbers for April could be the swing factor as to whether we get a 25bps move or a 50bps move by the ECB when it meets this week.
We've had a raft of ECB officials over the past few weeks say that there remains a long way to go before the ECB starts to consider a pause in its rate hiking cycle, and this week's core CPI print could prompt a continued aggressive approach. There is a risk that the ECB could over play its hand given what is already happening with PPI, having seen sharp falls from highs of 43.3% back in August last year, and are now down at 13.2%, with month-on-month readings now starting to come in negative.
