Week Ahead: Geopolitics and USD move in the spotlight

Markets have been shaken up by a surprisingly strong US CPI report and rising tensions in the Middle East. The latter exploded over the weekend with Iran firing multiple missiles at Israel, so is obviously highly volatile and unpredictable. An inevitable further risk off move could kick off the week and continue the recent price action we have seen. That said, most of the sides involved have played down their desire for a prolonged period of conflict so any sharp early spike in safe haven assets could be sold into.

For markets, the question has moved onto whether the “higher for longer” rates theme now turns into “higher forever”? This needs to be caveated by the fact that this narrative might only be a US phenomenon, as “divergence” now also becomes a buzzword for markets. Central banks may veer off on their own policy paths as inflation varies between regions. But with 2024 Fed rate cut bets crushed, from over 150bps to around 50bps now, it’s no wonder king dollar is reigning, and this could continue for some time.

The greenback enjoyed its best week since September 2022 with the euro and pound falling to their weakest levels against the buck since November. Geopolitical angst and a flight to safety on the Israel / Iran conflict, together with a happily divergent ECB means this theme may have legs. But sustained USD strength could cause problems for those central banks looking to cut rates without undermining their currencies and importing more inflation.

Rising commodity prices need to be added to this mix too, though gold’s seventh positive week in eight is really showing blow-off top type price action now. Friday’s price action was especially bearish with a new high at $2431 but a sharp close down near the low of the day and ultimately the week. Investors have been seemingly more worried about reaccelerating US inflation than funding costs, but we would expect a bigger retracement if the Middle East risks calm. Stocks have turned lower too with the focus turning to earnings driving expectations now due to the elevated equity valuations in US stocks, especially in tech. Watch out for more investment banks reporting, plus Netflix and TSMC in the latter part of the week.

Regarding the economic calendar, we get a bunch of inflation reports from Canada, New Zealand, the UK, and Japan. The latter will be interesting following the change in BoJ policy lately, so too Canada data though for dovish reasons after the recent BoC meeting hinted at a June rate cut. The UK also releases important CPI and wage growth figures. These will be a key determinant for the Bank of England with a June rate cut priced near a coin toss.

In Brief: major data releases of the week

15 April 2024, Monday

– US Retail Sales: Activity is predicted to fall two-tenths to 0.4% which would be below trend pace. Rising inflation and high borrowing costs are likely to impact. Households are increasingly focused on essentials and cutting back on discretionary spending. Even if we get a miss, the market may fade the immediate move as the focus is on hot inflation data.

16 April 2024, Tuesday

–  China Data: Consensus expects Q1 GDP around 5% y/y, two-tenths lower than the prior quarter but in decent shape to start 2024. Retail sales are seen at 4.5% which means consumption is improving. Industrial production is forecast at 5.4% with fixed asset investment at 4.0%.

–  UK Jobs: Focus is on the wage data and ex-bonuses could see a modest drop to below 6%. These figures should be impacted by high base effects going forward. The u/e rate is seen unchanged at 3.9%.

–  Canada CPI: Inflation has cooled further in recent months with the latest BoC Q1 forecasts revised lower. But risks remain, with shelter costs and other services prices remaining elevated.

17 April 2024, Wednesday

– New Zealand CPI: Inflation is forecast to ease to 4.1% from 4.7%. The quarterly reading is seen at 0.7% versus 0.5%. The RBNZ meeting saw it drop its tightening bias, but the OCR will need to remain restrictive for some time. Markets predict a first rate cut in August. However, the central bank expects to bring rates down in 2025.

– UK CPI: Headline inflation is expected to slow to 3.1% from 3.4 and the core to 4.3% from 4.5%. Services inflation, which is a key measure for the BoE, could fall below their estimate of 6%. But going forward, rising petrol prices might keep the headline print sticky. A June rate cut is priced near a coin toss.

18 April 2024, Thursday

– Australia Jobs: The labour market is expected to retrace the blockbuster February reading of 116.5k with a +15k print. Seasonal patterns have skewed the data in the first quarter of this year. The unemployment rate is forecast at 3.9%, two-tenths higher than in February.

19 April 2024, Friday

– Japan CPI: Expectations are for a headline print of 2.8%, matching February. Yen weakness and higher commodity prices are keeping this reading elevated. Core inflation is likely to cool two-tenths to 2.6%. This is due to base effects. 

– UK Retail Sales: No growth is expected though the early Easter holiday and long weekend could help support figures. On the flip side, the poor weather in March will likely have put off shoppers. 

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