Week Ahead: US CPI, ECB to dictate June rate cuts

We head into a new week with volatility picking up amid a choppy few days in markets, as traders digest the monthly US employment report ahead of this week’s next other major data point, US inflation. Recent signs of softening in the labour market Stateside were not seen in Friday’s data, and that means less evidence for the Fed to cut rates in June. Stock markets have been relying to some degree on policy easing happening this quarter, while gold has dazzled on this theme too, with the additional help of momentum buying and underlying geopolitical worries. The latter looks very overbought now having hit fresh highs above $2330.

Much could depend on the US CPI report released on Wednesday. The core monthly print is the one most professional traders and investors will focus on. This is expected to tick lower but still come in at 0.3%, which is just a touch too high for the Fed’s policymakers. Readings around 0.2% on a prolonged monthly basis are probably needed to give comfort to the FOMC to begin a rate cut cycle. The dollar printed a doji last week denoting some indecision after three straight weeks of gains, but would be boosted further by stronger than expected price data.

There are several major central bank meetings taking place over the next few days so more volatility might be seen with the ECB, RBNZ and Bank of Canada all gathering. In truth, these will likely be holding meetings which mark time before rate cuts in June and the following months. The ECB seem happy with this timing, judging by recent chat from ECB officials, as policymakers will then have a lot more data, as well as new staff economic projections. Markets could be too expectant of a direct signal from President Lagarde in terms of a cut at the next meeting, with lingering caution and a repeat of data dependency not likely not helping euro bulls.

The Bank of Canada meeting could also open the door up to a June rate reduction. Recent data has been mixed with rising unemployment but solid job numbers (until last Friday), and a downside inflation surprise contrasting with a larger than expected GDP print for January. Crucially, headline inflation is now in the bank’s target range and if the core continues to ease, the BoC may also feel more confident about a rate move. This could spark some softness in CAD if markets price in more than the 75bps of cuts currently predicted this year.

Finally, commodities will be a major focus with oil hitting $90 for the first time since October. Brent crude has risen around 18% this year while WTI is up 21%. Geopolitical tensions in the Middle East and the potential for a Syrian backlash have increased. Meanwhile, economic growth in the EU, Europe and China is expected to boost demand while Opec+ continues to constrain supplies. Bulls will be eyeing up $100/barrel which may have more significant implications for inflation, even though central bankers target the core measure which strips out volatile energy costs.  

In Brief: major data releases of the week

10 April 2024, Wednesday

–RBNZ Meeting: The RBNZ will “kick for touch” as one investment bank puts it. It will leave the OCR at 5.50% and forward guidance is likely to remain the same as the February statement. That means leaving the rate at its current level for a sustained period to restrain activity and return inflation to target. Markets price the first rate cut in August while the most recent rate projection by the RBNZ showed the bank standing pat in 2024. Kiwi bears have their eyes on the April cycle low at 0.5939.

–US CPI: Consensus forecasts 0.4% m/m and 3.5% y/y headline, and 0.3% and 3.7% core prints in March. Sticky shelter costs contribute over half of total inflation. Base effects could cause upside risks, so too energy prices. Strong data could see the greenback challenge strong resistance around 105.

–Bank of Canada: The BoC is expected to keep rates unchanged at 5%. Inflation surprised to the downside recently, but the labour market remains solid. Markets are pricing in above a 70% chance of a June rate cut and 75bp of easing by year-end. The CAD sold off on Friday after soft jobs data but remains in a range. Solid resistance sits at around 1.36.

11 April 2024, Thursday

–FOMC Minutes: The updated median dot plot still saw three 25bp rate cuts for 2024. But growth and inflation projections were revised higher, as well as the longer-term rate. Any hints on the timing of policy easing will be key.

-China CPI: Expectations are for a 0.4% print in March, down from the prior 0.7%. This is mainly due to falling food prices after the Chinese New Year. But consumers remain relatively subdued, while excess capacity still lingers.

-ECB Meeting: The ECB will stand pat on rates but is expected to tee up a first rate cut at its next meeting in June. Policymakers will have fresh staff economic projections and Q1 wage data at that meeting. Disinflation continues while the composite PMI was revised up above 50. EUR needs to break 1.0830 for more upside. Support is just above 1.07.

12 April 2024, Friday

–UK GDP: Analysts forecast another positive reading after the January rebound. This followed the shallow, technical recession at the end of last year. A very gradual recovery is predicted by most economists through this year. Cable printed a weekly doji as a battle between bulls and bears. The zone around 1.2550 is key support.

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