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Week Ahead: Dollar Declines After Massive Payrolls Miss; Inflation Now In Focus

By MarketPulse (Ed Moya)Market OverviewMay 09, 2021 02:30AM ET
www.investing.com/analysis/week-ahead-dollar-declines-after-massive-payrolls-miss-inflation-now-in-focus-200578677
Week Ahead: Dollar Declines After Massive Payrolls Miss; Inflation Now In Focus
By MarketPulse (Ed Moya)   |  May 09, 2021 02:30AM ET
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Wall Street went on a wild ride after a huge nonfarm payroll report miss reaffirms the Fed’s stance to do nothing. A massive slowdown in hiring was not expected and the knee-jerk reaction across the bond market might have paved the way for further dollar weakness.

The US economic recovery will likely take a lot longer than many have initially expected, as concerns grow that the issue with the labor market is more of a supply problem.

The aftermath of the massive payroll’s downside surprise will have many investors shift the focus to pricing pressures. Everything is starting to cost more, and employers may need to be prepared to increase wages.

The big economic release of the week will be the US April inflation report, which will see the “base-effects” in annual inflation due to the shock that hit the US economy last year.

Investors will also pay close attention to a wrath of Fed speak. Fed’s Evans, Williams, Harker, Waller, and Bullard all speak on the US economic outlook, while Daly participates at a banker’s event and Kaplan takes part in a moderated discussion.

Investors will also keep a close eye on China’s inflation and credit data. The world’s second largest economy should see inflation heat up and credit growth retrace. China’s economic recovery appears to be steadying.

US

The aftermath of a surprisingly disappointing nonfarm payroll report will justify Fed Chair Jerome Powell’s stance that he is not ready to start having a conversation on asset-purchase taper talk. Despite a big miss with April jobs number, US growth exceptionalism is still widely expected these next couple of months.

But financial markets could see a Powell pivot if inflation comes in much hotter-than expected, and if the rest of the recovery remains very robust.

After a steady dose of hawkish comments from Fed’s Kaplan, Wall Street will want to see if other policymakers are leaning closer to him. It is a busy week for Fed speak as Evans, Brainard, Daly, Clarida, Williams and Kaplan will all be making appearances.

Key economic indicators will also provide a better understanding of how strong the economy is and how quickly pricing pressures are accelerating. Wednesday, all eyes will be on the April inflation report, which will show a massive year-over-year increase due to base-effects Inflation, also driven from supply chain disruptions and pent-up demand.

On Friday, US retail sales are expected to come back down to earth as the effects of the latest round of stimulus starts to wane. February’s numbers were impacted by terrible weather, so the surge seen in March will likely be followed with only a modest gain in April.

EU

On Saturday (May 8), EU leaders met in Porto, Portugal for talks focusing on social affairs. The 27 EU leaders announced the resumption of Free Trade Agreement (FTA) negotiations between the EU and India, which have been stalled since 2013. Indian Prime Minister Narendra Modi joined the meeting remotely.

On Sunday, French President Emmanuel Macron travels to Strasbourg, France, to launch his future of Europe debate at the EU Parliament. Macron, a staunch supporter of the EU project, is looking to combat Euroskepticism and improve how the EU engages with citizens.

The Eurozone’s COVID vaccine rollout continues to accelerate. On Monday, the EU begins trials to test its vaccine certificate system, with the goal of a June roll-out. The first trials will include Germany, France and Greece.

Germany releases ZEW Survey Expectations for May on Tuesday. The consensus stands at 71.4, which would be an improvement over the previous read of 70.7 points.

On Wednesday, the Eurozone releases Industrial Production for March, which has been hampered by a shortage of semiconductor chips used by automakers, is expected to rebound from -1.0% to to 0.7% on a monthly basis.

UK

On Monday, the U.K. government will announce if it plans to further ease pandemic rules as of May 17. This would include allowing pubs and restaurants to serve indoors and would remove the ban on non-essential foreign travel.

On Tuesday, BoE Governor Andrew Bailey is scheduled to participate in a panel discussion about Libor, the “final chapter.”

As well, the UK government will outline its agenda for a new session of Parliament via a speech by the Queen. The government may propose legislation that includes a post-Brexit state package, a plan to improve adult social care, and a revamp of national security legislation.

On Wednesday, the UK releases GDP for Q1. The economy is projected to have contracted, with a forecast of -1.6% (QoQ) and -6.1% (YoY). We’ll also look for Industrial Production to remain steady, with a month-over-month 1.0% gain.

BoE Governor Bailey will address an event hosted by the International Swaps and Derivatives Association on Wednesday. On Thursday, Bailey addresses a citizens’ panel, together with Sarah Breeden, who is in charge of the BoE’s work on climate change. At a separate event, BOE Deputy Governor Jonathan Cunliffe will discuss digital currencies.

Norway

Norway’s economy is expected to show weakness with the first quarter GDP readings. Mainland GDP Q/Q is forecasted to decline by 0.7%, down from the 1.9% gain seen in the fourth quarter.

Emerging Markets

Turkey

A wrath of economic data could show Turkey’s economy weakened in March. On Monday, the Unemployment Rate will be released. Tuesday’s releases include current account balance and industrial production data.

China

China releases Inflation data on Tuesday. Markets will be on watch for an above 1.0% move which may increase expectations that the PBOC will raise its Loan Prime Rates as early as Q4 2020.

It may also prompt the PBOC to ramp up its liquidity tightening. Negative for Chinese equities, positive for the Yuan. China New Yuan Loans and M2 could spook markets if lower than forecast, as early signs appear that the pace of China growth is slowing after the 2020 boost.

China's regulator is considering new restrictions on Chinese companies listing overseas as part of a broader clampdown on China big-tech and data sharing. China equities finished the week lower and will start next week softer as regulatory threats persist.

Both the Shanghai Composite and Shanghai Shenzhen CSI 300 looked fragile, with China’s “national team” the buyer of last resort. If they step aside, the fall could be quite aggressive.

Geopolitical noise is ramping up once again but is being ignored by markets for now, which prefer to concentrate on the global recovery story. The US has signaled it is in no hurry to wind back tariffs in its upcoming review, another local equity headwind.

India

India’s COVID-19 disaster continues to grab headlines and although cases remain above 400,000 per day, foreign investors continue to pile back into the Indian rupee and the Sensex on a “buy-the-dip” recovery play. The Sensex was Asia’s best performer the past week, and the rupee recovering all of its COVID-19 losses and now part of its RBI QE announcement losses.

The RBI announced more measures to free up liquidity in the financial system last week, which has been supportive of equities, although that momentum is showing signs of fading. Further progress from here will be more challenging as markets approach levels on the currency associated with RBI QE-based losses.

India releases Industrial Production and its Balance of trade this week, which will make grim reading. If WPI spikes on Friday, stagflation fears will return (did they really ever go away?) and that will be another equity and currency headwind.

Australia And New Zealand

The Australian and New Zealand dollars were riding the commodity wave into the end of the week, although much was dependent upon the Non Farm Payrolls result. This week, both are poised to play catchup with the outsized gains of the Canadian dollar after ranging noisily last week.

Australian equity markets concentrated on soaring commodity prices, impressive bank earnings and another procession of impressive economic data. Even the partial suspension of the Australia/New Zealand travel bubble has had no effect on either market.

Australia releases NAB Business Confidence and Westpac Consumer Confidence this week. Both should show Australia’s rebound continues unabashed. The main threat to both Australia and New Zealand markets is COVID-19.

The community outbreaks in Western Australia and New South Wales appear contained, but if they spread, this will be a major headwind to local equities.

Japan

Japan’s COVID-19 states of emergency have been extended to the end of May, with new provinces added. The Olympics are now at serious risk of cancellation which will be a blow to domestic consumption recovery hopes. Although, with no overseas spectators allowed, some of that story is baked into markets.

Japan releases Machine Tool Spending on Friday, but it is Thursday’s Japan 30-Year JGB auction that holds most interest.

Japan equities were riding the cyclical recovery wave, powered by domestic investors. USD/JPY though was marking time around 109.00 and remained at the mercy of the 10-year/10-year rate differential with the United States.

Markets

Oil

Crude prices remain stuck in wait-and-see mode over the COVID-19 spread across India and many emerging markets. Despite all the concerns with the short-term outlook, the oil market seems poised for another run higher as US production remains below 11-million bpd and OPEC+ is sticking to the gradual increase to output plan.

On Monday, Saudi Aramco (SE:2222) is expected to provide cargo allocations for June oil sales to customers.

Energy traders will pay close attention to the OPEC monthly oil market report on Tuesday. Last month’s report saw OPEC predict a recovering oil market would absorb its extra supply. Given the deteriorating outlook in Asia, OPEC could become slightly less optimistic and that could be a drag for prices.

On Friday, the weekly Baker Hughes rig count will be released.

Gold

Gold and silver got their grooves back after the Treasury curve flattened and sent the dollar sharply lower. Gold has not participated in the latest commodity super cycle move, but could be playing catch up.

Trading gold has evolved into a bet on what are your expectations for inflation. The bond market seems to be less concerned about inflation down the road and that has been supportive for gold prices.

If Treasury yields become unanchored that would likely become a major drag for gold.

Bitcoin

It might seem like a stretch, but Elon Musk’s appearance on Saturday Night Live could have a similar reaction for the cryptoverse with what happened on Apr. 20..

A holiday for cannabis users, 420 was supposed to be the day that Dogecoin went to the moon. It did not, and that triggered a sell with the news type reaction that saw Dogecoin lose almost half its value, with some contagion across some other coins. That selloff, however, was quickly followed by relentless retail demand that also spurred further diversification into other altcoins.

Volatility was expected to remain wild over the weekend and traders should not be surprised if Bitcoin breaks out of its trading range.

Key Economic Events

Sunday, May 9

  • French President Macron to launch his future of Europe debate at the EU Parliament.

Monday, May 10

  • The UK government may relax more restrictive measures starting from May 17.
  • The EU to start verifiable vaccine certificate trials in Greece, Germany, and France.
  • Chicago Fed President Evans discusses the economic outlook at a virtual event hosted by the Society for Advancing Business Editing and Writing (SABEW).

Economic Data:

  • Australia retail sales
  • Turkey unemployment
  • France industrial sentiment

Tuesday, May 11

  • BOE Governor Andrew Bailey discusses Libor, the “final chapter.”
  • U.S. Fed Governor Brainard takes part in a Q&A.
  • San Francisco Fed President Daly speaks to the Community Bankers of Washington Northwest.
  • New York Fed President Williams talks to the Alternative Reference Rate Committee.
  • The Queen will deliver a speech outlining the UK government plans for the next 12 months or so.
  • Norges Bank Deputy Governor Bache gives a speech.

Economic Data/Reports

  • China PPI, CPI
  • Japan household spending
  • Germany may ZEW Expectations Survey: 71.4e v 70.7 prior; Current Situation: -40.0e v -48.8 prior
  • Italy industrial production
  • South Africa manufacturing production
  • Turkey current account, industrial production
  • OPEC Monthly Oil Market Report

Wednesday, May 12

  • President Biden plans to host his first meeting with House and Senate leaders at the White House.
  • Fed Vice Chair Clarida speaks at a National Association for Business Economics event.
  • BOE Governor Bailey speaks at an International Swaps and Derivatives Association event.

Economic Data

  • US Apr CPI M/M: 0.2%e v 0.6% prior; Y/Y: 3.6%e v 2.6% prior
  • Germany CPI
  • India CPI, Industrial Production
  • Mexico Industrial production
  • UK Industrial Production
  • Eurozone Industrial Production
  • UK Preliminary Q1 GDP Q/Q: -1.7%e v +1.3% prior; Y/Y: -6.2%e v -7.3% prior
  • Norway GDP
  • Russia trade
  • EIA Crude Oil Inventory Report

Thursday, May 13

  • Bank of Canada Governor Macklem speaks
  • St. Louis Fed President Bullard discusses the US economic and policy outlook
  • BOE Governor Bailey speaks
  • BOE Deputy Governor Cunliffe speaks on digital currencies.

Economic Data/Events:

  • US initial jobless claims, PPI
  • Mexico central bank (Banxico) rate decision: Expected to keep Overnight Rate unchanged at 4.00%
  • New Zealand food prices

Friday, May 14

  • Dallas Fed President Kaplan speaks in a moderated discussion at University of Texas McCombs School of Business.

Economic Data:

  • US May Prelim University of Michigan consumer sentiment: 90.0e v 88.3 prior, Apr Industrial production M/M: 1.3%e v 1.4% prior, Apr Advance Retail Sales M/M: 1.1%e v 9.7% prior
  • Canada existing home sales, manufacturing sales
  • India wholesale prices
  • Japan M2 money stock
  • New Zealand Manufacturing PMI
  • Poland CPI
  • Spain CPI
  • Baker Hughes Weekly Rig Count

Sovereign rating updates:

  • Portugal (Fitch)
  • Iceland (S&P)
  • Netherlands (S&P)
  • Cyprus (DBRS)

Original Post

Week Ahead: Dollar Declines After Massive Payrolls Miss; Inflation Now In Focus
 

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Week Ahead: Dollar Declines After Massive Payrolls Miss; Inflation Now In Focus

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