Data to help push the US 10-year Treasury convincingly above 3%
The key story for financial markets right now is whether the US 10Y government bond yield will convincingly break above 3%. We think it will and the upcoming data flow could be the catalyst.
First up is 1Q GDP and as we have already written, there is clearly a “residual seasonality problem” with the data. Over the past 30 years, growth in Q1 has on average been 1.5 percentage points lower than in Q2. As such there is risk to our relatively upbeat forecast of 2.4% annualised growth. Certainly, consumer, government and investment are likely to be softer than in Q4 2017 given there won’t be the post hurricane rebuild/replace spending that we saw back then. Nonetheless net trade & inventories should make a big positive contribution.
We will also get the personal consumer expenditure deflator next week. The core (ex food and energy) measure is expected to jump from 1.6%YoY to 2%, much as the CPI figure has already done. With the US jobs report on Friday set to show another strong reading for employment and a further uptick in wage growth this should add to a sense that the US will continue to grow strongly and that inflation pressures are building, which will keep yields elevated. Then, with the US fiscal deficit continuing to expand through a combination of higher spending and lower taxes, we suggest rising bond issuance at a time when the Federal Reserve is shrinking its balance sheet means that 10Y yields will push towards 3.5% later this year.
De-escalation of trade tensions to support three more Fed rate hikes this year
We are also hearing more positive signals on trade with President Trump suggesting NAFTA re-negotiations are “doing very nicely”, while the Canadian contingent are saying a “win-win-win agreement is possible” in the next few weeks. With Treasury Steve Mnuchin also hinting that there has been a de-escalation of tensions with China, fears of protectionism and an economically damaging trade war have receded to some extent.
This could change at any point with the odd Trump tweet or soundbite, but the situation as it stands right now suggests the Federal Reserve can be a little more relaxed. We therefore look for a relatively upbeat assessment in the press release accompanying next week’s FOMC decision which would be supportive of our forecast of three further Fed rate hikes this year.
Eurozone: Will recent data disappointments lead to weak Q1 growth?
The key question in the Eurozone next week will be whether recent data disappointments really led to unexpectedly weak GDP growth in the first quarter. Here, the first estimate of GDP growth in the Eurozone will be highly interesting. Expectations were sky-high at the beginning of the quarter, but data has disappointed as market jitters and geopolitical tensions surfaced. We still expect growth to have come in strong, but marginally slower than in Q4.
For inflation, the April reading will be one of two before the all-important June ECB meeting. There is not much in it to expect a sudden jump this month – or next for that matter – meaning that a dovish ECB continues to be the best bet for now.
Elsewhere, German inflation data could drop once again on the back of a reversed Easter effect.
UK PMIs to give final steer ahead of blockbuster Bank of England meeting
Following BoE Governor Mark Carney’s cautious comments, the prospects of a May rate hike rest on a knife-edge. Alongside UK GDP this week, next week’s PMIs will be the final data points before the Bank meets on 10 May, and policymakers may take solace in the fact that the services index should largely recover after a snow-induced collapse in March.
That might be enough to convince the committee to go ahead with a rate hike in May, particularly as the Bank has been clear it wants to tighten policy to combat the threat of higher wage growth. But at levels between 53-54, it’s clear the service sector is continuing to struggle and we don’t expect this strife (particularly in retail) to end rapidly. For this reason, alongside the fact that Brexit could get quite noisy in the autumn, we think the odds of multiple rate hikes this year remain fairly low at this stage.
Norwegian central bank meeting to be a highlight
The Norwegian central bank meeting on Thursday is the highlight of the week in Scandinavia. With no new forecasts, we expect limited change to Norges Bank’s policy stance; decent domestic data and rising oil prices mean the NB is on track for a first rate hike this autumn. April Manufacturing PMI surveys for Sweden and Norway are likely to tick up a little after falling in the past couple of months.