Fundamental Analysis

Slightly Easing Price Pressures

Slightly Easing Price Pressures


A busy week of data releases and central banks begins on a quiet note. Today we are eager to see if the US ISM manufacturing index for April reflects similar strength to previous PMIs.

Early Tuesday morning, we expect the RBA to leave monetary policy unchanged in line with market and consensus expectations. In addition, HICP data for the euro area will be released tomorrow.

On Wednesday, all eyes will be on the Fed, where we expect a final 25 basis point hike. The labour market report for April will be published on Friday.

On Thursday, there is the meeting of ECB, where we stick to our call for a 50 basis point hike, although the risks for a lower hike are rather low, especially if tomorrow’s bank lending survey disappoints.

Euro area macroeconomics: The German economy narrowly avoided a technical recession with unchanged GDP in the first quarter, thanks to lower energy prices and stronger export growth. However, there are still difficult times ahead as real income losses and rising interest rates continue to weigh on consumers. Inflation figures from several euro area countries, including Germany and France, suggest that inflation in the euro area will rise slightly tomorrow, with core inflation falling slightly. All in all, it is good news for ECB that underlying price pressures are not rising further, but core inflation remains far too high.

Bank of Japan: Governor Ueda showed a dovish side at the BoJ press conference on Friday, basically removing the risk of a quick retreat from yield curve control ahead of a policy review that could take up to 1½ years. The JPY also weakened significantly following the monetary policy announcement and after the press conference.

Trade: The global trade bellwether, South Korea, posted a sustained 14.2% annual decline in exports in April, led by weak sales to China. Semiconductor exports fell 41.0%, indicating an ongoing global struggle among manufacturers.

U.S. : Real PCE consumption and core PCE inflation were slightly above expectations on Friday, and the first-quarter employment cost index was also slightly higher than expected. Wages rose 1.2% quarter-over-quarter, which is still clearly too fast. Core services prices fell to 0.3% m/m SA (from 0.43%), which was no surprise after the previously released data from CPI. This did not change the outlook for the FOMC meeting on Wednesday.

Equities: Global equity prices rose in relatively quiet sessions on Friday. There was a lot of macro data, earnings numbers, and another U.S. bank on the verge of failure. So one could have easily found reasons for a volatile session, but that did not happen. However, it is not a complete surprise that First Republic is in trouble, and the same is true for the outcome of the data released on Friday. Investors are still risk averse, and since the data came out quite well, stocks are still on pain. In the U.S.: Dow +0.8%, S&P 500 +0.8%, Nasdaq +0.7% and Russell 2000 +1.0%. Some Asian markets are closed this morning, but Japan leads the open despite some disappointing PMI data out of China this morning. Most European markets are closed today. U.S. futures are marginally higher.

FI: It will be an eventful week with the Federal Reserve meeting on Wednesday and ECB meeting on Thursday. We expect the Federal Reserve to tighten monetary policy by 25 basis points and this will be the last hike in this cycle. ECB is expected to hike by 50 basis points but it will be a pretty close call between 25 and 50 basis points. ECB is expected to tighten monetary policy further as we expect ECB to raise the policy rate to 4%.

FX: Friday was dominated by JPY weakness following the Bank of Japan’s weak message. NOK also saw weak trading after Norges Bank’s FX announcement, although a rise in oil prices limited the decline. EUR/USD continues to trade north of 1.10, while EUR/SEK fell back to the 11.30 level.