The Daily Update: The Week Ahead

Last week, Friday’s US non-farm payroll data for April was a key focus. The numbers disappointed, registering only 266,000 jobs created against expectations (Bloomberg survey) of 1 million and the prior month’s figure was revised down to 770,000 jobs created from 916,000. The unemployment rate ticked up to 6.1% from 6% the prior month. Clearly, such a weak set of data surprised a market focused on the inflation outlook given a perceived strong recovery and stimulus support. It was only on Tuesday that Janet Yellen’s comment “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat” unsettled the market although she later clarified her remarks stating she did not foresee an inflation problem and was not predicting or recommending the Fed raise rates in response to the Biden administration’s spending plans.

In fact a number of data points also fell below expectations in the week. The April readings for the ISM for manufacturing and services were still strong readings but both pulled back from the prior reading and missed expectations: The ISM for manufacturing came in at 60.7 when expectations were for 65 and the ISM services came in at 62.7 when expectations were for 64.1. Nevertheless, the ISM services reading was still the second highest reading since 1997. Wednesday’s ADP job data showed the private sector added 742,000 jobs in April which was below expectations of 850,000 jobs added although Thursday’s jobless claims came in at 498,000 versus expectations of 538,000. Over the week, the yield on the UST 10 year tightened 5bps to 1.58%, although the UST 10 year yield spiked lower in reaction to Friday’s disappointing non-farm payroll data but then conceded some of the gains into Friday’s close. The 5s30s spread widened 6bps to 150bps at Friday’s close reflecting greater tightening in 5 year yields. US equities (S&P500 and Nasdaq) gained on Friday and over the week, the S&P 500 gained 1.23% but the Nasdaq was down 1.51%.

One of the other key events in fixed income markets was the BoE meeting: the Monetary Policy Committee (MPC) left interest rates unchanged and left the overall asset purchase target unchanged although announced plans to reduce the pace of bond purchases to £3.4bn per week. The MPC stated: ‘The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’. The committee expects inflation to return to about 2% in the coming months, however they added that ‘Inflation expectations remain well anchored’. The BoE also upgraded its growth forecasts for 2021 to 7.25%, up from a forecast of 5% 3 months ago, and they expect the economy to reach its pre-pandemic level by Q4’21.Over the week, the yield on the 10 year gilt tightened 6 bps to 0.78%.

In the week ahead, the fallout of the UK mayoral, council, Welsh Senedd and Scottish parliamentary elections continues with debate around the case for another Scottish independence referendum: a strong showing by the SNP which with the Green Party has resulted in a majority of pro-independence seats in the Scottish Parliament. The UK is also expected to announce the relaxation of further covid restrictions as the economy continues to reopen. On Wednesday, the UK GDP data for Q1 is due with the Bloomberg survey looking for the economy to contract by 1.6% qoq reflecting the lockdown. However, growth for the month of March is expected to improve from February reflecting gradual reopening with the return of schools. In Europe the vaccination rollout is ramping up although it lags the US and UK, countries are starting to relax restrictions and there are moves to reopen borders for the summer. The German ZEW survey for May is due on Tuesday with some improvement expected in the expectations reading from the prior month. Eurozone industrial production for March is also due on Wednesday.

Inflation data from the US and China will be a key focus. On Wednesday, US CPI data for April is due to be released: the Bloomberg survey is looking for the headline rate to increase 3.6% yoy from 2.6% yoy the previous month and for core US CPI ex food and energy to increase 2.3% yoy up from 1.6% yoy the prior month. On Thursday the PPI data is also due for release. China is due to release its CPI and PPI data for April on Tuesday with the Bloomberg survey looking for a 1% yoy and 6.5% yoy increase respectively. This compares with the prior month’s CPI and PPI readings of 0.4% and 4.4% respectively; higher commodity prices and a low base effect have been pushing up the PPI reading. Other US data releases include US retail sales data for April with the Bloomberg survey looking for the headline number to increase 1% mom after last month’s 9.7% mom increase which was supported by another round of stimulus cheques. The University of Michigan reading for consumer sentiment in May is also due and expected to show an improvement on the prior month. In terms of Central bank news the central banks of Mexico, Chile and Peru are due to make interest rate decisions on Thursday. Fed speakers this week include Charles Evans, Lael Brainard, Mary Daly, John Williams, Richard Clarida, James Bullard and Robert Kaplan. BoE Governor Andrew Bailey is due to speak several times over the week and Deputy Governor of Financial Stability Jonathan Cunliffe is due to speak on digital currencies on Thursday. Other areas of interest include the Australian budget on Tuesday.