Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Investment Strategist
Summary: With the banking sector concerns put to rest once again, at least temporarily, focus turns back to the Fed meeting this week to see if we get a pause signal or an affirmation of tightening to continue in the face of persistent inflationary pressures. Across the pond, ECB meeting also remains in focus with 25bps rate hike priced in but risks of a 50bps with bank lending and inflation data due just before the announcement. In Asia, RBA may find it tough to send any hawkish signals, while China’s growth recovery now banks on the Golden Week demand. Next leg of earnings also begins, with Apple, AMD, Ford and Starbucks being some of the key companies to tap.
This week brings a wave of macro events to keep on your radars, but Fed meeting takes the cake after considerable uncertainty on the growth and inflation trajectory as well as the risks of a banking turmoil. FOMC announcement is due on Wednesday, May 3 (4am SGT on May 4) and the market pricing suggests over 90% probability of another 25bps rate hike. But the big question is whether this hike will mark the end of the Fed’s tightening cycle. An outright signal of a pause could spur a rally in equities and a slump in the dollar. Still, message to keep rates higher for longer will likely be reaffirmed given that the most recent PCE print has again indicated sustained price pressures. There are still 60bps of rate cuts in market pricing for 2023, but banking sector concerns are cooling amid the recent earnings season which showed broad-based resilience in the banking sector despite pockets of risks. This means risks remain tilted towards a surprise on the hawkish side which could drive the USD higher and Gold lower.
More insights into the US labor market will be sought this week as the March JOLTs job openings as well as the April nonfarm payrolls are reported. Bloomberg consensus expects only a marginal cooling in the job openings to 9.725 million in March from 9.931 million in the preceding month, which will potentially still not be enough for the Fed to take comfort about wage and inflation pressures. The April nonfarm payroll is scheduled for release at the end of the week on Friday, after the Fed’s decision, and therefore may have little relevance for the markets. Hiring pace is expected to slow, and expected to come in at 180K in April as per Bloomberg consensus from 236K in March, as layoffs extend from IT sector to banking and others, even as services sector continue to hire. Unemployment rate is also seen marginally higher at 3.6% from 3.5% previously, but wage pressures will likely still remain steady 4.2% YoY/0.3% MoM.
The Reserve Bank of Australia (RBA) has no reason to go back on its pause decision from last month as it announces its next policy decision on May 2. Q1 CPI released last week signalled sustained price pressures with headline inflation still at 7%, although cooling from last quarter’s 7.8%. More importantly, the trimmed mean measure, which is the preferred central bank measure, came in below the RBA’s forecast. So, even as real rates remain negative, the RBA has to focus on the impact of its tightening measures so far given the higher proportion of floating-rate mortgages in the economy. The big question is whether the central bank still keeps the door open for more rate hikes, as it has done previously, or marks a peak in the tightening cycle. And if that was to happen, there is a high risk to credibility with the employment side remaining strong. AUDUSD may have little reasons to cheer this week.
Coming into this week the ECB is priced to hike 25bps on Thursday and the forward curve almost fully pricing two additional rate hikes through the September meeting this year. A couple of important data points are up today, that could help shape the size of the ECB hike as well as how much further tightening is flagged in the ECB’s guidance at its meeting on Thursday. The ECB will release its quarterly survey of bank lending and we will also get the Eurozone April flash inflation figure after the German flash April CPI report on Friday came in slightly softer than expected. The market is looking for Eurozone to report core inflation of 5.6% YoY after 5.7% in March, which was also the cycle high. Upside surprises could still tilt the needle towards a 50bps move from the ECB this week, pushing EUR to fresh highs.
China’s PMIs for April were reported over the last weekend, and official manufacturing PMI print surprised to the downside, slipping into contraction at 49.2 from 51.9 in March. Services strength was sustained with PMI at 56.4 from 58.2 previously, but was still below expectations. Data brought back risks that China’s recovery is losing steam, and built the case for further policy support.
However, travel demand during the Golden Week has started on a positive note. According to the China Railway Group, the country tourism and consumer activities rose sharply on the first day of the five-day Labor Day holiday, as residents rushed to travel and spend after three years of Covid-19 restrictions finally ended. As Bloomberg reports, some 19.7 million railway trips were made across the country on Saturday, the highest on record for a single day. The railway operator expects traffic to jump to a record 120 million passengers for the extended holiday period, up 20% from the same period in 2019, before the pandemic struck. Further data on retail sales, rail traffic and airport traffic for the week remains on watch and whether that could help to offset slowing domestic growth and geopolitical concerns. To get exposure to the recovery in Chinese travel demand, we have several themes from APAC Tourism to luxury & gaming stocks.
We are halfway through the Q1 earnings season with 53% of the S&P500 companies having reported results as on Friday. Factset reported that 79% of S&P 500 companies has reported a positive EPS surprise and 74% of S&P 500 companies have reported a positive revenue surprise. Overall, the S&P 500 is reporting a year-over-year decline in earnings of -3.7%. Another 162 companies report this week, with key focus being on Apple to determine whether it can continue the spate of better-than-expected results from big tech players like Microsoft, Meta, Alphabet and Amazon. Key to watch will be the trends in consumer demand both in the U.S. and especially China which has so far underwhelmed markets with the pace of its economic recovery. Supply forecasts from Apple also remain a focus with the production starting to move to India which could be a big test.
Travel demand going into the summer will also be put to test with results due from Norwegian Cruise Line, Marriott International, and Booking Holdings. Consumer discretionary sector has so far outperformed the S&P 500 earnings, and more companies such as Starbucks and automakers like Ford and Volkswagen will be reporting earnings this week. For more on what to watch in the earnings this week, read the preview note from our Head of Equity Strategy, Peter Garnry, here.
After strong gains in early March with the onset of the banking sector concerns, Gold has been stuck in a range with resistance at $2050 holding up well and $1970 serving as a key support. This week brings a big test for the near-term direction in Gold, with the Fed meeting on the radar. If the Fed signals peak interest rates or a pause, we could see the yellow metal react positively. Historically on three previous occasions during the past 20 years, Gold saw strong gains in the months and quarters that followed the confirmation of peak interest rates from the Fed. Market will be seeking confirmation that rates indeed will start to come down from June and onwards. A 60bps reduction is priced in before year-end, down from 75bps last week and any further lowering of expectations may trigger a move towards the key $1955-60 support area. Silver (XAGUSD) is holding above $25 ahead of $24.50, an area that provided several tops back in January and February. A deeper correction risk towards $23.72 will depend on the markets continued focus on the risk of higher rates and a slow pace of cuts thereafter.