Solid US Jobs Growth Supports May Hike from Fed

Today we take a look at Nordic inflation with March figures CPI from Denmark and Norway. In Denmark, we expect a 0.6 percentage point decline to 7.0%, driven by base effects in energy prices. In Norway, we expect core inflation to rise by 0.2 percentage points to 6.1% (see below).

For the euro area, we expect a weak retail sales release for February, as the services sector is currently the strongest part of the economy.

In addition to the incoming data, the markets will also process the U.S. labour market report from Good Friday.

Later in the week, the figures from US CPI on Wednesday will be crucial for the markets.

US: After a string of weaker-than-expected macro data last week (ISM, JOLTs, ADP), Good Friday’s US labour market data was strong enough to lift US Treasury yields over Easter, though slightly below expectations (+236k; consensus 240k; Danske 250k; Feb. revised up 15k). While other indicators suggest that labour demand is already cooling, and sectors such as retail and manufacturing saw job losses, the recovery in labour force participation (62.6%; up from 62.5%) continues to ease labour shortages, particularly in the leisure and hospitality sector (+72k jobs), supporting overall employment growth. Average hourly earnings growth increased to +0.3% month-over-month (from 0.2%), implying that payroll growth is still above pre-pandemic average levels.

The unemployment rate remains very stable at 3.5% (from 3.6%) near recent lows, which NY Fed chief Williams called a ‘remarkable development’ on Monday. NY The Fed’s 1-year inflation expectations actually rose to 4.7% in March from 4.2% in February, which, along with robust labour markets, continues to support our baseline scenario for another 25 basis point Fed hike at the May meeting. U.S. equity markets recovered from an early dip when markets reopened on Monday after the long Easter weekend, with investors now pricing in a greater than 80% probability of another 25 basis point rate hike.

Bank of Japan: the JPY weakened yesterday after the new Bank of Japan (BoJ) governor, Ueda, reiterated in an inaugural press conference that the current ultra-loose monetary policy is appropriate given economic conditions. The new governor noted that there are “positive developments” in wages, and if this continues, there is “a possibility that this would lead to more stable inflation of 2%.” He added that if the BoJ determines that inflation is persistently above target and decides to normalise monetary policy, it will have “to “make very large policy adjustments” and this will “cause major disruptions in the economy and markets.” In doing so, Ueda shared that any changes to monetary policy will be gradual and with a cautious approach. Following Ueda’s comments yesterday, it seems likely that the BoJ will leave its monetary policy unchanged at its next meeting on April 28. However, there is a possibility that the BoJ is underestimating the current price pressures in Japan, and we still believe that the BoJ will have to at least adjust its policy rate during the second quarter.

Consumer inflation in China slowed in March despite a pickup in economic activity, while producer prices continued to fall. CPI rose 0.7% from a year earlier (from 1% in February), and PPI fell 2.5% in March. The figures suggest that domestic demand and pricing power remain somewhat weak despite the reopening of the market after the Kovid.

Equities: global equity markets closed higher yesterday as U.S. stocks rose until the late hour of trading. Europe was closed for the final day of the Easter holiday, so it was no surprise that activity was muted. Limited sector and style rotation as yields were more or less unchanged yesterday and the macro calendar was thin. The factor of easing bond volatility continues to support equities. Implied bond volatility (MOVE) peaked on March 15, and stocks are up 6% since then. The index MOVE is still double the average of the last 10 years, and therefore it is reasonable to expect stocks to get more tailwinds from increased confidence as bond volatility continues to decline. In the US yesterday, Dow +0.3%, S&P 500 +0.1%, Nasdaq -0.03% and Russell 2000 +1.0%. Asian markets are higher this morning, boosted by Japan where the new Bank of Japan Governor Ueda signalled a continuation of Kuroda-style loose monetary policy. European futures are higher this morning, and the same is true for most U.S. indices, although we see more marginal increases in the U.S.

FI: U.S. Treasury bond yields rose slightly yesterday after rising sharply on Friday following better-than-expected nonfarm payrolls data. 2-year U.S. Treasury bond yields also rose a few bp to 4%. However, we are still a long way from the 5% mark on 2-year Treasuries that we saw before the problems at some U.S. regional banks.

DEVISES: Within the G3, the USD is the outperformer over the Easter holiday after Friday’s good U.S. jobs data and especially USD/JPY gained after the new Bank of Japan governor said yesterday that the current policy is appropriate. Scandinavian currencies lost ground against EUR on thin liquidity over Easter. Both EUR/SEK and EUR/NOK broke through the 11.40 level.

Credit: CDS indices were generally broader last week heading into the Easter holiday, with the iTraxx Main up 4bps to 88bps and the Xover up 23bps to 459bps. Last week saw a large number of bonds issued by European banks in unsecured format, following a long pause due to concerns over the state of the banking sector.