Dollar on the front foot
Markets have taken their cue from stronger than expected wage growth data in the US, pushing the dollar and bond yields higher and equities lower ahead of the Fed’s latest monetary policy announcement later this evening. The dollar has strengthened to around $1.0650 and $1.2470 vis-à-vis the euro and sterling respectively, leaving EURGBP little changed trading just below £0.8550.
In government bond markets, US 2- and 10-year yields both rose by around 6bps as rate cut expectations were dampened further post the latest economic data, while equivalent German and UK yields increased by something similar. Equity markets, meanwhile, had a tough enough time of it, with US and European stocks closing out the last day of April with losses of 1.6% and 1.2% respectively.
The latest employment cost index in the US, which the Fed watches closely, rose by more than forecast in the first quarter of this year, increasing by 1.2% q-o-q after a gain of 0.9% in Q4 last year. This halted the recent gradual deceleration in the year-on-year pace of increase, which was unchanged at 4.2%.
The Euro area economy recovered more strongly than expected in Q1, with GDP increasing by 0.3% q-o-q after falling by 0.1% in the final quarter of 2023. Core inflation also came in a touch firmer than forecast at 2.7% in April, albeit still down from 2.9% in March, while headline inflation was unchanged at 2.4%. The data leaves the ECB on track to cut interest rates in June, though the market has pared back the scale of expected easing this year (to around 65bps).
House prices in the UK fell for a second consecutive month in April according to the Nationwide measure. They were down 0.4% on the month, after dipping by 0.2% in March, with the annual increase declining to 0.6% from 1.6%.
The focus today is very much on the latest Fed meeting with markets awaiting the monetary policy statement and Powell’s remarks at the post-meeting press conference. A couple of weeks ago, Powell said “the recent data have clearly not given us greater confidence (that inflation is returning sustainably to 2%) and instead indicate that it’s likely to take longer than expected to achieve that confidence (hence) it’s appropriate to allow restrictive (monetary) policy further time to work”. This is likely to be the essence of the message he delivers today too.
On the economic data front meanwhile, key releases today include the ISM manufacturing index, job openings and ADP employment report in the US.