ECB meeting the focus this week
Friday’s stronger than expected jobs data in the US saw the dollar initially strengthen against the euro and sterling, however it gave up its gains again subsequently to end little changed on the day. It kicks off this week at around $1.0835 and $1.2630 respectively, with the euro-sterling cross trading at about 85.75p.
The jobs data led the market to pare back the extent of Fed easing this year (by about 10bps to circa 60bps) with a first quarter-point rate cut now not fully priced until September, which in turn contributed to a jump in US Treasury yields (10-year yields increased by around 10bps to 4.40%, a level last seen at the end of November last). US equity markets were impressed by the jobs numbers though, with the S&P 500 ending more than 1% higher on the day.
The US economy added 303k jobs in March, well ahead of the consensus forecast for an increase of 215k and also ahead of February’s gain of 270k, while the unemployment rate nudged down to 3.8% from 3.9%. The annual rate of growth in hourly earnings eased further last month, though at 4.1% it is still a bit too high to be consistent with inflation running in line with the Fed’s 2% target on a sustained basis.
Fed Governor Bowman, in comments on the outlook for the US economy and monetary policy on Friday, said “we are still not yet at the point where it is appropriate to lower” interest rates, noting that further evidence is needed that inflation is moving sustainably towards 2%. Similarly, her Fed colleague Logan cautioned that “it is much too soon to think about cutting interest rates” given recent high inflation readings and continued uncertainty about the path ahead.
Looking to the week ahead, the ECB meeting on Thursday will grab all the attention. The market expects interest rates to be left unchanged again at this meeting but is more or less fully priced for a quarter-point cut at the following one in June. The ECB itself has helped shape market expectations, with Christine Lagarde commenting recently that “(by June) we will have had a longer window to assess whether inflation data continue to fall broadly in line with our projections (and) if they do…we will be able to move into the dialling back phase of our policy cycle and make policy less restrictive.”
The main economic data releases of note this week are US CPI inflation for March on Wednesday and GDP for February in the UK on Friday. The minutes of the Fed’s March monetary policy meeting are published on Wednesday, while there’s a heavy schedule of Fed speakers over the course of the week.