RBC Capital Markets

Week ahead: The highlights of the week’s data calendar includes Euro area ‘flash’ PMIs (see EUR), Euro area Q1 GDP, Australia employment report (see AUD), UK employment report (see GBP), UK CPI, Canada CPI (see CAD), Japan CPI, and US existing home sales. The FOMC meeting minutes and the ECB financial stability review will be published this week.

EUR: With easing social restrictions in Italy and Spain, and activity in France likely having picked up in advance of the end of the national lockdown on the May 19, euro area services activity likely recovered further this month and we look for the headline services ISM (Friday) to rise to 52.6. Advance indicators suggest that manufacturing activity remained strong in May, but we forecast the euro area manufacturing PMI to be little changed at 62.7 due to supply disruptions. Euro area Q1 GDP (Tuesday) will also be on tap.

GBP: We expect the unemployment rate to be unchanged at 4.9% in the three months to March in the UK employment report (Tuesday). However, the more important development in the UK labour market is taking place away from the ONS’s monthly release as furloughed workers are being quickly reabsorbed by their employers. One thing we would flag to watch in the ONS report this month is employment growth which we think is likely to turn positive this month for the first time in just under a year.

Moreover, we look for a significant rise in April CPI inflation (Wednesday). We forecast CPI inflation to have risen to 1.2% y/y as the contribution from transport fuel strengthens on the back of base effects. In addition, there is the impact of the lifting of the household energy price cap on April 1. For the second quarter as a whole we expect CPI inflation to average 1.8% y/y; the MPC’s expectation in the May MPR was for Q2 CPI to average 1.7%.

AUD: The Australia employment report (Thursday) will be closely watched to ascertain the impact of the ending of the JobKeeper scheme. The momentum in employment growth, elevated and rising vacancies, plus encouraging partials from tax receipts hint at only a modest impact. The monthly labour force data however is historically volatile, and this has been exacerbated in the past year by the pandemic. Nevertheless, we look for employment change of -20k, and a small lift in the unemployment rate to 5.7%.

CAD: RBC Economics is forecasting a 0.4% m/m rise in April headline CPI (Wednesday), which would push the annual rate to 3.3% in what should be a temporary rise in inflation driven by base-effects. All three of the BoC’s core measures are expected to climb higher in April as well. However, the BoC noted in the April MPR that CPI-Trim (2.2%) and CPI-Median (2.1%) are likely overstating underlying inflation at present. Thursday’s Financial System Review provides an annual look at risks to the Canadian financial system. The BoC has noted some concerns on the housing front given record levels of activity and accelerating prices, but it also prefers to use macroprudential policies to manage those risks.

Goldman Sachs

Whether higher-than-expected CPI inflation will result in Dollar appreciation or depreciation therefore comes down to the Fed’s response. Our economists do not expect the FOMC to materially revise its outlook based on the recent inflation news, both because the committee will likely view the surge in prices as transitory and because this is the conventional way developed market central banks respond to the policy trade-offs created by a supply shock (see here for a more detailed discussion).

The worse-than-expected April employment report should reinforce the case for patience. With the Fed firmly on hold, we do not think higher inflation will support the Dollar, and we continue to forecast broad depreciation (with a preference for EUR/USD longs currently, given accelerating activity in the Euro area).

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