Week ahead: Key data releases may determine the timing of interest rate cuts

The world’s major central banks are data-dependent, which means that traders and investors have to watch the key data releases that are coming out later this week. The US CPI is the biggest release for markets, followed by UK labour market data and a plethora of economic releases coming from Japan at a delicate time for the yen.

US: CPI and Retail Sales data on the ticket

Key economic data releases in the US this week include CPI, PPI and retail sales. The Federal Reserve chair said that one route to rate cuts would be weaker inflation and labour market data. So far this month we have seen a large decline in the pace of growth of Non-Farm Payrolls. The market is also expecting a slight decline in the pace of growth in inflation for April. The headline rate is expected to moderate to 3.4% from 3.5% in March, the core rate of inflation is expected to fall back to 3.6% from 3.8%. At this point in the monetary policy cycle, it is also worth looking at the monthly rates of inflation growth. Headline MoM CPI is expected to rise by a robust 0.4% in April, the same pace as in March. However, the core rate of monthly price growth is expected to inch lower to 0.3% from 0.4%. It is worth noting that in the past month, the Citi Economic Surprise index has fallen to its lowest level in more than a year and is in negative territory. This means that there are more negative than positive surprises in US economic data. Thus, the risk is for the rate of price growth to slow more than expected. Cooling core prices are worth watching closely, as they could sway the Fed, after 6 months of increases. However, there will still be pockets of inflation that could cause concern to the Fed. Gasoline prices have been rising, and food prices away from home may also pick up after California State raised the minimum wage for fast food minimum wages by 20%. There are signs that this Is putting upward pressure on consumer prices. Interestingly, this could have more of an effect on the core PCE deflator, which is released at the end of May, as food away from home is a key component of the core PCE report.

Right now, the market is pricing in a 48% chance of a Fed rate cut in September. However, a weaker than expected CPI report could cause some recalibrating. If the market pushes forward expectations of a rate cut from the Fed, then this could weigh on the dollar, which had another strong week, especially vs. the yen, and USD/JPY rose by another 1.19% last week. The prospect of a summer Fed rate cut could play into the BOJ’s hands by weakening the dollar and allowing the yen to strengthen once more after USD/JPY rose back above 155.00 last week.

It is also worth watching the PPI report from the US, and US retail sales that are released this week. The weakening jobs market and recent upward price pressure may have weighed on consumption in April. The market is expecting a sharp slowdown in sales growth. Advanced retail sales are expected to have grown by 0.4% in April, down from a 0.7% pace in March. Core sales excluding autos and gas sales are only expected to have grown by 0.1% vs. a 1% growth rate in March. The stock market reaction to a weaker consumer is worth watching as it could impact risk sentiment. The US consumer has done much of the heavy lifting for global growth, if it is showing signs of faltering, then risk sentiment might get knocked. Fed chair Powell is speaking on the 14th, which is the day before the CPI release. It will be interesting to see if he maintains his less hawkish stance and what he makes of the recent weakening in US economic data.

The specter of November’s Presidential election may also hang over markets at the start of a new week. President Biden is set to announce a raft of tariffs on Chinese imports, including electric vehicles. However, any boost to the share prices of US-made EVs may be short lived, as this is likely to open the door to retaliatory action from Beijing.

UK: Labour market data in focus

In the UK, labour market data is the key report to watch. The market is looking for an uptick in the unemployment rate to 4.3% from 4.2% in the three months to March. Earnings growth is also expected to fall a notch to 5.5%, with earnings excluding bonuses expected to decline to 5.9% from 6%, the first-time wage growth has been below 6% since September 2022. If we see wage growth slip more than expected, it could be a sign that the post-covid uptrend in wage growth has peaked, which could add to expectations for a rate cut from the Bank of England in June. The FTSE 100 broke fresh record highs last week, and had a strong performance, rising 3.2%, outperforming the main US indices, after the Bank of England cut its inflation forecast and boosted its outlook for growth in last week’s Monetary Policy Report. Thus, any further signs that a rate cut could be coming in the next few weeks would be welcome news for UK stocks.

Europe: Will the Eurozone economy spring back to life?

Europe also has some key data releases this week, including the first reading of Q1 GDP. The market is expecting a reading of 0.3%, the annual rate of growth is expected to be 0.4%. However, will Europe, like the UK, see growth beat expectations in the first quarter? Germany returned to growth in Q1, with GDP rising at a 0.2% rate. The return to growth of Europe’s largest economy could boost the outlook for the entire Eurozone. The final reading of April CPI is also released on Friday. The market is expecting no change, with headline CPI rising at a 2.4% annual rate, and the core rate rising by 2.7%. With the ECB expected to cut rates in June, any deviation in GDP or inflation could derail a rate cut, as the ECB also remains data dependent and will not pre-commit to rate cuts. The prospect of lower interest rates is also boosting European stocks, and the Dax was one of Europe’s top performers last week, rising more than 4% in 5 days, as the market was encouraged by both Germany’s return to growth and the prospect of ECB easing.

Japan: All eyes on the GDP deflator

In Japan, the market will be watching a plethora of Q1 data on Thursday, including GDP, exports and consumption data. All eyes will also be on the Q1 GDP deflator. The market is expecting it to moderate to 3.3% from 3.9%. This is still above the BOJ’s target rate, but the BOJ has spoken about the lack of persistent inflation pressure being a concern for them and stopping them from hiking rates. Thus, a weak GDP deflator could cause the market to sell the yen further, as it makes BOJ rate hikes more likely, and increases the interest rate differential with the US even more. If this happens, then USD/JPY volatility could surge, and if this pair rises above 157.00, we think the BOJ could be forced to intervene to stem yen strength once more.

Equity earnings

We are coming to the end of earnings season for Q1, but there are still some key releases to watch including Walmart in the US. So far, earnings growth has been strong for Q1. FactSet reports that the blended growth rate for companies on the S&P 500 who have already reported earnings is 5.4%, the highest level since Q2 2022. There are also some key UK equity earnings reports for Q1 this week. Vodafone, easyJet, Land Securities, Burberry, BT, and Sage are all worth watching, and they will be a key health check on the FTSE 100. If these companies can report decent Q1 earnings and give positive future outlooks, then we could see further gains for the UK index, which is higher by more than 9% this year, roughly in line with the 9.5% YTD gain for the S&P 500.