It’s been another volatile, choppy week in markets as traders digest the monthly US employment report ahead of the next major data point, US inflation. Recent signs of softening in the labour market Stateside were not seen in Friday’s data, and that means less evidence for the Fed to cut rates in June. Stock markets have been relying to some degree on policy easing happening this quarter, while gold has dazzled on this theme too, with the additional help of momentum buying and underlying geopolitical worries.
Much could depend on the US CPI report released next Wednesday. The core monthly print is the one most professional traders and investors will focus on. This is expected to tick lower but still come in at 0.3%, which is just a touch too high for the Fed’s policymakers. Readings around 0.2% on a prolonged monthly basis are probably needed to give comfort to the FOMC to begin a rate cut cycle. The dollar is printing a doji candle denoting some indecision after three straight weeks of gains, but would be boosted further by stronger than expected price data. Sticky services, the lagged impact of rents, and higher energy prices all present upside risks going forward. But shelter costs are seen coming down gradually in time, which carry an oversized weight in the Fed’s favoured measure of inflation.
There are several major central bank meetings taking place over the next few days so some volatility might be seen with the ECB, RBNZ and Bank of Canada all gathering. However, they may just be "holding" meetings which mark time before rate cuts in June and the following months. The ECB seem happy with this timing, judging by recent chat from ECB officials, as policymakers will then have a lot more data, as well as new staff economic projections. Markets could be too expectant of a direct signal from President Lagarde in term of a cut at the next meeting, with lingering caution and a repeat of data dependency not likely not helping euro bulls.
The Bank of Canada meeting could also open the door up to a June rate reduction. Recent data has been mixed with rising unemployment but solid job numbers (until today), and a downside inflation surprise contrasting with a larger than expected GDP print for January. Crucially, headline inflation is now in the bank’s target range and if the core continues to ease, the BoC may also feel more confident about a rate move. This could spark some softness in CAD if markets price in more than the 75bps of cuts currently predicted this year.
Here are the main risk events on the calendar: