The week ahead: holidays and payrolls

It’s the start of two shortened weeks due to Easter holidays, predominantly in Europe, however, we expect to see lower volumes in the coming days, even though the US markets are open as usual. There are some key data releases that could trigger more volatility than usual, especially if this data is significantly different from expectations. The three events that we are focussing on include: how bad is the outlook for European growth, US payrolls and a quick look at the prospects for Japan. 

European price data 

Europe is on everyone’s radar at the moment as a surge in new covid infections has led to fresh curfews and lockdowns, although Germany’s Angela Merkel has loosened restrictions recently. This week we are going focussing on European consumer prices, along with some key data from France and Germany. The overall Eurozone core inflation reading for March is expected to remain steady at 1.1%, headline prices are expected to stay at 0.9% for March. This is the preliminary figure, so it is subject to change, however, if price growth is around this level then it supports further ECB support, which has been crucial to the strong performance of some European indices and the outperformance of European bond prices (lower yields), compared to the US and the UK. Interestingly, French consumer prices are expected to jump in March, pushing the annual rate to 1.3% from 0.8% in February. If this pushes up the overall Eurozone rate then we may see some impact on the FX market, which has been extremely sensitive to global interest rate differentials recently. The EUR has already weakened significantly vs. the USD this quarter, it is down from $1.23 and closed last week just below $1.18, its lowest level since November. We think that stronger than expected inflation on Wednesday could see the euro stage a tentative recovery; but we think that the path of less resistance for the euro is further downside. In EUR/USD, $1.1650, the low from early November, is a key support zone in the medium-term. Considering the ECB remains resolute in its monetary support of financial markets, and this is unlikely to change any time soon due to the recent surge in Covid infections throughout the currency bloc, we do not expect a euro recovery rally on the back of any better-than-expected economic data to last for the long term. 

All eyes on Japan 

Traders will also be looking towards Japan this week, as it releases its Tankan index late on Wednesday/ early on Thursday. The large manufacturing index is expected to have recovered strongly in the first quarter of the year and rise from -8 in Q4 2020 to 4. The non-manufacturing index is expected to rise to -2 from -6, although not in positive territory it is movement in the right direction. Capex is also expected to rise strongly to 1.4% from -1.2%. Why the focus on this Tankan index? Largely because Asia seems to be successful at avoiding the latest waves of Covid that have reached Europe’s shores, and its economy has opened up. Thus, it could be a blueprint of what growth in a less locked down economy can look like. A strong performance for Japan in the first quarter of this year, could pave the way for stronger growth in the UK and the US later in Q2, while Europe could take longer to recover. We doubt that the Tankan index will move the markets too much, it is a better sign of what to expect from growth where Covid is less of a problem than it has been in the UK and Europe in the first months of 2020. However, we would point out that Japan’s vaccine roll out has been slow, which could adversely impact its growth rate later this year. 

US payrolls: wages are key 

 We have saved the most important release for last. While European and UK markets will be closed for the Good Friday bank holiday, traders will still be able to trade FX, thus it is worth watching the US NFP report for March. The market expects a stellar month for job growth with 655k jobs expected. Hourly earnings are expected to moderate slightly to 4.6% from 5.3% in February. The unemployment rate is expected to moderate to 6% from 6.2% last month. Overall, February’s hourly earnings rate caused concern about out-of-control inflation rates in the US. While the potential moderation in wage growth for March is welcomed, it is unlikely to change the dial for the US, with a strong jobs report expected to keep the pressure on US 10-year bond yields. The 5-year 5-year forward inflation expectation rate remains close to its highest level since 2018, suggesting that upward pressure will remain on Treasury yields if there is another month of strong jobs data. That means a strong jobs report could knock the Nasdaq index and tech stocks in particular, and dollar strength could be maintained at the end of the week. The dollar index has had a performance in March, with the DXY rising from below 90 to 92.70 at the end of last week. There could be further gains to come and the technical signals also point to a stronger dollar as we move into Q2.