Next Week's Alphabet Soup: FOMC, BOJ, GDP, CPI

The week ahead is important from a macro perspective. The Bank of Japan and the Federal Reserve meet, the US and the eurozone provide the first estimates of Q1 21 GDP, and the preliminary April EMU CPI will be reported.

The data will be interesting even if not market-moving. The divergence meme that helped the US dollar trade broadly higher in Q1 has failed to help the greenback this month, even though a string of important data -- including jobs, retail sales, auto sales, and housing starts -- were well above expectations.

Bloomberg's survey median forecast for 6.6% annualized growth in Q1 may be on the low side, which is consistent with the pattern seen in the high-frequency data where economists generally do not appreciate the economy's strength. 

All three Federal Reserve banks that have GDP trackers project stronger growth than the private sector, mostly bank economists surveyed. The NY Fed is the closest at 6.9%. The Atlanta Fed's model sees it at 8.3%, and the St Loius model puts Q1 growth at almost 10.2%.

Even if it comes out a bit lower than the median market forecast, the US economy would have produced more goods and services than in Q4 19 before the pandemic struck and this represents a new record.

There is more good news. Growth has not peaked. The economy is still accelerating. Growth is likely to peak in the middle two quarters of the year before gradually slowing as the fiscal stimulus and the income effect of people returning to their jobs run their course. Indeed, in Q3, some of the fiscal support winds down. But, in the meantime, the US economy is digesting $2.8 trillion stimuli agreed in the December-March period, like a python swallowing a doe.

The market is skeptical that the economic conditions will allow the Fed to wait until 2024 to lift interest rates, which is what 11 of 18 officials thought last month. The leadership, which includes the NY Fed President and the Board of Governors, are likely in the majority.

At the end of last year, the December 2022 Eurodollar futures contract ($1 million notional contract for a three-month deposit) implied a 25 bps rate. It trended higher and peaked in early April near 57.5 bps. It dovetailed nicely with the dollar's recovery from the November-December slide.

However, since early April, and despite one strong economic report after another, the implied yield has fallen back to almost 40 bps. The market is less aggressive now, and the risk is that the re-adjustment process is not complete. Despite recognizing that the economy is taking off, the Fed will not succor to a hike's ideas as early as next year.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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