Macro data – Mixed signals
Economic data in April continue to give mixed signals, with manufacturing cooling quickly in US and Europe but services holding up ok. In the US, the Philadelphia Fed manufacturing indicator for April pointed to a contraction in the sector, registering the lowest reading since Covid. S&P PMIs gave a slightly better picture, with an overall expansionary print. In Europe, April PMIs reveal a strong service sector but lagging manufacturing. Overall levels for the indicator remain around 54, a moderately expansionary level. Both in US and Europe, input and producer prices remain on the back foot for the second month in a row. Overall, the picture that is emerging in April is one of economic slowdown and softer inflation, but no recession. As a result, we think the Fed and ECB will be able to deliver the last few hikes promised to markets, but no more. We see terminal rates of 5% and 3.5% as likely, with a protracted hold (and not cuts) likely following.
Central banks – BoJ opens the dances
The Bank of Japan will meet on Thursday, in the first meeting under the new Governor, Kazuo Ueda. We don’t expect any policy change at the meeting. Earlier in April, Mr Ueda reported to the Japanese Congress in his first speech in the new role. The tone was dovish, downplayed wage-induced inflationary pressures and pointed to policy continuity. The tone makes the abrupt policy change some market participants feared unlikely. However, a gradual tweak to yield curve control is likely over the month, especially as the target levels is now well out of market context. We think a gradual exit will help the yen over the next few months, while we see limited opportunities in rates, as levels price in an exit from the policy already. The BoJ will open an important week for central banks, with the Fed and ECB meetings coming up, respectively on May 3rd and 4th.
Algebris Investments’ Global Credit Team
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