Week Ahead: Major central banks set to raise rates, NFP to remain solid

Monetary policy is to the fore next week as a plethora of heavyweight central banks meet to combat super-hot inflation while battling slowing growth. How much do policymakers push ahead with more tightening even as the activity picture dims?

The Fed and Bank of England are fully expected to raise rates, with the former definitely going for a bigger half point rise. Front-loading is the Fed’s policy after it was caught asleep at the wheel continually talking about “transitory” price pressures – remember that? Inflation is now broad based and running at 40- year highs, while the unemployment rate is below 4%. We get an updated March figure on Friday with the usual monthly NFP data, and forecasts see another healthy report.

At least two more 50bp hikes are priced in for the following two FOMC meetings before a switch to smaller quarter point moves as quantitative tightening gets up to speed. This is set to be confirmed by Chair Powell which should underpin support for the dollar’s recent overbought rally.

The Bank of England is expected to opt for a 25bp rate hike, having hiked three times already. The bank has said it is comfortable with a more ‘phased’ approach to tightening. The risk is for sizeable forecast revisions and guidance that the 150bp of hikes by year-end priced by markets is way out of line. A drop under major support around 1.25 could ensue if this dovish tone is notable.

The hardest central bank meeting to call is Tuesday’s RBA so volatility is expected. Rate hikes of 15bps through to 40bps are forecast, with the base rate currently at a record low of 0.10%. Policy objectives have broadly been met and a series of rates rises are forecast this year. But the terminal rate of 3.6% expected by markets could be a stretch due to household debt levels and the upcoming hit of high inflation on real incomes. Initial support for the aussie sits at this week’s low at 0.7054, ahead of major long-term support around 0.70.

Major risk events of the week

02 May 2022, Monday:

US ISM: The market median is for rise to 57.7 from 57.1 in March. Robust momentum is still being seen in manufacturing, but the figures have been edging lower recently. Some analysts see this as adding to other evidence like regional surveys which point to a major slowdown.

03 May, Thursday:

RBA Meeting: Markets expect the tightening cycle to begin with the first rate hike since November 2020. The size of the actual move is up for debate. Consensus anticipates a 15bp rise to 0.25% and the adoption of a strong tightening bias which will signal a follow-up move in June.

04 May 2022, Wednesday:

FOMC meeting: A 50bp rate hike is fully priced by markets, thanks to recent Fed guidance. A clear indication that rates will move “expeditiously” in the upcoming meetings is expected. Any talk of a 75bp move will be seized upon.  A quick ramping up of quantitative tightening through mid- year is also forecast by many analysts.

07 May 2022, Thursday:

Bank of England Meeting: Consensus expects a 25bp rate hike by the MPC, the fourth increase of this cycle. Analysts say last month’s 8-1 vote may shift to 7-2. New forecasts are set to show that the difficult balance between rising inflation and slower growth has expanded.

  • May 2022, Friday:

US Non-Farm Payrolls: Analysts expect more healthy job gains with a median estimate of 350k for the headline print. This comes after a miss in March but decent revisions to past data. The unemployment rate is estimated to fall to 3.6% and support robust wage growth which is forecast at 0.4%. The supply of workers is the chief concern and is pushing the jobless figure close to pre-pandemic lows at 3.5%.  

Canada Jobs: Another strong print is forecast after 72.5k jobs were added in March, while the unemployment rate fell to a record low of 5.3%. This came after the blockbuster gain of 336k jobs in February. Analysts say it may be too soon for the effects of higher rates or heightened geopolitical tensions to filter through.

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