Price action reflected a mildly positive tone for risk sentiment this week. On the one hand, volatility continues to calm after the banking turmoil in March, supported by strong earnings from some of the major US banks. But on the other, sticky price pressures in the US likely keeps the Fed's focus on hiking rates as the data showed further signs of a slowing economy. Indeed, the March meeting minutes revealed a "mild recession" in the US is being factored into the Fed staff's baseline outlook. The FX market reflected these mixed narratives: risk sentiment supporting the Euro and the Australian dollar but the safe haven Yen also advancing.
IMF downgrades global growth
In its April outlook, the IMF lowered its forecasts for global growth this year (2.8%) and next (3%), slowing from its pace in 2022 (3.4%). The group expects the advanced economies will drive the slowdown, with the UK falling into recession (-0.3%) this year and weak growth in the euro area (0.8%); the US is anticipated to be more resilient (1.6%). Overall, the IMF characterizes the outlook as fragile, highlighting that core inflation pressures have yet to abate risking further rate hikes at a time when financial conditions could also tighten following the bank failures in the US and Europe.
Australian labour market remains robust
This week's Australian labour market data for March outperformed expectations, confirming the strength in the February report was more than a post-holiday rebound (reviewed here). Employment lifted by a further 53k in March - well above the top end of the range of forecasts - following February's sharp 63.6k increase. These outcomes have reaccelerated employment growth to 3.1% on a 3-month annualised basis, returning to the sort of momentum it had prior to the summer slowdown. Reaccelerating employment also kept the unemployment rate at 3.5%, around a 50-year low, as the participation rate lifted to 66.7%, a near-record high.
Resilience was also a theme in the NAB Business Survey, with the conditions index remaining well above average at a +16 reading in March. That was supported by a rise in trading conditions (+26) and while the employment (+10) and profitability (+13) subcomponents eased, both are at very elevated levels. However, weakness in business confidence (-1) reflects concern over the durability of current conditions. Consumer confidence continues to remain at weak levels, though the Westpac-Melbourne Institute index surged 9.4% higher in April following the RBA's rate-hiking pause.
Fed assesses risks post bank failures
The Fed's March meeting minutes showed the expected effects on financial conditions following the failures of SVB and Signature Bank were factored into the FOMC's decision to hike rates by 25bps. The preliminary view of the Committee was that credit availability would become tighter for US households and businesses, weighing on growth, employment and inflation. Fed staff went a step further presenting an outlook to the Committee that had a "mild recession" starting later this year as its base case. Given all this, a 50bps rate hike - considered worthy of consideration based solely on the incoming data - was taken off the table, and "many" members had lowered their forecast for the peak policy rate.
Since the March meeting, liquidity strains in the banking system have eased. The latest data reported use of the Fed's liquidity facilities had declined for the fourth week in succession, to $139.5bn from $164.8bn a month earlier. That situation has seen the focus turn back to the data, in particular this week's CPI report for March. Headline inflation printed south of expectations at 0.1% month-on-month, driving a fall from 6% to 5% on an annual basis. But a 0.4% rise on the core rate saw the annual pace tick up from 5.5% to 5.6%, leading markets to expect a May rate hike. Falls in food, energy and goods prices are driving a disinflationary pulse in the US, but services prices are still elevated (7.2%yr). The driving component for services has been housing, though rents may be starting to ease after posting their slowest month-on-month rise (0.5%) in almost a year.
ECB likely to press on hiking
An ECB sources article from Reuters indicated the central bank was likely to continue hiking rates at the upcoming meeting in May, though with the pace of the next hike slowing to a 25bps move. The article suggested there was a range of factors supporting a slower pace of rate hikes, with increased caution appropriate given the uncertainty of the outlook.
Over at the Bank of England, Governor Bailey gave a speech at the IMF in Washington. Amidst the banking strains elsewhere, the governor made the point that financial stability concerns should not be a constraint on the MPC in setting interest rates.
