The Macro Backdrop at the Start of the Second Quarter

macroeconomic fundamentals have not changed much in the first three months of
the year. 
US growth remains near trend, the labor market continues to improve gradually, both headline and core
inflation remain firm, and the Federal Reserve remains on course to hike rates
at least a couple more times this year, even though the market is
skeptical.  The uncertainty surrounding
US fiscal has not been lifted, and it may
not be several more months.  

is growing perhaps a little quicker than a trend,
but price pressures remain subdued.
  The preliminary March core CPI reading
underscores the ECB’s conclusion that inflation has yet to be put on a stable
path toward the target.  While a move
away from the negative deposit is
understood to be beneficial to European banks, it seems premature to expect
a change in rates in the coming months.
Japanese economy appears to be finding some traction, but it is narrowly based,
and household consumption remains poor.
  There is no price pressure of which to
speak.  There is no pressure on the Bank
of Japan to change monetary policy. 
nine months since the UK’s referendum, Article 50 of the Lisbon Treaty has been triggered.
  At this juncture, it was an important formality but a formality
nonetheless.  There will be much
jockeying for position, feints, and parries,
and investors need to look past the noise and remain focused on the
signal.  The signal is still a function
of macroeconomics and market positioning. 
Although there has been a dramatic adjustment of speculative
positioning in the futures market for euros,  sterling positioning has hardly adjusted.
  The UK economy remains resilient, though it
is expected to slow.  Price pressures may
not have peaked, but without stronger wage growth, the impact from the past
decline in sterling and rise in oil prices will dissipate. 
non-farm payrolls are often the single most important economic report in the US
monthly data cycle.
After two months of jobs growth in excess
of 200k a month, a reversion to the mean seems likely.  It may have been
hinted by the increase in weekly jobs claims.  Payback may come from manufacturing and
construction sectors, which have been particularly strong.  However, provided that job growth does not collapse,
but simply returns to trend, it ought not
impact expectations for Fed policy.  A
June hike still seems to be the most likely scenario.

minutes from the March FOMC meeting will be released.
  The minutes often have a high noise to signal
ratio as voters and non-voters voices are included,
and the important views of the of the leadership are obscured.  The Federal
Reserve publish the confidence intervals (fan lines) around their projections.
Once introduced, the dot plot cannot be di
but it can
be softened, which is
precisely what the confidence intervals will accomplish.

end of the week features the US, and
Chinese Presidents have their first face-to-face meeting.
  Trump has toned down the bellicose rhetoric
in which he accused China of “raping” America, threatened to abandon the
one-China policy, and citing China as a currency manipulator “on day one.”  
seems to have made a few concessions.
   It has banned coal imports from North Korea,
and the US had long wanted China to do more to rein in its ally.  It has also granted Trump a little more than
three dozen trademarks, including, according to the Guardian, an escort service. 
Japanese Prime Minister Abe visited President Trump recently, the two agreed to
trade talks to be led by the US Vice
President Pence and Japanese Finance Minister Aso. 
may very well serve as the template for the US and China.   Such talks, incidentally, are also similar to part of the consequences of the US
Treasury finding a country guilty of currency manipulation.  That report is due later in the month, and
given the current criteria, China is unlikely to be cited.  Also, President Xi may announce some new commercial
activity and purchases of US goods, which is part of China’s modus
Senate confirmation of a Supreme Court Justice hardly seems to be an issue for
investors, but it is important now.
  Trump enjoys a slim majority in both houses.  A key strategic choice is whether to seek
greater control of the Republican Party, which like all modern parties, is a
coalition, or seek support from moderate Democrats. 
To overcome a filibuster over Gorsuch’s nomination, it is possible that the Republicans
in the Senate modify the rules to allow a simple majority for judicial
Such a maneuver would antagonize the Democrats and make cooperation more
difficult on other parts of the Trump Administration’s agenda. 
the eurozone, survey data has been
running ahead of real sector data.
  German industrial output likely fell, though
there was a little sign from the
PMI.  The final March PMI may slip.  February retail sales are expected to soften.  The
unemployment rate may ease to 9.5% from 9.6%. 
It peaked a little above 12%.
real sector reports are of little significance
in the current environment.
The key is the reaction function of the European Central Bank, and it is
not presently about the real sector, but prices.  The weaker than expected preliminary March
CPI report dealt a blow to the hawks, who
seemingly had been pressing to begin the exit from the unorthodox policies even
before the asset purchases are complete. 
The record of the recent ECB meeting will be released, and it will likely show that the hawks remain in a small minority. 
divergence between the surveys and real sector data is also evident in Sweden
and Norway.
The March manufacturing PMI in Sweden may ease from a heady 60.9 reading
in February, but industrial output likely fell around 0.5% in February.  Norway’s manufacturing output may edge higher
March, but manufacturing output likely also fell 0.5% in February. 
Reserve Bank of Australia is the only major central bank to meet in the first
week of April. 
is little chance of a change in policy. 
There has been very little change since the last meeting.  The government has tightened mortgage
issuance rules, which may reduce an obstacle that the central bank may see in
its way if it wanted to ease policy. 
will also report March jobs data at the end of the week. 
It has grown 254k jobs in
the past seven months, and nearly all were full-time positions.  While other high frequency data have been
robust, the pace of job growth is simply not sustainable.   Interest rate differentials, the underlying
direction of the US dollar, and perhaps, oil prices, seem more important for
the Canadian dollar’s direction than the jobs data. 
broad strokes, we expect US interest rates to stabilize and turn higher. 
There has been a powerful
adjustment to the net speculative position in US 10-year note futures.  The Commitment of Traders data suggests that the decline in yields has been a function
of bottom pickers establishing new longs, while short-covering has been minimal.  With the help
of a rebound in oil prices, and the likely reacceleration of growth
(January-March growth has averaged 1.1% beginning in 2010, while the other
quarters grow 2.5% on average), a reduced safe haven bid as angst over the French
presidential election eases, firmer interest rates will likely lend the dollar
better support in Q2 than in Q1.  

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