US payrolls in focus with markets expecting a post-winter rebound

• US payrolls in focus with markets expecting a post-winter rebound
• ECB policy expected on hold as inflation approaches a low
• Japan’s Tankan to reflect firmer outlook for Q1 GDP before sales tax hike? 

Risks give way to signs of firmer activity ... Despite concerns about ongoing developments in Ukraine and more troubling signs emerging from China, including a short-lived bank run this week, equity markets appear to be more upbeat. Equities in US, Euro area and UK remain close to recent highs (although the FTSE 100’s greater resources exposure has left it somewhat lower). Market sentiment has remained underpinned by hopes of a more significant rebound in the US and relatively buoyant activity in the Euro area. Yet bond yields remain low, with fixed income particpants seemingly more concerned about the outlook.


Rebound ? ... It is a key week for releases in the US with the national ISM indices and the latest payrolls report for March. The question is whether the US will start to show more convincing signs of a rebound in activity as it recovers from a severe winter. Recent survey evidence has been mixed with the Empire State survey showing little sign of recovery, but the Philadelphia Fed survey showing a more robust rebound. We forecast some improvement in the ISM indices, particularly the more affected non-manufacturing index. But most interest will fall on payrolls. We forecast a 210k rise in the headline number, but acknowledge the risk of an even bigger rise reflecting some catch-up in employment. The unemployment rate is likely to fall back to 6.6% - on the cusp of the Fed’s previous forward guidance threshold. However, as the Fed moved to a more qualitative assessment in the future, markets will also focus on wage developments. Annual earnings growth rose to 2.2% in February. We forecast a modest acceleration to 2.3% this month. Any sign of a faster pick-up would raise concerns about the pace that the labour market is tightening. Fed Chairwoman Yellen’s speech on Monday may provide further clarity on policy.


Euro area inflation to reach nadir ... Before Thursday’s ECB meeting, markets will focus on the preliminary release of March HICP inflation. This was just 0.7% in February and we expect a further fall this month, driven by base effects from last year. We forecast a drop to 0.5%, softer than consensus, that will likely further fan deflation concerns in the Euro area. However, we expect March’s reading to mark the nadir in the inflation cycle, with base effects likely to lift the annual rate as soon as next month. This may help explain the ECB’s more sanguine assessment of deflation risks. This month’s meeting is likely to see no change in policy. While the ECB continues to forecast euro area recovery - a view supported by recent data - it is likely to maintain its outlook for a gradual rise in inflation towards target over the coming years. We now doubt there will be further stimulus from here. However, recent comments from Germany’s Weidmann suggest that QE may not be off the cards should the area suffer a significant negative shock.


Japan’s crunch time ? ... Japan publishes its quarterly Tankan for Q1 in the coming week. We forecast a relatively robust pick-up in GDP in Q1, forecasting 0.7%. This looks likely to be boosted by faster consumption spending as Japanese households attempt to avoid April’s sales tax hike. The economy’s reaction to the increase in the sales tax will be key in assessing the outlook for growth for the rest of the year and to gauging the outlook for Bank of Japan policy.


UK focus on Bank releases ... Domestically the coming week’s PMIs are unlikely to have much market impact with our forecasts for only modest declines. Markets are likely to focus on the record of the latest FPC meeting, despite this week’s policy statement suggesting little hardening of views to date. The Bank also publishes its Q1 Credit Conditions Survey on Thursday.