FOMC Preview: Upgrade to the recovery assessment, but dovish stance will remain – On Wednesday, the FOMC will announce the outcome of its April policy meeting. We and markets expect no change to policy or to the forward guidance on asset purchases and rates. The most likely change will be an upgrade to the assessment of the recovery, which since the last meeting has gained further momentum – leading us to raise our Q1 GDP forecast and to see upside risks to our 2021 growth forecast. We do not expect any major shifts to Fed communication until late Q3 as a base case, when we might see some kind of hint at a tapering of asset purchases – something we expect to start in early 2022. On this, the Fed has promised to be more transparent and to telegraph such changes well in advance. Given this, we expect Chair Powell to continue to defend the dovish stance of the Fed in Wednesday’s press conference, where he is likely to receive further questions on the risk of overheating and an inflationary surge. In response, Powell is likely to reiterate that the risk of such a scenario is low in the near-term, given that this did not occur even with very tight labour market conditions at the end of the last cycle. With bond yields having recently stabilised after a sustained rise in Q1, the market impact of this month’s FOMC meeting is likely to be limited. We recently changed our view on the near-term trajectory of US yields, and we now expect yields to be broadly stable over the coming year. See here for more. (Bill Diviney)
Euro Macro: Industrial sector continues to be weighed down by supply shortages – The eurozone PMI report and Germany’s Ifo business climate report for April, each highlighted that sentiment in industry remains elevated, although the level of production continues to be weighed down by supply bottlenecks. Germany’s Ifo business climate in manufacturing rose to 25.3 in April, up from 24.0 in March, reaching the highest level since May 2018. Whereas the current conditions component of the manufacturing Ifo increased, the component that measures expectations about the level of production during the next six months declined somewhat, while remaining well above its long-term average value. According to the Ifo Institute, a striking 45 percent of all companies had reported bottlenecks in the supply of intermediate products, the highest level since 1991. Supply bottlenecks in manufacturing were also highlighted by the details of the eurozone manufacturing PMI for April, which showed a further lengthening in suppliers’ delivery times. The overall eurozone manufacturing PMI increased from 62.5 in March to 63.3 in April, with half of this rise due to the lengthening of suppliers’ delivery times. Despite the reported supply bottlenecks, industrial production in the eurozone should continue to grow robustly in the coming quarters. Indeed, the new orders component of the eurozone manufacturing PMI rose to the highest level since the start of the series in June 1997 in April (64.6). Meanwhile, the eurozone services sector PMI edged higher in April (to 50.3, up from 49.6 in March), indicating that activity in the sector is stabilising. As a combined result of the change in the manufacturing and the services PMI, the eurozone composite PMI increased from 53.2 in March to 53.7 in April. At this level it is consistent with GDP expanding modestly in Q2 after it probably contacted in Q1. The flash estimate for GDP in Q1 will be published on 30 April. We have pencilled in -1.2% qoq, which is somewhat below the consensus forecast. (Aline Schuiling)
New Global Monthly: Just how much pent-up demand is there? – Last Friday, we published a new-look Global Monthly, containing a global theme as well as short regional updates. This month, we write about how much pent-up demand there might be in the US and eurozone as the recovery takes hold. The shape of the global recovery will in large part depend on the extent to which consumers in these economies spend the massive build-up in savings. While this will drive a significant rebound in consumption, we argue that it will likely be tempered by the skew in savings to higher earners, and elevated unemployment. In addition to this global theme, we also provide updates per region, and a summary page with all our key macro views. We hope clients find this useful, and welcome any feedback. Please see Global Monthly April 2021 for more.