The divergence thesis that drives our constructive outlook for the dollar received more support last week than we expected.  A few hours after investors learned that Japan’s flash PMI remained below the 50 boom/bust level, Europe reported disappointing PMI data as well.  And a few hours after that the US reported that retail sales surged in March by the most in a year and a half (1.6%).  This coupled with the new cyclical low in weekly jobless claims boosted GDP forecasts, quieted the recession talk.

With some markets closed on Monday, the week not only will have a slow start but the potential to change the investment climate is low.  The US earnings season continues with some favorites like Amazon, Facebook, Twitter, and Microsoft on tap.  Boeing also reports and some economists see the grounding of the 737 Max and production cuts shaving US Q2 GDP by a 0.2%-0.3% through slower equipment spending and exports.   At the end of the week, S&P reviews Greece and Italian debt.  Italy’s rating will likely be kept at BBB, where both Moody’s and Fitch also are.  There is a reasonable chance that Greece’s rating is revised up from the current B+.  S&P has a positive outlook for Greece.  It would be a catch-up move as Fitch already put Greece at BB- last August (with a stable outlook).

We provide a thumbnail sketch of the six events that will command attention.   Two major central banks meet (Bank of Japan and the Bank of Canada).  There are two big data points (US Q1 GDP and Australia Q1 GDP).  There are two official events as the UK Parliament returns from the vacation and Brexit remains the focus though May 2 local elections will steal some attention and US-China trade talks resume.

1.  Bank of Japan:  Governor Kuroda indicated recently that the BOJ could provide additional easing if the price gains lost momentum.  This seems to be a bluff.  For more than a year now, Kuroda has slowed the pace of bond purchases.  In fact, catching the market by surprise, it the BOJ announced before the weekend that it would reduce the among of long-term bonds it will purchase, for the first time in a few months.  There seems to be little appetite for a deeper cut in the minus 10 bp deposit rate or the zero target of the 10-year benchmark yield (capped at 20 bp).  The Japanese economy stagnated in H2 18, and the economy may have contracted in Q1 19.  The all-industries index is a proxy for GDP, and after falling by 0.2% in January, it is expected to have fallen by 0.1% in February and will be reported before the BOJ meets.  Exports fell for four consecutive months through March.  Core inflation, which the BOJ targets, excludes fresh food, stood at  0.8%.  It peaked at 1.0% last September and October.  Operationally, the closure of the local markets and settlement for ten days later this month for the ascension of the new Emperor will likely require massive injections of liquidity, which could weigh on the yen.  Kuroda wants to project a central bank with tools and will at its disposal, but it seems increasingly exhausted. The BOJ may reduce outlook for exports and production.  Trade talks with the US pick up with Prime Minister Abe in Washington at the end of next week with Finance Minister Aso.  North Korea’s test of a new tactical weapon will likely also be on the agenda.

2. Bank of Canada:  The neutral stance will be maintained.  The economic data is sufficiently mixed to allow the officials to be patient and monitor developments.  Extrapolating the overnight swaps index, the market is pricing less than a one-in-five chance of a rate cut in the next six months.  Canada faces two immediate economic challenges.  First, which is well known, is the housing market in the Toronto and Vancouver regions.  The second is that its non-oil exports have fallen to their lowest level in a year, with a 4% decline in February.  Overall, exports are off 6% from the record highs set last July.  The new provincial government in Alberta will reverse the current policies and boost the output.  Employment growth remains robust, averaging 30k over the past six months, which is comparable to the US adding 300k a month and nearly twice the 12-month average. Consumption has softened, but gain in February retail sales (0.8% which was twice the median forecast in the Bloomberg survey) snapped a three-month drop.