Take Five: Go your own way

(This May 10 story has been corrected to fix U.S. CPI expectations in paragraph 7)

(Reuters) – Global central banks are starting to break away from the pack as rate cuts roll out across Europe while borrowing costs in the U.S. may stay higher for longer, which is lifting the dollar.

A key test of U.S. inflation is at the heart of the data calendar and could be the deciding factor in the near-term direction for markets.

Here is your look at what’s happening in markets this coming week from Rae Wee in Singapore, Ira Iosebashvili in New York and Naomi Rovnick and Amanda Cooper in London.

1/PAGING GOLDILOCKS

Goldilocks is getting a health check, with U.S. inflation data set to show whether consumer prices are finally cooling after a run of unexpected strength.

For months, the balance of resilient growth and easing inflation that some investors dub the “Goldilocks scenario” helped buoy markets – until it was upended by a series of data showing the economy was more robust than expected.

Some relief came earlier this month, when the Federal Reserve assured markets it was still looking to eventually cut rates and a U.S. employment report showed signs of cooling in the labour market.

Inflation data on May 15 could keep the good vibes going if it shows consumer prices increased at a slower pace. But more evidence of stubborn inflation could renew interest rate worries and reignite market volatility. Economists polled by Reuters project CPI to have gained 0.4% in April month-on-month.

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2/CLOSE SHAVE

Japan may have narrowly avoided a technical recession in the fourth quarter, but the narrative over the longer-term growth outlook hasn’t changed much.

An ageing population and weak domestic demand continue to plague the Asian nation, coupled with a weakening yen that’s struggling to gain ground, even after Tokyo’s latest bouts of suspected intervention.

Thursday’s first-quarter growth figures will reveal whether the Japanese economy began 2024 on a strong footing, especially since the Bank of Japan (BOJ) in March made a landmark exit from negative interest rates – kickstarting a tentative virtuous cycle of rising wages and prices.

But the BOJ’s preference to keep monetary policy accommodative for now is unlikely to take the pressure off the yen, as interest rates elsewhere remain at multi-decade highs, in turn squeezing households further as import costs rise.

3/WHICH WAY?

The forex market feels like a one-way street.

Central banks no longer operate like the rate-raising herd of 2022 and 2023, leaving the dollar to batter almost everything else, with the Federal Reserve likely to keep U.S. rates high for some time.

Speculators now hold their largest bullish bet on the dollar against any other major currency in five years.

Currencies bearing low rates get punished extra hard, leaving the Japanese yen and Swiss franc as the biggest laggards, down around 8% each this year.

The net long position in the dollar against other G10 currencies is worth around $33 billion. In January, when markets anticipated at least five U.S. rate cuts in 2024, investors held roughly $7.23 billion in bets against the dollar.

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As rate outlook expectations have unravelled, so have those bearish positions. Expect more, not less, dollar strength ahead.

4/BAD APPLE

The negative sentiment towards China has been turning in recent days, though investors are keeping a close eye on the country’s real estate market and what’s to become of it.

April home price data on May 17 will be the next barometer of health for the beleaguered sector which has been engulfed by a debt crisis for about three years now, leaving property developers on the brink of collapse.

The release comes alongside China’s retail sales and urban unemployment rate figures due the same day, and on the heels of disappointing May Day spending data.

Comments from policymakers at April’s Politburo meeting have primed investors for a wave of stimulus measures from Beijing to boost economic recovery, keeping the market mood buoyant for now. Chinese stocks have edged away from their February lows, while the yuan seems to have found a floor.

5/UK LABOUR MARKETS

The Bank of England is expected to cut interest rates this year after inflation eased, but remains on alert for pay rises refuelling price pressures ahead of fresh labour market data due on May 14.

Traders see a good chance rates will fall in June. But the central bank might need more time and data to be sure that Britain has escaped a wage and price spiral.

Annual pay growth is still running hot, while labour supply is stagnating, with more than a fifth of working-age adults not seeking employment and the number of people registered as long-term sick having hit 2.83 million, the highest since records began in 1993.

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