Good morning, and welcome back. The US dollar and Treasury yields are holding steady at elevated levels after a first-quarter gross domestic product report pushed easing expectations further out. North American equity indices are advancing in the premarket on the back of another set of monster earnings releases from Microsoft and Alphabet. Oil prices are stable, and risk-sensitive currencies are eking out small gains on the crosses.

Data out yesterday morning showed quarterly inflation accelerating for the first time in a year, even as the American economy slowed more than expected. The core personal consumption expenditures deflator rose at an annualised 3.7 percent pace, while growth slowed to an annualised 1.6 percent rate, undershooting market expectations, and coming in well below the fourth quarter’s 3.4-percent. But with almost a quarter of the gain in the inflation index driven by increases in financial services costs – which are themselves driven by insurance fees and appreciation in investment portfolios – we aren’t sure that policy expectations should be dramatically adjusted. And growth remains surprisingly solid: a measure often used by economists to measure underlying demand – final sales to domestic purchasers, which excludes inventory adjustments and the effects of net trade – remained strong at 2.8 percent in the first quarter, suggesting that consumer spending and business investment haven’t slowed materially thus far.

However you slice it, the stakes have been raised ahead of this morning’s data release. Strong income growth likely kept driving spending levels higher, but economists polled by the major data providers think the Federal Reserve’s preferred inflation benchmark – the core personal consumption expenditures index – maintained the previous month’s pace in March, rising 0.3 percent month over month, up 2.8 percent year over year. The “supercore” measure is also seen rising 0.3 percent – which, combined with upward revisions in previous months, could suggest that underlying inflation pressures are still accelerating. If this plays out, Treasury markets could endure more selling and the dollar might spike even higher, while an undershoot might trigger a fairly violent reversal in yesterday’s price action.

Japan’s yen is trading below the 156 mark against the dollar for the first time since 1990 after the central bank left its key interest rate settings unchanged and declined to explicitly reduce bond buying. Disappointing those who had expected a more profound shift toward quantitative tightening, the Bank of Japan issued a terse statement that committed to maintaining asset purchases “in accordance with the decisions made at the March meeting,” removing language that previously referred to buying around 6 trillion yen a month. With rate differentials against the dollar remaining astonishingly wide, and threatening to stay wide, many investors are going all-in on yen-funded carry trades, daring authorities to step in closer to the 160 threshold. With US inflation data set to drop today, a Japanese holiday coming on Monday, and the Fed decision landing on Wednesday, currency intervention could come at any time.

Inflation expectations in the euro area fell further in March, helping set the stage for a rate cut at the European Central Bank’s June meeting. A consumer survey published earlier this morning showed 12-month price growth forecasts slipping to 3 percent, down from 3.1 percent in the prior month – tumbling to the lowest levels since December 2021 – and households remained deeply pessimistic, expecting the economy to contract nearly -1.1-percent over the coming year. Next week, the euro area is expected to report an incremental acceleration in economic growth during the first quarter, along with a slight deceleration in the month-over-month realised rate of inflation for April.

Price action should fade later in the morning as data releases slow to a trickle and Fed officials stay on mute. The University of Michigan will release its final April consumer sentiment survey at 10:00 eastern, but investors are unlikely to pay it much heed – as previously discussed, US household survey data has largely lost its relevance in predicting macroeconomic outcomes in an era of polarised political attitudes.

Next week’s economic calendar is dotted with potential volatility landmines. Tuesday’s euro area and Canadian gross domestic product releases could underline a narrowing in growth differentials between the US and other major economies, possibly weakening the dollar. A pickup in the Fed’s employment cost index may help bolster the case for a more cautious (read: hawkish) approach from central bankers at the central bank’s Wednesday meeting. And Friday’s all-important non-farm payrolls report could see investors revising expectations for the American economy itself. Another superheated print might lift the greenback and send ten-year Treasury yields soaring toward the 5-percent threshold on re-acceleration hopes, while evidence of a sharp employment slowdown could have the opposite effect, reinvigorating fears of a Fed-induced hard landing.