The idea that the U.S. economy had returned to a growth path that was sufficiently strong to permit the Federal Reserve to begin normalizing monetary policy has been challenged by a string of disappointing data. This will culminate with the first estimate of Q1 GDP on April 29. There still seems to be some downside risk to the consensus of 1.0% annualized growth.

A few hours later the FOMC will release a statement following its two-day meeting.  There will be no change in policy, but investors will be looking for clues that a June hike is also off the table.  Expectations have already shifted away from June, and the Federal Reserve appears determined to keep the investors focused on economic data, not a particular time frame.

The Fed already acknowledged the slowdown in Q1.  As we have noted, since the recovery has begun, the first part of the year has repeatedly been soft.  Recall over the last five years, Q1 growth has averaged 0.6% (annualized), whereas growth in the rest of the quarters has averaged 2.8%. The Fed's point is that the headwinds on the US economy will likely prove transitory.  There is no reason for the Fed to modify its expectation that the under-utilization of the labor market is will continue to diminish.  

The April data has been mixed.  The regional survey data have been soft.  However, the four-week average  of weekly initial jobless claims have fallen to a new cyclical low. April auto sales, which will be reported at the end of the week, are expected to be near a 17 mln unit annual pace.  This is above both the Q1 average (16.59 mln) and the 12-month average (16.65 mln).

American households are positioned to step up their consumption.  Consumption was particularly strong in Q4 14.  The 4.4% annualized increase in Q4 was the strongest since 2006.  Perhaps Americans spent their anticipated gasoline savings.  This coupled with the weather may have spurred a break in Q1.  Consumption growth was more than halved in Q1 15.  The consensus is for a 1.7% increase, which might be optimistic. However, the consumer returned in March.  Not only were auto sales strong but retail sales as a whole posted the biggest increase in a year.

Meanwhile, the downside pressure on prices appears to be abating.  Monthly core CPI readings consistently surprised to the upside in the first quarter, even if only marginally. Break-evens (yields of inflation protected securities and conventional bonds) have risen. Many economists are detecting an upward pressure on labor costs.  The Q1 Employment Cost Index will be released the day after the FOMC meeting.  It is expected to rise by 0.6%, the same as in Q4 14.  This would lift the four-quarter average to its highest level since 2008.

Ironically, survey sources of inflation expectations, which the Fed has placed emphasis on over market-based measures may have become un-anchored.  The final University of Michigan inflation expectations survey results will be reported at the end of the week.  The preliminary figures showed the 1-year inflation expectation falling to 2.5% from 3.0%, and the 5-10 year expectation slipping to 2.6% from 2.8%.  While this sounds like a small adjustment, the 2.6% matches a six month low, which itself was the lowest since March 2009.  

The Reserve Bank of New Zealand, the Riksbank of Sweden and the Bank of Japan meet on April 29.  New Zealand's mini-tightening cycle that lifted the cash rate from 2.50% to 3.50% is over.  Policy has been on hold since the middle of last year.  While no change in policy is expected, the two cent decline in the New Zealand dollar in the middle of last week was at least partly fueled by expectations of a dovish statement.  RBNZ officials wish investors did not quite like the local dollar as much as they do, having driven it up by nearly 5% on the official trade-weighted measure over the past three months.  

The Riksbank is continuing to wrestle with deflationary forces, and this is expected to result in another step into the world of QE.  There are two complimentary tools the Riksbank is using.  Its repo rate is already set at -25 bp.    It could cut it again, and the Bloomberg consensus expects a 10 bp move.  The other tool is its bond purchases.  These are likely to be increased further from the SEK30 bln announced last month.  We are slightly less convinced of a rate cut than an expansion of QE.  The krona looks vulnerable against the euro from a technical perspective.

There are three reports from the eurozone that will garner attention, but outside of headline risk, are not game-changers.  The flash April CPI estimate is expected to improve from -0.1% in March. There is even a chance of a positive 0.1% reading, but from an economic and policy point of view, he difference is not significant.  Separately, money supply and lending data for March should show the gradual improving trend has continued. Lastly, Spain is in the midst of a robust economic rebound.  Growth in Q1 may have nudged ahead of Q4 14's 0.7% quarter-over-quarter pace.  The expansion of GDP is not translating into steady improvement in the labor market, nor does it appear to be bolstering support for the government, which faces national elections at the end of the year.  

Meanwhile, the ECB's asset purchase program continues apace.  Spain has recently sold both 3 and 6 month bills with negative yields.  Last week Belgium sold 5-year bonds with negative yields. The ECB's minus 20 bp deposit rate has not offered a solid floor to eurozone interest rates. German 2 and 3-year bonds yields are below the deposit rate. Finland, Netherlands and Belgium's 2-year note yields are also below the deposit rate, and France is on the cusp.   

The debate over how to resolve Greece's financial straits within monetary union remains unsolved three months after a new Greek government was elected.  The Troika's progress with the previous government had broken down six months before Syriza's election victory in Greece. There has been a strong correlation between the windows of opportunity and disappointment.   The next Eurogroup meeting is not until May 11, and that appears to be the next such opportunity.  There is precedent in Europe for taking the matter to the Council of Ministers, composed of the heads of state when finance or other ministries cannot reach an agreement on a particularly thorny issue. 

Meanwhile, the strict constructionists, for the lack of a better term, at the ECB have opened up a new line of attack:  Greek banks access to ELA (Emergency Lending Assistance).  Recall the ECB retracted a waiver for Greek government bonds as collateral, which forces Greek banks its own central bank.  Under this facility the Greek central bank can loan to Greek banks at a higher rate for collateral unacceptable to the ECB.  The risk remains on the Greek central bank's balance sheet, but it requires ECB approval.  The ECB has been doling out its approval a little at a time on a weekly basis.  

The critics raise two points.  First the ELA is by definition for emergencies, but Greek banks are not changing their business models, or in other ways, responding to the emergency,  Second, that the haircut charged for using Greek government bonds as collateral needs to be reviewed in light of the circumstances.  

Although there is no formal mechanism to eject Greece from the monetary union, cutting the Greek banks off of central bank funding has long been perceived to be one way that the process can be engineered.  Draghi has indicated a reluctance to make such a political decision.  We would expect him to be able to marshal a majority to support this position, but perhaps not without a compromise, which could include a greater haircut.  The net effect would be to bring forward the day that Greek banks exhaust their collateral.  

Growth in the UK is expected to have slowed to a 0.4% quarter-over-quarter pace from 0.6% in Q4 14.  The May 7 election looms large and overshadows the Q1 GDP report.  With the Lib-Dems ruling out participating in a coalition that includes the Scottish Nationalist Party, it is difficult to see how a majority government will be cobbled together in a country that insists on calling the absence of a single party majority, a hung parliament.  

Japan full economic calendar,  but the general view that the world's third large economy crawling rather than truly rebounding after contracting April through September last year. The BOJ is likely to downgrade its economic assessment at the conclusion of its meeting on April 29. A build of inventories warns of weakness in industrial output.  Overall household spending remains weak even though the labor market is tight by official measures.  Despite aggressive expansion of the BOJ balance sheet, inflation has fallen back toward zero when fresh food and last year's sales tax are excluded.  

Politics may overshadow the Japan's economic news.  Prime Minister Abe will speak to a joint session of the US Congress on April 29.  Abe will be the first Japanese prime minister to do so.  He is likely to focus on two topics in addition to some reflective remarks about the end of WWII:   Security and the Trans-Pacific Partnership trade agreement.  Abe was not an enthusiastic supporter initially of the trade agreement but has become among its leading advocates.  If Obama is not granted trade promotion authority, which essentially scuppers the agreement, Abe's domestic reform efforts also would be a setback.

Lastly, the combination QE in the eurozone (and Sweden) and Japan, with China easing and expectations pushed out for the Fed's lift off, has increased the preference for risk assets.  The MSCI Emerging Market equity index has advanced for four consecutive weeks.  Note that Brazil’s Bovespa gained 3.5% last week, bringing the year-to-date advance to 13.2%.   The Brazilian central bank is one of the few central banks that remains in a tightening mode.  It is expected to hike the key Selic rate another 50 bp on April 29 to 13.25%. 

The S&P 500 (SPY) is at record highs, and the NASDAQ (QQQ) is near the record high it set 15 years ago.  The Nikkei is above 20000 for the first time since 2000.  German, French and Italian stock markets are up more than 20% this year. China's Shenzhen Composite is up 59% this year, with the Shanghai Composite up 36%.  

The June light sweet oil futures contract ended a four-week advance last week but is still 23% above last month's contract low.   Other industrial commodities have also begun firming.   Iron ore posted its biggest weekly advance in nearly three years last week, rising more than 12%. 

​Read more by Marc on his site Marc to Market.