Dollar Firm Ahead of Jobs Data

April 07, 2023

Win Thin

Fed officials continue to look through the banking crisis; Fed tightening expectations remain depressed; March jobs report will be the highlight; Canada reported solid March jobs data yesterday
National Bank of Poland releases minutes of the March 8 policy meeting; Turkey central bank announced more measures to help support the lira
Japan reported February labor cash earnings; outgoing BOJ Governor Kuroda gave his last press conference before his term ends this weekend

The dollar is up modestly ahead of the jobs report. Trading is very quiet as most European markets are closed for Good Friday. DXY is trading near 102 now but the clean break below 102 earlier this week sets up a test of the February low near 100.82. The euro is trading flat near $1.09 after being unable to break above $1.0975 earlier this week but remains on track to test the February high near $1.1035. Sterling is trading flat near $1.2445 after being unable to build on its gains after trading earlier this week at the highest level since last June near $1.2525. USD/JPY is trading lower near 131.65 after testing the 132 area earlier today. Bottom line: the dollar may see some safe haven bid from time to time but until U.S. yields recover, the dollar is likely to remain under pressure near-term. Today’s jobs report will be key in setting the dollar’s near-term direction.

AMERICAS

Fed officials continue to look through the banking crisis. Bullard said “Financial stress seems to be abated, at least for now. And so it’s a good moment to continue to fight inflation and try to get on that disinflationary path.” He added that he doesn’t think tighter credit conditions resulting from the banking crisis will be enough to tip the U.S. into recession, noting that demand for loans remains strong. Bullard also said that the recent stresses are low compared to what was seen during the Great Financial Crisis. Lastly, he stressed that “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation.”

Fed tightening expectations remain depressed. WIRP suggests around 50% odds of 25 bp hike at the May 2-3 meeting. After that, it’s all about the cuts. Between 2-3 cuts by year-end are currently priced in. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. Last week’s PCE data were mixed. While headline and core both came in a tick lower than expected, super core accelerated for a second straight month to 4.63% y/y and is the highest since October. This is not the direction that the Fed desires and so we look for the hawkish tilt in Fed comments to continue next week.

The March jobs report will be the highlight. NFP consensus stands at 230k vs. 311k in February, while the unemployment rate is seen steady at 3.6%. Average hourly earnings are expected to slow to 4.3% y/y vs. 4.6% in February. It's worth noting that markets are very thin today due to the Good Friday holiday and so we could get some outsized movements from the data, whether good or bad. Weekly jobless claims and JOLTS data earlier this week suggest the labor market is softening. Just how much it’s slowing is still unknown but we’ll know more after today’s data. Of note, next week will be very important as the U.S. reports CPI, PPI, and retail sales data.

Canada reported solid March jobs data yesterday. A total of 34.7k jobs were created vs. 7.5k expected and 21.8k in February. The mix was good at 18.8k full-time jobs and 15.9k part-time jobs, while the unemployment rate was steady at 5.0%. Bank of Canada meets next Wednesday and WIRP suggests around 15% odds of a rate cut then. This is highly unlikely. Looking ahead, two rate cuts by year-end are fully priced in and this too seems very unlikely.

EUROPE/MIDDLE EAST/AFRICA

National Bank of Poland releases minutes of the March 8 policy meeting. It said then that it expected inflation to fall to 6% by year-end and that current rates were appropriate to get inflation back to the 1.5-3.5% target range. Since that meeting, inflation first accelerated to 18.4% y/y in February before falling back to 16.2% in March. Much of the improvement was due to high base effects from last year after Russian invaded Ukraine. As such, we think it will be very difficult for inflation to fall to 6% by year-end with current policy settings. However, the market is pricing in the start of an easing cycle over the next three months. Earlier this week, the bank kept rates steady at 6.75% and continued to tilt dovish as Governor Glapinski said inflation has started its steep decline.

Turkey central bank announced more measures to help support the lira. The new measures effectively raise foreign currency reserve requirements and force banks to buy more local currency government debt if the new requirements aren’t met. These are just the latest in a long line of efforts to support the lira whilst avoiding the obvious solution of hiking interest rates. We suspect policymakers will pull out all stops in keeping the lira steady and interest rates low ahead of the May 14 election. Many foreign investors believe that if Erdogan were to lose, as some polls suggest, any incoming government would reverse current economic policies to a more orthodox framework, including allowing interest rates to rise sharply in order to tame inflation. The recent improvement in the y/y readings is due in large part to high base effect as the m/m gains remain significant.

ASIA

Japan reported February labor cash earnings. Nominal earnings came in as expected at 1.1% y/y vs. 0.8% in January and real earnings came in as expected at -2.6% y/y vs. -4.1% in January. Last week, labor market data came in soft and if this trend continues, it will be tough for wages to rise enough for the Bank of Japan to feel comfortable removing accommodation.

Outgoing Bank of Japan Governor Kuroda gave his last press conference before his term ends this weekend. He said “The time for achieving the 2% stable price goal is now getting close. The norms surrounding prices are changing.” When asked about his future plans, Kuroda said “I’d like to consider something like teaching at a university somewhere. I’m 78, so I have no intention of taking on any kind of full-time work.” While Kuroda oversaw the return to an era of inflation rather than deflation, he has left the difficult part of exiting to his successor Ueda. To his credit, Kuroda has not painted Ueda into any corners, allowing the incoming Governor to exit accommodation on his own terms. Of note, WIRP suggests no odds of liftoff April 28, rising to around 10% June 16 and nearly 50% for July 28. A hike isn’t priced in until December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 20 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.

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