Dollar Firmer Ahead of ADP as RBA and RBNZ Deliver Very Different Surprises

April 05, 2023
  • Fed officials continue to talk about higher rates; yet Fed tightening expectations continue to fall; ADP reports its private sector jobs estimate; February JOLTS job openings suggest some softening of the labor market; March ISM services PMI readings will be closely watched; Mexico reports March CPI
  • Eurozone reported final March services and composite PMIs; Germany reported strong February factory orders; some ECB officials are softening their outlooks; Poland is expected to keep rates steady at 6.75%
  • There has been growing chatter by former Japan officials about reviewing YCC; recent data should keep the Bank of Japan on hold for now; RBA Governor Lowe was very dovish; RBNZ delivered a hawkish surprise and hiked rates 50 bp to 5.25% vs. 25 bp expected; industrial commodity prices are little changed from China reopening

The dollar is getting some traction ahead of ADP. DXY is trading higher near 101.705 after two straight down days. Clean break below 102 sets up a test of the February low near 100.82. The euro is trading lower near $1.0940 after running into resistance near $1.0975. It remains on track to test the February high near $1.1035. Sterling is trading lower near $1.2460 after trading yesterday at the highest level since last June near $1.2525. USD/JPY remain heavy as it trades back below 132. With the BOJ seen on hold for the foreseeable future and banking sector tensions easing, we believe USD/JPY remains a buy at current depressed levels. NZD is lower despite the RBNZ’s hawkish surprise (see below), while AUD is the worst performing major for the second straight day after Governor Lowe followed yesterday’s RBA hold with very dovish comments today (see below). Bottom line: we expect the dollar to bounce after markets reprice Fed tightening expectations but this process is taking far too long. In the meantime, the technical picture for the dollar is awful and so further near-term losses appear likely.

AMERICAS

Fed officials continue to talk about higher rates. Mester said monetary policy needs to move “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.” She added that she was “very comfortable” with the Fed’s decision to hike rates 25 bp last month and that “So far that seems to have stabilized at the moment.”

Yet Fed tightening expectations continue to fall. WIRP suggests around 55% odds of 25 bp hike at the May 2-3 meeting. After that, it’s all about the cuts; 2-3 cuts by year-end are priced in. In that regard, Powell 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.

ADP reports its private sector jobs estimate. It is expected at 210k vs. 242k in February. Consensus for NFP this Friday stands at 240k 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 the data will come on Good Friday. With markets likely to be very thin, we could get some outsize movements from the numbers, whether good or bad. Ahead of NFP, Other key labor market data will be reported this week.

February JOLTS job openings suggest some softening of the labor market. Openings fell to 9.931 mln vs. 10.500 mln expected and a revised 10.563 mln (was 10.824 mln) in February. Openings are the lowest since May 2021 but remain elevated compared to pre-pandemic levels. Quits edged higher to 4.024 mln. March Challenger jobs cuts and weekly jobless claims will be reported tomorrow.

March ISM services PMI readings will be closely watched. Headline is expected at 54.4 vs. 55.1 in February. Of note, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May. Last week, Chicago PMI came in at 43.8 vs. 43.0 expected and 43.6 in February. However, ISM manufacturing came in on the soft side. February trade data will also be reported and the deficit is expected at -$68.8 bln vs. -$68.3 bln in January.

Mexico reports March CPI. Headline is expected at 6.90% y/y vs. 7.62% in February, while core is expected at 8.07% y/y vs. 8.29% in February. If so, headline would be the lowest since October 2021 but would remain well above the 2-4% target range. Last week, Banco de Mexico hiked rates 25 bp to 11.25% and said that the balance of risks for inflation are still biased to the upside and due especially to energy prices. The bank said it will consider the inflation outlook at the next meeting May 18 and added that inflation has slowed more than expected. The market is not pricing in any more tightening but we see risks of one more 25 bp hike than that would see the policy rate peak near 11.50%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported final March services and composite PMIs. Headline services came in at 55.0 vs. 55.6 preliminary, which dragged the composite down to 53.7 vs. 54.1 preliminary. Looking at the country breakdown, the German composite came in steady at 52.6 but the French composite fell to 52.7 vs. 54.0 preliminary. Italy and Spain reported for the first time and their composite PMIs came in at 55.2 and 58.2, respectively. Both were up 2-3 points from February. Markets are getting bulled up about the eurozone economic outlook but it’s hard to see how it can escape recession when the ECB is still tightening and the U.S. and China disappoint.

Germany reported strong February factory orders. Orders jumped 4.8% m/m vs. 0.3% expected and a revised 0.5% (was 1.0%) in January. This is perhaps the first sign that China reopening is having any impact on Europe so it’s worth watching this series. IP will be reported tomorrow and is expected at -0.1% m/m vs. 3.5% in January. However, the y/y rates remain deeply negative. France reported IP today at 1.2% m/m vs. 0.5% expected and a revised -1.4% (was -1.9%) in January, while Spain reported IP today at 0.6% m/m vs. 0.4% expected and a revised -0.8% (was -0.9%) in January. Eurozone IP will be reported April 13.

Some ECB officials are softening their outlooks. Vujcic said today that “The biggest part of the cycle of rate rises is behind us” but added that if core inflation remains above 4%, further hikes can be expected. The next policy meeting is May 4 and WIRP suggests nearly 90% odds of a 25 bp hike then while another 25 bp hike is priced in for July 27. After that, odds of one last 25 bp hike top out near 25% in September and so the peak policy rate is now seen near 3.50%, up from 3.25% during the height of the banking panic. Chief Economist Lane speaks later today.

National Bank of Poland is expected to keep rates steady at 6.75%. Minutes of the previous meeting March 8 will be released Friday. At that meeting, the bank tilted dovish as Governor Glapinski said he expects inflation to fall to 6% by year-end and that current rates are appropriate to get inflation back to the 1.5-3.5% target range. He also said the zloty was strong and saw no need for further appreciation. Since then, 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 3-6 months, which seems very unlikely.

ASIA

There has been growing chatter by former Japan officials about reviewing Yield Curve Control. Yesterday, former Vice Minister for International Affairs Nakao said “The yield curve control should be reviewed, even if that results in short-term shocks. This can’t go on forever.” Today, former BOJ Executive Director in charge of monetary policy Momma said “There’s a possibility in April if you consider the current circumstances objectively. Long-term yields won’t rise abruptly even if the YCC is scrapped,” referring to the current period of depressed global yields. Incoming Governor Ueda takes up his post this Sunday. While we do not think former officials have an inside scoop on policy matters, we believe their points of view are mirrored by many current officials.

That said, recent data should keep the Bank of Japan on hold for now. WIRP suggests no odds of liftoff April 28, rising to around 10% June 16 and 50% for July 28. A hike isn’t priced in now until December 19 vs. October 31 at the start of this week. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 15 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.

Japan reported final March services and composite PMI readings. Services was revised up to 55.0 vs. 54.2 preliminary, which dragged the composite up to 52.9 vs. 51.9 in February. This was the highest composite reading since last June.

Reserve Bank of Australia Governor Lowe was very dovish. He noted that “The decision to hold rates steady this month does not imply that interest rate increases are over. Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” When asked how the RBA can pause while other major central banks are still hiking, Lowe listed three factors: a slower pace of wages growth, rapid pass-through of hikes to mortgages, and a desire to hold onto some of the labor market gains made during the current recovery. He added that “The board is prepared to have a slightly slower return of inflation to target than some other central banks,” adding that “Our judgment at the moment is that if we can get inflation back to 3% by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses.” This is a very, very dovish stance and that has seen AUD tack on another -1% loss on top of yesterday’s -0.5%. The market clearly believes the tightening cycle has ended and is pricing in one cut by year-end. The RBA releases its Financial Stability Report tomorrow.

Reserve Bank of New Zealand delivered a hawkish surprise and hiked rates 50 bp to 5.25% vs. 25 bp expected. It noted that “The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.” The bank said it discussed recent global banking stresses and concluded that local banks are well placed to face any risks and repeated ECB President Lagarde’s mantra that there is no trade-off between price stability and financial stability. Updated macro forecasts won’t come until the next meeting May 24, but the RBNZ noted today that “In aggregate, economic projections were little changed relative to the February statement.” Of note, the February forecasts see the policy rate peaking near 5.5% this year and staying there for much of next year. Looking ahead, WIRP suggests odds of one final 25 bp hike at around 75% May 24 and nearly 90% July 12 that would see the policy rate peak near 5.5%, up from 5.25% at the start of this week.

COMMODITIES

Industrial commodity prices are little changed from China reopening. Using December 6 (the day before China eliminated most Covid Zero restrictions) as the starting point, the chart below shows that copper prices are little changed. Oil is up a bit more but this is really due in large part to this past weekend’s surprise OPEC+ oil output cut of 1.1 mln bbl/day. Iron ore is up a bit more but is likely to come under greater pressure as China is in the midst of trying to lower steel output. We put natural gas in this chart not because of the China impact, but to illustrate just how lucky Europe and the U.K. have been in terms of lower natural gas prices. If it had been a colder than normal winter, this chart would look much different.

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