Dollar Pressured by Powell Pause Ahead of ECB Decision

May 04, 2023
  • Markets are still digesting the Fed decision; after doing his best to avoid acknowledging a pause, Chair Powell ended the press conference by doing so; Fed easing expectations shot higher as a result; the Fed’s weekly H.4.1 report will be closely watched; ADP reported a strong private sector jobs estimate; Canada reports March trade data and April Ivey PMI; Brazil COPOM delivered a dovish hold
  • The ECB is expected to hike rates 25 bp; eurozone and U.K. reported final April services and composite PMI readings; Germany reported weak March trade data; Norges Bank hiked rates 25 bp to 3.25%, as expected
  • Australia reported firm March trade data; Caixin reported soft manufacturing PMI; the commodity complex continues to sink

The dollar remains under pressure in the wage of the FOMC decision. DXY is trading lower for the third straight day near 101.266 after trading near 102.294 Tuesday, the highest since April 11. NOK is outperforming after Norges Bank hiked rates 25 bp and signaled more in June (see below). The euro is trading lower near $1.1050 ahead of the ECB decision (see below). Of note, the euro tends to weaken on ECB decision days. It has done so 4 of the past 5 and 7 of the past 9. Elsewhere, sterling is trading flat near $1.2565 while USD/JPY remains heavy and trading near 134.65 after trading as low as 134.15 earlier. We had hoped that the First Republic deal would help address banking sector concerns but more clearly needs to be done. We had also hoped that a less dovish than expected FOMC decision would help the dollar but that didn’t happen and Fed rate cut expectations actually picked up as a result. So while recent data have been dollar-supportive, the dollar remains vulnerable until those major negative headwinds have been fully addressed.

AMERICAS

Markets are still digesting the Fed decision. U.S. equity markets ended the day down and futures point to a lower open. In particular, regional bank stocks ended lower after an early bounce and pre-market trading points to another bad day today. U.S. yields fell sharply yesterday but are edging higher today. Same goes for the dollar. The message sent by the Fed was mixed (see below) and so the mixed response is understandable. We also think markets are hesitant to make big directional bets ahead of the jobs report tomorrow, as ADP data suggests another strong print for NFP. At this point, we believe markets should stop trying to guess what the Fed is going to do next. Despite hints of a pause, it will all come down to the data. Next week brings CPI and PPI and so an implied pause is by no means assured. Indeed, current Cleveland Fed Nowcasting suggests big gains for both headline and core CPI. Stay tuned.

The two-day FOMC meeting ended with a 25 bp hike, as expected. The decision was unanimous while the statement was softened without signaling a pause. To wit, it now reads “In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time…” vs. the March statement where “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” To us, this was the key point that underscores a data-dependent process going forward. Updated forecasts and Dot Plots won’t come until the June meeting.

Chair Powell’s press conference echoed this theme. At least at first, as he led off by saying that the Fed will make decisions meeting by meeting based on the data. He said the Fed will need a few months of data showing that its policy moves have been correct as part of an ongoing assessment whether the policy rate is sufficiently restrictive. Powell stressed that the Fed is trying to reach and remain at a sufficiently restrictive level for rates. He said the FOMC’s inflation outlook doesn’t support rate cuts and that if inflation stays high, the Fed won’t cut rates. So far, so good. This doesn't sound like a bank that's in a hurry to cut rates.
After doing his best to avoid acknowledging a pause, Chair Powell ended the press conference by doing so. He said the Fed did discuss pausing but not for this meeting, but added (unnecessarily in our view) that it feels like “we’re getting closer, maybe there for a pause.” Once again, the Fed messaging was muddied by an off-handed comment by Chair Powell. The whole meeting was supposed to underscore that future moves will be data dependent and then he admitted a pause may be here. What if we get a blockbuster jobs number tomorrow? Or CPI and PCE readings continue to run hot? There is so much time and data between now and the June 13-14 FOMC meeting that could impact Fed policy, so why even venture a guess about a possible pause? It totally undermines the data-dependent message that (we think) the Fed was trying to convey.

Fed easing expectations shot higher as a result. The market is now pricing in three (yes, three!) cuts by year-end, with around 50% odds that the easing cycle starts July 26. This is simply not going to happen but of course, the market is once again getting carried away with the Fed pivot story. Fed officials will likely try to push back in the coming days but the market isn't really listening to the Fed anymore. Once again, it will be up to the data to do the talking for the Fed. Between now and the June 13-14 FOMC meeting, we get two sets each of jobs, CPI, and PPI data as well as one set each of retail sales and PCE data. Let the games begin.

The Fed’s weekly H.4.1 report today will be closely watched. Data here will show commercial bank use of emergency borrowing from the Fed’s Discount Window and Bank Term Funding Program through yesterday, May 3. Thus , we should get some sort of an idea whether regional banks this week are seeing the kinds of stresses that we saw back in March, when Discount Window usage jumped and the BTFP was created and quickly tapped. Recent reports from notable bank analysts have suggested that the regional banks have shored up their balance sheets in recent weeks. Perhaps some of these banks will report Q2 trends to help stem the panic. Stay tuned.

ADP reported a strong private sector jobs estimate. It came in at 296k vs. 150k expected and 145k in March. We all know ADP has been an awful predictor of NFP, even after its revamp last year. That said, NFP has outperformed ADP for 8 of the past 9 months and 13 of the past 15. Consensus for NFP tomorrow currently stands at 182k vs. 236k in March, while the unemployment rate is expected to rise a tick to 3.6% and average hourly earnings are expected to remain steady at 4.2% y/y. While there have been some signs of cooling in the labor market, it remains relatively tight.

April ISM services PMI was solid. Headline came in a tick higher than expected at 51.9 vs. 51.2 in March. Details were mixed, however. Employment fell to 50.8 vs. 51.3 in March and activity fell to 52.0 vs. 55.4 in March. However, prices paid rose a tick to 59.6, suggesting services inflation is likely to remain high near-term.

There are several minor data reports today. March trade data, Q1 unit labor costs and productivity, April Challenger job cuts, and weekly jobless claims will all be reported. Initial claims are expected at 240k vs. 230k last week and continuing claims are expected at 1.865 mln vs. 1.858 mln last week. Of note, the Atlanta Fed’s GDPNow model is now tracking Q2 growth at 1.8% SAAR, up from the initial estimate of 1.7% SAAR. Next model update comes today after the data. Bloomberg consensus for Q2 have fallen to 0.1% SAAR and Q3 at -0.9% SAAR.

Canada reports March trade data and April Ivey PMI. The economy is holding up relatively well but some signs of cooling have led the Bank of Canada to pause. After the bank held rates at 4.5% at both the March 8 and April 12 meetings, WIRP suggests another hold is expected at the next meeting June 7. Indeed, markets are pricing in steady rates over the next six months, with a cut fully priced in at the December 6 meeting. This seems too soon to us.

Brazil COPOM delivered a dovish hold. Despite complaints from President Lula and his administration, the bank unanimously kept rates at a sky-high 13.75%. However, it softened its language as “Copom emphasizes that, although a less likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.” Next COPOM meeting is June 21 and a cut then seems too soon. However, the August 2 meeting is looking quite possible if inflation and inflation expectations ease.

EUROPE/MIDDLE EAST/AFRICA

The ECB is expected to hike rates 25 bp. There are around 15% odds of a larger 50 bp move. QT will be maintained at the initial EUR15 bln per month through June. We know the hawks want to quicken the pace but we do not expect any announcement until the June 15 meeting, with a possibly faster pace beginning in July. At the last meeting March 16, the bank hiked rates 50 bp whilst acknowledging recent market tensions had added uncertainty to its baseline assessments. The ECB refrained from signaling future rate moves in that statement and we expect the same today. President Lagarde stressed then that the bank would a data-dependent approach going forward, and we expect her to maintain that tone today as well. Updated macro forecasts were released in March and so the next set will come at the June meeting. Looking ahead, WIRP suggests another hike is priced in for June 15 and another for September 14, with the deposit rate seen peaking at 3.75%. March PPI came in a tick higher than expected at 5.9% y/y vs. a revised 13.3% (was 13.2%) in February.

Eurozone reported final April services and composite PMI readings. Headline services was revised to 56.2 vs. 56.4 preliminary, while the composite was revised to 54.1 vs. 54.4 preliminary. Looking at the country breakdown, the German composite was revised up three ticks to 54.2 and the French composite was revised down nearly 1.5 points to 52.4. Italy and Spain report for the first time and their composite PMIs came in at 55.3 and 56.3, respectively, and were both weaker than expected.

Germany reported weak March trade data. Exports came in at -5.2% m/m vs. -2.2% expected and 4.20 in February while imports came in at -6.4% m/m vs. -2.1% expected and a revised 4.4% (was 4.6%) in February. Both y/y rates continued to slow significantly. Factory orders will be reported tomorrow and are expected at -2.3% m/m vs. 4.8% in February, with the y/y rate expected at -3.1% vs. -5.7% in February. Continued weakness in the German data support our view that China reopening continues to have very little impact on its major trading partners.

U.K. reported final April services and composite PMIs. Both were revised up by a full point to 55.9 and 54.9, respectively. March consumer credit was also reported. While the economy has surprised to the upside recently, it’s hard for us to get excited about the growth outlook. Bank of England meets next week and is expected to hike rates 25 bp to 4.5%. WIRP suggests no odds of a larger 50 bp move. Looking ahead, another 25 bp hike is nearly 75% priced in for June 22 while the odds of one last hike top out near 65% for September 21. Inflation remains stubbornly high and so more may need to be done.

Norges Bank hiked rates 25 bp to 3.25%, as expected. The bank said that “Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.” It noted that “Inflation is high and markedly above the target of 2%” and added that “Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead.” With regards to the exchange rate, Governor Bache noted that “The krone has been weaker than forecast, and krone weakness means prices of imports rise which in isolation can mean that a higher rate than presumed earlier may be needed.” New forecasts won’t come until the June 22 meeting but it’s likely that with this hawkish tone, the expected rate path may see a hawkish shift then. Much will depend on how the krone and inflation behave in the interim.

ASIA

Australia reported firm March trade data. Exports rose 4% m/m vs. -3% in February while imports rose 2% m/m vs. a revised -10% (was -9%) in February. In y/y terms, exports came in at 16.5% vs. 12.1% in February while imports came in at 6.3% vs. -1.5% in February. Both exports and imports had been slowing significantly and we view this bounce as temporary given the sharp drop in iron ore and coal prices in April and May (see below). With China reopening losing any sizzle it had, we see these trends continuing in Q2.

Caixin reported soft manufacturing PMI. Headline came in at 49.5 vs. 50.0 expected and actual in March. This was the first sub-50 manufacturing reading from Caixin since January. Services and composite PMIs will be reported tomorrow, with services expected at 57.0 vs. 57.8 in March. Last weekend, official PMI readings came in much weaker than expected. Manufacturing came in at 49.2 vs. 51.4 expected and 51.9 in March, while non-manufacturing came in at 56.4 vs. 57.0 expected and 58.2 in March. As a result, the composite fell to 54.4 vs. 57.0 in March to the lowest since January. All in all, the data (both domestic and global) continue to show that the impact of reopening continues to underwhelm and so more stimulus seems likely.

COMMODITIES

The commodity complex continues to sink. Brent oil is nearing a test of the March 20 low near $70.10 and is lower now than when OPEC+ cut output back in early April. Break below would set up a test of the December 2021 low near $65.70. Of note, WTI is leading this move and already broke below its March 20 low near $64.10 before rebounding. Here, a clean break would put WTI on track to test its December 2021 low near $62.45. OPEC+ could try to put a floor under prices with another output cut but that is unlikely to be any more successful than its April cut. This is because there is a demand problem, not a supply problem. Other commodities are also reflecting global growth concerns, with coal and iron ore (along with oil) lower now than when China reopened back in December. Of note, iron ore traded below $100 per ton today.

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