Dollar Remains Soft Ahead of Jobs Data

September 06, 2024

Win Thin

August jobs report will be key; Fed easing expectations have picked up after this week’s softish data; Canada data highlight will also be August jobs data; Chile reports August CPI
France has a new prime minister; Germany reported mixed July IP and trade data; ECB easing expectations remain intact
Japan reported soft July household spending; OPEC+ announced it will extend its output cuts by two months until the end of November 2024

The dollar remains soft ahead of jobs data. DXY is trading lower for the third straight day near 101 as soft labor market data already reported this week (see below) have led markets to set up for a weak number today. The yen is outperforming again despite soft household spending (see below), with USD/JPY trading lower near 142.85. The euro is trading flat near $1.11 while sterling is trading lower near $1.3175. We believe the U.S. labor market remains in solid shape and so we continue to believe that market expectations for aggressive Fed easing remain overdone. We also continue to believe that the divergence story remains in place and should eventually support the dollar. The jobs report today will be key in advancing our narrative.

AMERICAS

The labor market data released so far this the week were not firm enough to ease market concerns about a slowdown. The August ISM services employment index fell to a two-month low at 50.2. While the August ISM manufacturing employment Index improved to a two-month high of 46.0, it remains in contraction territory. The July JOLTS total job openings dipped more than expected to the lowest level since January 2021, while the August Challenger job cuts announcements had the biggest monthly increase since March. ADP private sector job gains undershot expectation in August with the lowest monthly gain since January 2021. Lower weekly jobless claims were the only bright spot but were ignored by the markets.

August jobs report will be key. Bloomberg consensus for NFP stands at 165k vs. 114k in July, while its whisper number stands at 155k. The unemployment rate is expected to fall a tick to 4.2%, with the participation expected to remain steady at 62.7%. Average hourly earnings are expected to rise a tick to 3.7% in July, while the average workweek is expected to rise a tick to 34.3. Yesterday, ADP private sector jobs estimate came in at 99k vs. 140k expected and a revised (was 122k) in July. After revisions, NFP has outperformed ADP for 3 straight months and 11 of the past 12 months.

Yet we see upside risk to August NFP. Some of the temporary factors that contributed to the soft July job report reverse, such as the impact of Hurricane Beryl. Looking beyond that, there is no acceleration in layoffs as the layoffs rate has been in a 1.0-1.1% range since April 2023. Moreover, strong labor force growth is largely behind the rise in the unemployment rate. Lastly, the hiring rate is near pre-pandemic average, suggesting demand for labor is just fine. Stay tuned.

Fed easing expectations have picked up after this week’s softish data. The market now sees 100-125 bp of easing by year-end and nearly 225 bp of easing over the next 12 months, both up nearly 25 bp since the start of this week. The odds of a 50 bp cut in September have risen to nearly 50% vs. 25-30% at the start of this week. A strong August NFP number (above 200k) would skew the probability towards a 25 bp reduction and offer USD near-term support, while a weak NFP print (below 100k) would reinforce the case for a 50 bp cut and drag USD to fresh lows. Anything in between would further cloud the employment outlook and lead to choppy financial market moves.

The debate between the Fed doves and hawks Chicago could also be settled. While most officials are in favor of caution and gradualism, Fed President Goolsbee (a 2025 FOMC voter and staunch dove) remains at the other end of the spectrum. Overnight, Goolsbee said that he saw more warning signs about the labor market and added “it is pretty clear that the path is not just rate cuts soon…but multiple cuts over the next 12 months.” Williams and Waller speak today. At midnight tonight, the media blackout goes into effect and there will be no Fed speakers until Powell’s post-decision press conference the afternoon of September 18.

August ISM services PMI was solid. Headline came in at 51.5 vs. 51.4 expected and actual in July. This was the second straight rise but remains well below the May high of 53.8. Looking at the components, employment fell to 50.2 vs. 51.1 in July, activity fell to 53.3 vs. 54.5 in July, and prices paid rose to 57.3 vs. 57.0 in July. Recall that manufacturing PMI prices paid also rose to 54.0 vs. 52.9 in July and these readings should keep the Fed a bit cautious.

Growth remains robust in Q3. The New York Fed’s Nowcast model is tracking Q3 growth at 2.5% SAAR and will be updated today. It should also publish its first estimate for Q4 at the same time. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.1% SAAR and will be updated Monday after the data. While both model estimates are down from their earlier highs, growth remaining above trend is quite impressive in light of the Fed’s tightening.

Canada data highlight will also be August jobs data. Consensus sees 25.0k jobs added vs. -2.8k in July, while the unemployment rate is expected to rise a tick and match the January 2022 high of 6.5%. Overall, Canada’s labor market has cooled significantly, and the Bank of Canada is particularly concerned with emerging slack in Canada’s labor market. The swaps market implies 175 bp of easing over the next 12 months, which is a drag on CAD.

Canada August Ivey PMI will also be reported. S&P Global reported its August PMIs earlier this week and all three have been below 50 for the past three months.

Chile reports August CPI. Headline is expected at 4.7% y/y vs. 4.6% in July. If so, it would be the fifth straight month of acceleration to the highest since November. The central bank cut rates 25 bp to 5.5% earlier this week and accentuated the negative, noting that spending is showing more weakness and that bank lending remains weak. It’s clear that the bank is more concerned about the sluggish economy than inflation now and so rates should continue falling. The market is pricing in another 125 bp of easing over the next 12 months that would see the policy rate bottom near 4.25%.

EUROPE/MIDDLE EAST/AFRICA

France has a new prime minister. French President Macron picked Michel Barnier - a member of center-right party and former Brexit negotiator - as the country’s next prime minister. The new government will now have to table and adopt a credible 2025 budget next month to correct the country’s excessive fiscal deficit. Stay tuned. In the meantime, French-German 10-year government bond yield spreads are holding near recent lows of 70 bp after peaking at 82 bp at the end of June. However, France continues to trade wide of Portugal and there is ongoing debate whether this is a structural change. Stay tuned.

Germany reported mixed July IP and trade data. IP came in at -2.4% m/m vs. -0.5% expected and a revised 1.7% (was 1.4%) in June. As a result, the y/y rate fell to -5.3% vs. -3.5% expected and a revised -3.7% (was -4.1%) in June. However, exports rose 1.7% m/m vs. 1.1% expected and imports rose 5.4% m/m vs. 0.7% expected, and both y/y rates improved from June. Retail sales data have been delayed, with May data expected early next week. Elsewhere, France reported July IP at -2.2% y/y vs. -0.9% expected and a revised -1.7% (was -1.6%) in June.

ECB easing expectations remain intact. A 25 bp cut next week is fully priced in. While another cut in Q4 is also fully priced in, the odds of a third cut stand around 60%. Despite the ECB’s cautiousness, we believe the worsening growth outlook will eventually lead to more easing than what’s currently priced in.

ASIA

Japan reported soft July household spending. Spending came in at 0.1% y/y s. 1.2% expected and -1.4% in June. It was the first positive reading since April but remains weak overall. Bank of Japan is likely to remain cautious about tightening. The market does not price in the next hike until well into 2025, with only 20-25 bp of tightening seen over the next 12 months.

COMMODITIES

OPEC+ announced it will extend its output cuts by two months until the end of November 2024. Originally, OPEC+ members were planning to boost daily output by a total of 180k barrels in October and November but the ongoing slump in oil prices clearly called for an adjustment. However, OPEC+ is still planning to reinstate a total of 2.2 mln barrels of output cuts per day over the next year and has simply delayed it by two months. No wonder crude oil prices are still trading heavy near their December 2023 lows. With China’s outlook still quite weak and the U.S. slowing, it seems that global demand is unlikely to be able to absorb this planned extra supply. Of note, output cuts of 2 mln barrels per day were announced by OPEC + back in October 2022 and oil is trading well below the levels that held then.

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