Dollar Soft as New Week Begins

April 24, 2023
  • We have entered the quiet period for the Fed ahead of the May 2-3 FOMC meeting; March Chicago Fed National Activity Index will be important; regional Fed surveys for April will continue to roll out; Mexico reports mid-April CPI
  • Germany reported mixed IFO business climate readings for April; ECB officials stressed that increased volatility in inflation and growth are making policymaking more difficult
  • Japan’s ruling LDP nearly swept the weekend by-elections; Singapore reported March CPI; Taiwan reported soft March IP

The dollar is soft as the new week begins. DXY is trading lower for the third straight day near 101.658 and a break below 101.448 would set up a test of the April 14 low near 100.788. The euro is trading higher just above $1.10 and a clean break above $1.1010 would set up a test of the April 14 high near $1.1075. Sterling is trading higher near $1.2440 and a break above $1.2470 would set up a test of the April 14 high near $1.2545. USD/JPY is trading higher near 134.65 and is on track to test the April 19 high near 135.15. This just about matches the March 10 near 135.10 and a clean break above would set up a test of the March 8 high near 138. Recent data have been dollar-supportive and we are finally seeing a reaction in U.S. yields. Until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable. While U.S. yields have traded sideways in recent days, it seems that this repricing is now under way.

AMERICAS

We have entered the quiet period for the Fed ahead of the May 2-3 FOMC meeting. Instead, the data will do all the talking. Between now and next Wednesday’s Fed decision, we won’t get any top tier data but we will get some important clues. This week, Chicago Fed NAI today and Q1 GDP data Thursday will tell us about the real sector, while PCE and ECI data Friday will tell us more about the inflation outlook. Next week, Monday brings ISM manufacturing PMI. We will get some more labor market readings as next Tuesday brings JOLTS data and next Wednesday brings ADP private sector jobs. NFP won’t come until after the FOMC decision. Recent resilience in the U.S. economy helped push UST yields higher and we look for that process to continue. If so, the dollar should continue to gain as well.

Fed tightening expectations have picked up bit. WIRP suggests over 90% odds of 25 bp hike at the May 2-3 meeting, up from 80% at the start of last week and 70% at the start of the week before that. To us, a hike next week is a done deal. There are about 15% odds of another 25 bp hike in June. Between the May 2-3 and June 13-14 meetings, the Fed will have digested two more job reports, two CPI/PPI reports, and one retail sales report. At this point, a pause in June might just be the most likely outcome but it really will depend on how all that data come in. After all that, one cut is still priced in by year-end vs. two at the start of last week. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. We concur.

March Chicago Fed National Activity Index will be important. Headline is expected at -0.20 vs. -0.19 in February. A zero reading means the economy is growing at around trend and so we are back at above trend growth for two straight months after three straight months below trend. If so, the 3-month moving average would improve to -0.05 vs. -0.13 in February and would be the highest since October. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth.

Regional Fed surveys for April will continue to roll out. Dallas Fed manufacturing index is expected at -11.0 vs. -15.7 in March. Philadelphia Fed non-manufacturing, Richmond Fed manufacturing (-8 expected vs. -5 in March), and Dallas Fed services indices will be reported tomorrow. Kansas City Fed manufacturing index will be reported Thursday and is expected at -2 vs. 0 in March. Kansas City Fed services index will be reported Friday. So far, the manufacturing surveys have been mixed, with Philly Fed at -31.3 vs. -19.3 expected and -23.2 in March and Empire survey at 10.8 vs. -18.0 expected and -24.6 in March.

Mexico reports mid-April CPI. Headline is expected at 6.28% vs. 6.58% end-March and core is expected at 7.76% y/y vs. 8.03% end-March. if so, headline would be the lowest since mid-October 2021 but still well above the 2-4% target range. At the last policy meeting March 30, Banco de Mexico hiked rates 25 bp to 11.25% and noted “Since the last monetary policy meeting, annual headline inflation has decreased more than expected. For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained.” Next policy meeting is May 18 and if inflation continues to fall, the bank is likely to keep rates steady.

EUROPE/MIDDLE EAST/AFRICA

Germany reported mixed IFO business climate readings for April. Headline came in at 93.6 vs. 93.4 expected and a revised 93.2 (was 93.3) in March. Current assessment fell to 95.0 vs. 96.0 expected and 95.4 in March, but this was offset by a rise in expectations to 92.2 vs. 91.1 expected and a revised 91.0 (was 91.2) in March. While German sentiment indicators have been improving, the IFO readings suggest that the gains may be leveling off. Perhaps we’ll know more after May GfK consumer confidence is reported Wednesday, which is expected at -28.0 vs. -29.5 in April.

ECB officials stressed that increased volatility in inflation and growth are making policymaking more difficult. Panetta focused on geopolitics and the Ukraine invasion, noting “Geopolitical shocks may trigger persistent output and inflation volatility, with multiple spillovers. Russia’s aggression against Ukraine has, for instance, disrupted energy and commodities markets, with major implications for inflation.” Elsewhere, Villeroy focused on climate change, noting “Climate transition entails structural changes to the global economy that are both universal and certain, with an overall and possibly negative supply shock. Second, higher volatility is likely, which means shocks on both activity and inflation. This is where we central banks have to do our job in order to maintain a solid anchoring of long-term inflation expectations despite higher volatility. We cannot just look through it, since it is not an unexpected and transitory shock” Both are correct to highlight these long-term issues.

ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests about 30% odds of a 50 bp hike then. After that, another 25 bp hike is priced in for June 15 followed by another 25 bp hike July 27. Odds of one final hike in in September or October top out near 45% and so the peak policy rate is now seen between 3.75-4.0%%, up from3.75% at the start of last week and 3.50% at the start of the week before that.

ASIA

Japan’s ruling LDP nearly swept the weekend by-elections. It held on to threelower house seats and picked up an upper house seat. There will likely be increased chatter of early general elections but the margins of victory for the LDP were pretty narrow. Regardless of the election timing, the Bank of Japan will likely be under great pressure not to tighten policy prematurely. The BOJ is not expected to change policy at this week’s meeting. However, updated macro forecasts should provide some clues regarding its expected timeframe for liftoff.

Singapore reported March CPI. Headline came in as expected at 5.5% y/y vs. 6.3% in February, while core came in a tick lower than expected at 5.0% vs. 5.5% in February. Headline is the lowest since May and core is the lowest since July. While the MAS does not have an explicit inflation target, falling price pressures amidst slowing growth led it to keep policy steady at this month’s meeting. Next meeting is in October and we expect steady policy then as well inflation continues to fall. IP will be reported Wednesday and is expected at -6.1% y/y vs. -8.9% in February. If so, it would be the sixth straight monthly contraction.

Taiwan reported soft March IP. It came in at -14.52% y/y vs. -12.30% expected and revised -7.66% (was -8.68%) in February. It was the seventh straight monthly contraction and the weakest for any month besides January or February (Lunar New Year distortions) since May 2009. The slide in IP coincides with similar weakness in both exports and export orders. Q1 GDP data will be reported Friday and is expected at -1.60% y/y vs. -0.41% in Q4. If so, it would be the weakest since Q2 2009. Clearly, China reopening has had little impact on Taiwan’s economy. Given this weak backdrop, markets (including us) were surprised when the central bank unexpectedly hiked rates at its March 23 meeting. Next meeting is June 15 and no change is expected then.

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