Dollar Steadies Despite Weak Data

April 06, 2023

Win Thin

Weak data have pushed U.S. yields lower; ADP reported its private sector jobs estimate; March ISM services PMI disappointed; Fed tightening expectations continue to fall; Canada highlight will be March jobs data
ECB Chief Economist Lane flagged the risk of further rate hikes; Germany reported firm February IP
RBA released its semi-annual Financial Stability Review; Australia reported weak February trade data; Caixin reported firm March services and composite PMI readings; India delivered a dovish surprise and kept rates steady at 6.5% vs. an expected 25 bp hike

The dollar is getting some traction as risk off impulses offset the impact of weak U.S. data. DXY is up for the second straight day and trading near 102 after two straight down days. Clean break below 102 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 this week. It remains on track to test the February high near $1.1035. Sterling is trading flat near $1.2460 after being unable to build on its gains after trading this week at the highest level since last June near $1.2525. USD/JPY remain heavy and traded below 131 earlier before recovering to trade near 131.50 currently. 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.

AMERICAS

Weak data have pushed U.S. yields lower. The 2-year yield traded as low as 3.64% yesterday before recovering to around 3.74% today, but last month’s low near 3.55% remains within sight. Elsewhere, the 10-year yield traded at a new cycle low as 3.26% yesterday before recovering to around 3.29% today. With market focusing purely on the U.S. outlook, 2-year yields in other countries have not fallen as much and so the differentials continue to move against the dollar to multi-month lows and so further dollar weakness is likely near-term.

ADP reported its private sector jobs estimate. It came in at 145k vs. 210k expected and 242k in February. While ADP has understated NFP for much of this past year, market expectations for March jobs data Friday have softened. NFP consensus now stands at 235k 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, March Challenger jobs cuts and weekly jobless claims will be reported today.

March ISM services PMI disappointed. Headline came in at 51.2 vs. 54.4 expected and 55.1 in February and was the lowest since December. The details were also weak, with employment at 51.3 vs. 54.0 in February, activity at 55.4 vs. 56.3 in February, and prices paid at 59.5 vs. 65.6 in February. The prices paid reading was the lowest since July 2020. It’s worth noting that recent softness in the data has been picked up in the Atlanta Fed’s GDPNow model, which is tracking Q1 growth at 1.5% SAAR vs. the peak near 3.5% in late March. The next model update will come this Monday.

Fed tightening expectations continue to fall. WIRP suggests less than 50% odds of 25 bp hike at the May 2-3 meeting. After that, it’s all about the cuts. Three cuts by year-end are now priced in, with a fourth cut seen in January. 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. Bullard speaks today.

Canada highlight will be March jobs data. Unlike the U.S., Canada has moved up the release by a day due to the Good Friday holiday. Consensus sees 7.5k jobs created vs. 21.8k in February, while the unemployment rate is expected to rise a tick to 5.1%. March Ivey PMI will also be reported today and stood at 51.6 in February. The bank next meets April 12 and WIRP suggests nearly 25% odds of a rate cut then. A total of 2-3 rate cuts by year-end are priced in too and all of this seems very unlikely.

EUROPE/MIDDLE EAST/AFRICA

ECB Chief Economist Lane flagged the risk of further rate hikes. He repeated President Lagarde’s forward guidance that “If the baseline we developed before the banking stress holds up, it will be appropriate to have a further increase in May.” Lane added that “However, we need to be data-dependent about the assessment of whether that baseline still holds true at the time of our May meeting.” The next policy meeting is May 4 and WIRP suggests nearly 90% odds of a 25 bp hike then. After that, another 25 bp hike is priced in for Q3. There are no longer any odds of one last 25 bp hike in Q4 and so the peak policy rate is now seen near 3.50%, up from 3.25% during the height of the banking panic.

Germany reported firm February IP. It was expected at -0.1% m/m but instead came in at 2.0% vs. a revised 3.7% (was 3.5%) in January. This continues a string of stronger than expected data from Germany. However, the y/y rates remain subdued, not only in Germany but across much of the eurozone as well. Eurozone IP will be reported April 13 and is expected at 0.7% m/m.

ASIA

Reserve Bank of Australia released its semi-annual Financial Stability Review. It noted that “Banks are well regulated, strongly capitalized, profitable and highly liquid. This leaves them well positioned to continue lending to Australian households and businesses.” However, the report stressed that regulators are overseeing financial institutions “more intensively than usual” as policymakers are using the lessons learned from the recent bank crisis abroad “to ensure Australia’s regulatory regime remains fit for purpose and our financial system remains resilient.” The report warned of a potential rise in the number of households and firms falling into arrears on their loans but stressed that any increase in NPLs would start from a very low level. The good news here is that the RBA is at or near the end of its tightening cycle, though we take exception with market pricing for a rate cut this year. Next meeting is May 2 and rates are expected to remain steady at 3.60^. Updated macro forecasts then should help markets determine how the RBA is likely to proceed in the coming months.

Australia reported weak February trade data. Exports came in at -3% m/m vs. 1% in January and imports came in at -9% m/m vs. 5% in January. Looking at the y/y rates, exports rose 12.2%, the slowest since April 2021, while imports fell -0.5%, the first contraction since February 2021. This supports our view that China reopening has yet to have a significant impact on regional trade and activity. Trade data from Korea, Taiwan, and Japan have been similarly soft.

Caixin reported firm March services and composite PMI readings. Services came in at 57.8 vs. 55.0 expected and actual in February, while the composite came in at 54.5 vs. 54.2 in February. Last week, official manufacturing came in at 51.9 vs. 51.6 expected and 52.6 in February while non-manufacturing came in at 58.2 vs. 55.0 expected and 56.3 in February. As a result, the official composite PMI rose to 57.0 vs. 56.4 in February. While there has been some pickup in domestic activity from reopening, it has yet to make a significant impact on regional trade and activity.

Reserve Bank of India delivered a dovish surprise and kept rates steady at 6.5% vs. an expected 25 bp hike. The decision was unanimous but the bank flagged risks of further tightening by keeping its bias towards “removal of accommodation.” Governor Das stressed “Our job is not yet finished and the war against inflation has to continue. The MPC will not hesitate to take further action as may be required in its future meetings.” Das said that Das the bank felt it necessary to evaluate the cumulative impact of 250 bp of tightening already seen, adding that the decision is a “pause, not a pivot.” The market says otherwise and is pricing in no more hikes and a potential easing cycle in the next 3-6 months. Lastly, Das said India’s banking system remains healthy but that the RBI will keep a close watch on banking sector turmoil in some developed countries.

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