Dollar Remains Soft Ahead of CPI Data

November 14, 2023
  • October inflation data take center stage; prepared remarks for Barr’s testimony today were released; October NFIB small business optimism was reported; House Speaker Johnson hopes to vote on his two-step plan; Chile central bank minutes will be released
  • November German ZEW survey was mixed; U.K. wage pressures remain elevated; Sweden reported mixed October CPI data
  • Australia may have to rethink its infrastructure spending plans due to labor shortages and cost overruns; the RBNZ is likely done hiking; reports suggest China plans to provide further support to its struggling housing sector

The dollar remains soft ahead of the CPI data. DXY is trading slightly lower for the third straight day near 105.565. The euro is trading higher near $1.0720 while sterling is trading higher near $1.2290. USD/JPY traded at a new cycle high near 151.90 yesterday but saw no follow though buying due to BOJ intervention concerns. With the dollar rally staling a bit, it will take some firm data to challenge the current dovish Fed narrative. If the data do remain firm as we expect, the Fed doves (and the market) will have to capitulate. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed may have to hike again and will not be able to cut rates as soon as the market thinks.


October inflation data take center stage. CPI will be reported today. Headline is expected at 3.3% y/y vs. 3.7% in September, while core is expected to remain steady at 4.1% y/y. Of note, the Cleveland Fed's Nowcast model suggests October headline at 3.3% y/y and core at 4.2% y/y followed by November headline at 3.2% y/y and core at 4.2% y/y. It’s hard for us to believe that the Fed will be happy with such elevated core readings. PPI will be reported Wednesday. Headline is expected at 1.9% y/y vs. 2.2% in September, while core is expected to remain steady at 2.7% y/y.

Fed tightening expectations remain subdued. WIRP suggests 15% odds of a hike December 13, rising modestly to around 30% January 31. We get plenty of Fed speakers but as we stressed before, it will come down to what the data say. Williams, Jefferson, Barr, and Goolsbee speak today.

Prepared remarks for Barr’s testimony today were released. The link to the full remarks can be found here. Vice Chair for Supervision Barr will tell the Senate Banking Committee that the banking sector remains resilient whilst stressing that the Fed has been “conducting targeted reviews at banks exhibiting higher interest rate and liquidity risk profiles and conducting focused training and outreach on supervisory expectations about these risks.” Barr added that the Fed is also “monitoring for potential credit deterioration, particularly within the consumer and CRE (commercial real estate) lending segments.” Barr’s testimony follows a Fed report last week highlighting potential losses for bank stemming from commercial real estate and high interest rates.

October NFIB small business optimism was reported. It came in two ticks higher than expected at 90.7 vs. 90.8 in September. It was the third straight drop to the lowest since May.

House Speaker Johnson hopes to vote on his two-step plan today. Over the weekend, Johnson unveiled an unusual plan that extends funding for some agencies until January 19 and others until February 2. The plan contains no supplemental funding, including aid for Israel and Ukraine. it’s not clear who this plan is meant to appeal to. At least eight Republican hardliners have already expressed opposition due to the lack of any spending cuts. House Minority Leader Jeffries remains non-committal, neither rejecting nor supporting Johnson’s plan. He will reportedly discuss with his caucus today. We suspect many Democrats may not support it due to the lack of any aid for Israel and Ukraine. Stay tuned.

Chile central bank minutes will be released. At the October 26 meeting, the bank delivered a hawkish surprise and cut rates 50 bp to 9.0% vs. 75 bp expected. Since then, the peso has gained over 2% vs. the dollar and inflation eased to 5.0% y/y, the lowest since August 2021. Next policy meeting is December 19. Another 50 bp cut seems likely but if the peso remains relatively firm, we think the bank will be tempted to go back to 75 bp.


November German ZEW survey was mixed. Expectations rose to 9.8 vs. 5.0 expected and -1.1 in October, while current situation fell to -79.8 vs. -77.0 expected and -79.9 in October. Expectations were the highest since March but current situation remains stuck at the cycle lows. ZEW official said that the readings “support the impression that the economic development in Germany has bottomed out. The heightened economic expectations are accompanied by significantly more optimistic outlooks for the German industrial sector and both domestic and foreign stock markets.” We remain skeptical of any meaningful upturn in the eurozone’s largest economy. Of note, final Q3 GDP data was unchanged at -0.1% q/q. Bloomberg consensus stands at 0.0% q/q for Q4 but we see downside risks. ECB tightening expectations remain subdued. WIRP sees no odds of a hike December 14. After that, only cuts are priced and the first one is nearly 65% priced in for April 11 and fully priced in for June 6. Lane and Villeroy speak today.

U.K. wage pressures remain elevated. Average weekly earnings for the three months ending in September came in at 7.9% y/y vs. 7.3% expected and a revised 8.2% (was 8.1%) the previous period. The ONS suspended the release of its Labour Force Survey due to falling response ratees and is still experimenting with the unemployment methodology. ONS will reportedly resume publishing the survey in December. In the meantime, the unemployment rate remained steady at 4.2% for the three months ending in September under the experimental methodology. Of note, Bank of England tightening expectations have evaporated. WIRP now suggests 10% odds of a hike December 14, rising modestly to top out near 20% February 1. The first cut is largely priced in for August 1. Dhingra and Pill speak later today.

Sweden reported mixed October CPI data. Headline came in a tick lower than expected at 6.5% y/y and was steady from September, CPIF came in two ticks lower than expected at 4.2% y/y vs. 4.0% in September, and CPIF ex-energy came in two tickers lower than expected at 6.1% y/y vs. 6.9% in September. Of note, CPIF accelerated for the first time since February and moved further away from the 2% target. At the last meeting September 21, the Riksbank hiked rates 25 bp to 4.0% and said rates could be raised further. With targeted CPIF inflation remaining stubbornly high, markets have taken the Riksbank at its word. WIRP suggests nearly 40% odds of a hike at the November 23 meeting but is fully priced in for February 1.


Australia may have to rethink its infrastructure spending plans due to labor shortages and cost overruns. An independent review warned that without significant changes, the government won’t be able to keep its infrastructure costs under control in the coming years. Infrastructure Minister Catherine King said she would response to the review in “coming days” but acknowledged that “If we continue as we currently are, we cannot commit to any new projects for the next ten years – until 2033.” The government has about AUD120 bln ($76 bln) of infrastructure projects in the pipeline. While some fiscal tightening probably wouldn’t hurt the RBA’s fight against inflation, it’s widely believed that Australia needs the infrastructure spending due to the needs of a growing population. As things stand, the RBA may have to hike further. WIRP suggests no odds of another hike December 5 but those odds rise over the course of H2 to top out near 60% in Q2 vs. 35% before last week’s hike.

On the other hand, the RBNZ is likely done hiking. Assistant Governor Karen Silk said that recent economic data show that high interest rates continue to cool demand and reduce inflationary pressures. She noted that “If you think back to the last decision in October, we were already seeing evidence of our policy settings reducing demand and inflationary pressure in the economy. And the more recent data we’ve seen since October has continued to support that trend, certainly in the more interest-rate sensitive sectors of the New Zealand economy.” WIRP suggests no odds of a hike November 29 but those odds rise modestly to top out near 10% February 28. Rate cuts are priced in for H2 2024.

Reports suggest China plans to provide further support to its struggling housing sector. Policymakers are likely to provide at least CNY1 trln ($137 bln) of low-cost financing to existing urban village renovation and affordable housing programs. The People’s Bank of China would reportedly inject funds in phases through policy banks that would in turn provide funding to households for home purchases, the people said, asking not to be identified discussing a private matter. Officials are considering options including the existing Pledged Supplemental Lending program as well as through special loans and could be seen as soon as this month. We just can’t get excited about a proposal to pump more air into a rapidly deflating bubble. October property sales and investment data will be reported tonight and are expected to show continued weakness.

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