Dollar Soft Ahead of Jobs Report

July 07, 2023

Win Thin

The data highlight will be the June jobs report; Fed tightening expectations continue to rise; the latest round of data support our view that the U.S. economy remains fairly robust; Canada highlight will also be June jobs data; BOC tightening expectations have picked up slightly ahead of next week’s meeting
Germany reported weak May IP; BOE tightening expectations remain elevated ahead of Mann’s speech; Hungary reported June CPI
Japan reported firm May cash earnings data; Taiwan reported weak June trade data

The dollar is soft ahead of the jobs report. DXY is trading slightly lower for the second straight day near 103.045 after three straight up days. Both U.S. yields and the dollar are off yesterday’s post-ISM highs. Odds of a second Fed hike are still around 50% so we’re not sure what's behind the weakness beyond some profit-taking ahead of today’s data. The euro is trading flat just below $1.09 while sterling is trading higher near $1.2765. USD/JPY remains heavy after being unable to break above 145 and is currently trading at the lowest since late June just above 143. With markets now starting to increasingly price in that second Fed hike this year (see below), 2-year differentials continue to move in the dollar’s direction and further gains are likely. Jobs data this today will be key to this repricing and we would use current dollar softness as an opportunity to go long at better levels.

AMERICAS

The data highlight will be the June jobs report. Consensus for NFP is currently 230k vs. 339k in May but the Bloomberg whisper number crept higher to 275k as the recent data suggest the labor market remains robust. The unemployment rate is expected to fall a tick to 3.6%, while average hourly earnings are expected to fall a tick to 4.2% y/y. Ahead of the jobs report, ADP reported its private sector jobs estimate at 497k vs. 240k expected and a revised 267k (was 278k) in May. It’s worth noting that NFP has outperformed ADP for 3 straight months, 4 of the past 5, 9 of the past 11, and 14 of the past 17 months. That said, it's going to be very hard for NFP to top 497k so late in the business cycle and yet stranger things have happened.

Other labor market data came in firm yesterday. May JOLTS job openings came in at 9.824 mln vs. 9.9 mln expected and a revised 10.32 mln (was 10.1 mln) in April. June Challenger job cuts slowed to 25.2% y/y and the level was the lowest since October. Lastly, initial jobless claims came in at 248k vs. 245k expected and a revised 236k (was 239k) last week. Continuing claims came in at 1.72 mln vs. 1.737 mln expected and a revised 1.733 mln (was 1.742 mln) last week. This was the lowest since mid-February.

Fed tightening expectations continue to rise. A 25 bp hike in July is nearly priced in while the odds of another 25 bp hike after that have risen to nearly 50%. If the U.S. data continue to come in strong, those odds should rise further. Indeed, strong data this summer could bring a third hike into play. Regardless, the first Fed cut has been pushed out to next July rather than June. Simply put, the market is finally starting to believe the Fed’s “higher for longer” message. The jobs data today and inflation data next week will be key for an extended dollar rally. Yesterday, Logan said a more restrictive Fed policy is needed to reach its goals. She added that she sees no sign of any abrupt worsening in labor market conditions and that tighter credit is due to tighter policy and not bank stresses. Lastly, Logan said she remains skeptical of large scale consequences of the lags in monetary policy. Full speed ahead for Logan, it seems.

June ISM services PMI came in firm. Headline came in at 53.9 vs. 51.2 expected and 50.3 in May and was the highest since February. Employment rose to 53.1 vs. 49.2 in May and activity rose to 59.2 vs. 51.5 in May. Prices paid fell to 54.1 vs. 56.2 in May and was the lowest since March 2020. This was a strong headline number backed up by strong details and so increases the odds even more of a strong jobs report today.

The latest round of data support our view that the U.S. economy remains fairly robust. Of note, the Atlanta Fed's GDPNow model is currently tracking 2.1% SAAR for Q2, up from 1.9% previously. Next model update comes next Monday. It’s worth noting that after the upward revision in Q1 GDP growth to 2.0% SAAR, the economy has grown four straight quarters at or above trend at a time when the Fed wants below trend growth to bring down inflation.

Canada highlight will also be June jobs data. Consensus sees 20.0k jobs created vs. -17.3k in May, with the unemployment rate expected to rise a tick to 5.3%. Canada’s economy also remains resilient despite past BOC tightening. June Ivey PMI will also be reported today.

Bank of Canada tightening expectations have picked up slightly ahead of next week’s meeting. A majority of analysts polled by Bloomberg see a 25 bp hike while WIRP suggests odds of a hike are around 70%. It will really depend largely on today’s jobs data. Looking ahead, a hike is still fully priced in for September 6 while the odds of another 25 bp hike after that top out near 50% in Q4.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak May IP. It came in at -0.2% m/m vs. 0.0% expected and 0.3% in April, while the y/y rate came in at 0.7% vs. 0.5% expected and a revised 1.7% (was 1.6%) in April. Eurozone IP will be reported next Thursday and is expected at 0.3% m/m vs. 1.0% in April. Germany has been the weak link in the eurozone but others are quickly being dragged down as well. That said, Italy reported May retail sales at 0.7% m/m vs. -0.2% expected and 0.2% in April.

ECB tightening expectations remain steady. WIRP suggests a 25 bp hike is priced in for July 27. Odds of another 25 bp hike stand near 60% September 14 but becomes priced in for October 26. After that, odds of one last hike top out near 25% in January. This is noteworthy as it appears the market believes the doves even though core inflation remains uncomfortably high. Indeed, Guindos said today that “While underlying price pressures remain strong, most indicators have started to show some signs of softening “ and added that “the range of measures of underlying inflation recently began to narrow. This suggests that the unusually high level of uncertainty around the downward trajectory of inflation over the medium term has started to ease somewhat.” Nagel and Lagarde speak later today and are likely to offer a more hawkish take.

BOE tightening expectations remain elevated ahead of Mann’s speech. Mann has emerged as the leading hawk on the MPC and so expect some hawkish comments to emerge. As it is, WIRP suggests a 50 bp hike is largely priced August 3, as is another 50 bp hike September 21. After that, 25 bp hikes are seen November 2 and December 14 that would see the bank rate peak near 6.5% vs. 6.25% at the start of this week. Odds of another 25 bp hike in 2024 top out near 20% in March but even without that, this rate path would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude. Yet the benefits to sterling are starting to wane as recession becomes very likely after some optimism earlier this year that a downturn could be avoided. Updated macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop.

Hungary reported June CPI. Headline came in as expected at 20.1% vs. 21.5% in May. This was the lowest since August 2022 but still well above the 2-4% target range. Yet the central bank was the first in EM to start an easing cycle and has cut its key 1-day deposit rate by 100 bp twice. Next policy meeting is July 25 and further easing seems likely. The swaps market is pricing in cuts in the base rate totaling 125 bp over the next three months, followed by another 200 bp over the subsequent three months. This would most likely be accompanied by similar cuts in the 1-day deposit rate and strikes us as way too aggressive given how stubbornly high inflation remains. Such an aggressive rate path would likely weigh further on the forint, which in turn would push up imported inflation. Note that the forint was the fourth best performing EM currency in H1 but recent weakness stemming from premature easing has made it the worst performer so far in H2.

ASIA

Japan reported firm May cash earnings data. Nominal earnings came in at 2.5% y/y vs. 1.2% expected and 0.8% in April, while real earnings came in at -1.2% y/y vs. -2.7% expected and -3.2% in April. While the improvement is welcome, it falls far short of the sort of real wage growth that the Bank of Japan wants to see before it eventually removes accommodation. Elsewhere, May household spending came in at -4.0% y/y vs. -2.5% expected and -4.4% in April. Consumption in particular is very vulnerable due to falling real wages. WIRP suggests little odds of liftoff by year-end.

Taiwan reported weak June trade data. Exports came in at -23.4% y/y vs. -13.5% expected and -14.1% in May, while imports came in at -29.9% y/y vs. -15.7% expected and -21.7% in May. Both are new lows for this cycle and the export orders data suggest no relief to shipments over the next six months. This is something that is plaguing all the regional exporters as the boost from China reopening has proven to be a dud.

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