Dollar Steady as Markets Square Up Ahead of Weekend

September 15, 2023
  • Strike action by the UAW began after the midnight deadline passed last night without a deal; it's way too early to try and estimated the potential economic costs of the strikes; retail sales remain firm; regional Fed manufacturing surveys for September will start rolling out; University of Michigan reports preliminary September consumer sentiment; Peru cut rates 25 bp to 7.5%, as expected
  • ECB delivered a dovish message; Madame Lagarde stayed on message; GC member Muller said further rate hikes are unlikely; we expect a similar message from the BOE next week
  • Reports suggest BOJ officials are concerned with how markets took Governor Ueda’s recent comments; New Zealand’s National Party pledged to follow through with its tax cut pledge if it wins the election; PBOC cut reserve requirements by 25 bp to 10.5%; China also reported firm August IP, retail sales, fixed asset investment, and property investment data

The dollar is hanging on to recent gains as markets square up ahead of the weekend. DXY is trading slightly lower near 105.277 after three straight up days took it the highest since March 9 near 105.435 yesterday. It is on track to test that month's high near 105.885 and break above that would set up a test of the November 30 high near 107.195. The euro is trading higher near $1.0660 but remains on track to eventually break below the May low near $1.0635 and test the March low near $1.0515 after the dovish ECB decision (see below). Sterling is trading flat near $1.2410 and remains on track to test the May low near $1.2310. Break below sets up a test of the March low near $1.1805. USD/JPY is trading higher near148 after BOJ officials pushed back against market reaction to Ueda comments (see below). The pair remains on track to test 150. We believe the fundamental story remains in favor of the greenback. Looking through the recent noise, the U.S. remains in a much stronger position than the other major economies such as the eurozone or the U.K. Indeed, the worsening outlook in Europe led the ECB to deliver a dovish message yesterday. Along with firm U.S. data, this would feed into further dollar strength.


Strike action by the UAW began after the midnight deadline passed last night without a deal. The UAW will initially strike at key plants of all three major U.S. auto companies at the same time, the first time this strategy has been attempted. Rather than calling for a full work stoppage, the UAW will target factories producing the highest profit margin models. Workers walked out at a Ford plant in Michigan that makes Bronco SUVs, a GM plant in Missouri that assembles Chevrolet Colorado pickups, and a Stellantis (formerly Chrysler) plant in Ohio that makes Jeep Wrangler SUVs. Of note, GM CEO Mary Barra made a last ditch proposal for a 20% pay raise over the contract period, up from the previous offer of 18% but far short of union demands for a 36% hike. Elsewhere, UAW rejected Ford CEO Jim Farley’s latest proposal, which included a 20% pay raise.

It's way too early to try and estimated the potential economic costs of the strikes. These costs will depend on both the breadth and the duration. The strikers could eventually target plants that make the profitable Ford F-150, Chevy Silverado, and Ram pickups. For now, the strikes are limited to three plants but are expected to widen out to others if a deal remains elusive. There are also risks that parts suppliers will eventually be hurt by the strikes if they drag on.

The strike comes during the BLS survey week containing the 12th of the month. However, our understanding is that because the striking workers were still on payroll when this week began, September jobs data should not be impacted. Initial claims for last week came in at 220k vs. 225k expected an a revised 217k (was 216k) last week, while the 4-week moving average fell to 225k vs. 229k last week and was the lowest since late February. Continuing claims came in at 1.688 mln vs. 1.690 mln expected and a revised 1.684 mln (was 1.679 mln) last week. The labor market remains tight and suggests another solid jobs report for September. There is no Bloomberg consensus yet but its whisper number is currently at 171k.

Recent data suggest a pause is warranted by the Fed next week. WIRP suggests only 5% odds of a hike September 20. More likely, we will see the next hike November 1. By that November meeting, we will get one more each of the jobs report, CPI, PPI, and retail sales as well as two PCE readings. If things go the way we expect for the U.S., the current 50% odds of a hike then are too low. There are no Fed speakers this week due to the media embargo.

Retail sales remain firm. Headline came in at 0.6% m/m vs. 0.1% expected and a revised 0.5% (was 0.7%) in July, while ex-autos came in at 0.6% m/m vs. 0.4% expected and a revised 0.7% (was 1.0%) in July. The so-called control group used for GDP calculations came in 0.1% m/m vs. -0.1% expected and a revised 0.7% (was 1.0% )in July. Due to high base effects from last year, the y/y rates slowed modestly. Bottom line: consumption has held up relatively well in recent months and is currently driving solid Q3 growth. The Atlanta Fed GDPNow model is now tracking 4.9% SAAR for Q3 after the data, down from 5.6% previously. This is still way above trend growth at a time when the Fed wants below trend growth. Next model update comes next Tuesday.

Regional Fed manufacturing surveys for September will start rolling out. Empire survey kicks things off today and is expected at -10.0 vs. -19.0 in August. August IP will also be reported today and is expected at 0.1% m/m vs. 1.0%. August import/export prices will also be reported.

University of Michigan reports preliminary September consumer sentiment. Headline is expected at 69.0 vs. 69.5 in August, with expectations expected to fall to 65.0 and current conditions expected to fall to 74.8. Both 1-year and 5- to 10-year inflation expectations are expected to remain steady at 3.5% and 3.0%, respectively.

Peru central bank cut rates 25 bp to 7.5%, as expected. Thus begins the easing cycle after the tightening cycle ended with the last 25 bp hike back in January. However, the bank stressed that “This decision doesn’t necessarily imply a cycle of successive reductions in the interest rate.” Nonetheless, Bloomberg consensus sees another 75 bp of easing in Q4 followed by another 75 bp each in Q1 and Q2, 50 bp in Q3, and 25 bp in Q4 that would see the policy rate end next year at 4.5%. Such an aggressive easing cycle would take a toll on the sol. July GDP proxy will be reported today and is expected at 0.0% y/y vs. -0.6% in June.


European Central Bank delivered a dovish message. It hiked rates 25 bp and said that “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” With regards to forward guidance, it said that “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.” As we expected, growth forecasts were revised up and inflation forecasts were revised down. We believe the growth forecasts are still way too optimistic.

Madame Lagarde stayed on message. Like last time, she was decidedly downbeat, warning that that growth will be “very, very sluggish.” Lagarde said that more tightening was needed “not because we want to force a recession, but because we want price stability.” She said the bank fielded a lot of data and analysis from the staff and that “some members didn’t draw the same conclusions” and would have preferred to pause. However, Lagarde stressed that a “solid majority” agreed with the decision to hike. To us, this was no surprise there's a split as that was evident last meeting too.

She offered little in the way of forward guidance. Lagarde said that she can’t say that rates have peaked but noted that rates at current levels will help deliver 2% inflation. She said the ECB did not discuss the durations rates will stay high but stressed several times that the bank sees current rates, if held long enough, are restrictive enough to get inflation back to target. Reading between the lines, we think the discussion at the ECB has shifted from how high to how long. We believe rates have indeed peaked but she can't actually say that.

Governing Council member Muller was more direct and said further rate hikes are unlikely. Specifically, he said “At yesterday’s ECB meeting, we decided to raise interest rates by another 0.25%, but we also made it clear that, to the best of our knowledge, no further interest-rate hikes are expected in the coming months.” Lagarde speaks again today, along with Villeroy. Despite the dovish message, the ECB did inject a bit of uncertainty. Before the decision, there were basically zero odds of a second hike. After the decision, odds of another hike top out near 40% in December and the first cut is still seen around mid-2024.

We expect a similar message from the Bank of England next week. Let’s face it, the U.K. is facing the same stagflation risks as the eurozone and policymakers are in the same bind. Tightening expectations have fallen sharply. WIRP suggests odds of a 25 bp hike are around 70%. For a time over the summer, a 50 bp hike was largely priced in and so the change is noteworthy. Odds of a second 25 bp hike are around 15% November 2 and then rise to top out near 35% February 1. However, the first cut is still not priced in until H2 2024. Mann speaks.


Reports suggest Bank of Japan officials are concerned with how markets took Governor Ueda’s recent comments. The yen weakened as a result and has given up all of its Ueda-related gains to close this week basically flat. Recall that the yen strengthened after Ueda said last weekend the bank might have enough data by year-end to know whether wages will continue to rise, adding that if the BOJ becomes confident that prices and wages will keep rising sustainably, ending negative interest rates is among the options available. BOJ officials feel that his comments indicated little change in the bank’s existing policy stance and we concur. As we pointed out earlier this week, Ueda did not say he thinks wages will rise enough to warrant tightening, just that the bank will know more by year-end. The unnamed BOJ officials also acknowledged that inflation remains high, which may lead to upward revisions in the inflation forecast at the October meeting.

New Zealand’s National Party pledged to follow through with its tax cut pledge if it wins the election. Nicola Willis, who would become Finance Minister in a government led by the National Party, said “If we didn’t deliver tax reduction, yes I would resign. We are making a commitment to the New Zealand people and we intend to keep it.” National plans to partially fund the tax cuts by once again allowing foreigners to buy houses worth more than NZD2 mln ($1.2 mln and applying a 15% tax to those purchases. Many believe this would be nowhere near enough to offset the tax cuts. The pledge to cut taxes is of course meant to help at the polls but seems irresponsible in light of the deteriorating fiscal outlook set forth recently be current Finance Minister Robertson.

PBOC cut reserve requirements by 25 bp to 10.5% effective today. This was the first cut since March and reports suggest it would boost liquidity in the market by CNY500 bln. The central bank kept its key 1-year MLF rate steady at 2.5%, as expected, but further cuts are likely in Q4 as policymakers continue to try and boost the economy.

China also reported firm August IP, retail sales, fixed asset investment, and property investment data today. IP came in at 4.5% y/y vs. 3.9% expected and 3.7% in July, while sales came in at 4.6% y/y vs. 3.0% expected and 2.5% in July. FAI came in a tick lower than expected at 3.2% YTD vs. 3.4% in July, while property investment came in a tick higher than expected at -8.8% YTD vs. -8.5% in July. We remain skeptical as to how much the economy can recover on stimulus that is merely pumping air back into a rapidly deflating bubble.

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