Dollar Consolidates Ahead of ECB Decision

September 09, 2021
  • The Fed Beige Book report painted a fairly upbeat picture for the September 21-22 FOMC meeting; speakers this week suggest the Fed is looking through the August jobs miss; July JOLTS job opening are worth discussing; weekly claims data should show continued improvement in the labor market; BOC delivered a dovish hold, as expected; Peru is expected to hike rates 25 bp to 0.75%
  • The ECB decision is due out shortly and no change is expected; new macro forecasts will be unveiled; the euro is a mixed bag on ECB decision days; Germany reported trade and current account data
  • Prime Minister Suga extended the state of emergency to September 30; Chinese regulators are once again pushing restrictions on tech companies; China CPI decelerated to 0.8% y/y in August vs. 1.0% expected; Malaysia kept rates steady at 1.75%, as most had expected

The dollar is soft ahead of the ECB decision (see below). DXY is down today near 92.555 after two straight up days took it up to a high near 92.862. The euro is up modestly near $1.1835 after finding some support near $1.18, while sterling is trading back above $1.38 after finding some support near $1.3725. USD/JPY feels heavy and is trading back below 110 today after being unable to break above 110.50 yesterday. The Nikkei snapped an 8-day uptrend on Thursday as tech shares across the APAC region dragged indexes lower. Japan’s benchmark closed -0.6%, while the Hang Seng (-2%) and Kospi (-1.5%) suffered heavier losses as more regulations on the gaming sector were announced in China.


The Fed Beige Book report painted a fairly upbeat picture for the September 21-22 FOMC meeting. It was prepared by the New York Fed based on information gathered on or before August 30. The report noted that growth had “downshifted slightly” to a moderate pace and cited the delta variant as a reason for this deceleration due to a pullback in dining out, travel, and tourism. However, the Fed noted that other sectors where growth slowed “were constrained by supply disruptions and labor shortages, as opposed to softening demand.” All districts continued to report rising employment at paces ranging from “slight to strong.” Demand for workers continued to strengthen but this was not being met due to “extensive labor shortages.” This led to a number of districts reporting an acceleration in wages. With regards to prices, some districts reported that businesses are finding it easier to pass on cost increases through higher prices, with several indicated that firms anticipate “significant hikes” in selling prices in the coming months.

Speakers this week suggest the Fed is looking through the August jobs miss. Yesterday, Williams said that it “could be appropriate” to begin tapering before year-end. He added that “I will be carefully assessing the incoming data on the labor market and what it means for the economic outlook, as well as assessing risks such as the effects of the delta variant.” Bullard was even more forceful, noting that the Fed should press ahead with tapering despite the weak August jobs report. He said the labor market looks “very strong” and that another reason to taper is the “incipient housing bubble.” Daly, Evans, Bowman, and Williams all speak today. Between the Beige Book and the Fed speakers, it seems that the Fed will not be deterred from tapering this year. The only question is one of timing.

July JOLTS job openings  are worth discussing. Openings rose to 10.93 mln vs. 10.049 mln expected and a revised 10.185 mln (was 10.073 mln) in June. This is a new record high dating back to 2000 and supports the notion that recent weak jobs creation is a supply issue, not a demand issue. Of course, there are always skill mismatches but job openings are now about 2.2 mln greater than unemployed. This is the largest excess for the JOLTS data going back to December 2000. Wages have to go higher to clear this imbalance.

The hawks at the Fed will most likely focus on the outsized 4.3% y/y gain in average hourly earnings in August. These readings have been distorted this past year due to the pandemic but appear to be normalizing. We note that pre-pandemic readings were in the 3.0-3.5% range. How can wages be going up so much if the labor market weren’t tightening? We have been warning that wages would have to go up to attract more workers back to work and that seems to be playing out. If there were to be any one reason for the Fed to go ahead with a tapering announcement in September, it would be strong wage growth.

Weekly claims data should show continued improvement. Initial claims are expected at 335k vs. 340k the previous week, while continuing claims are expected at 2.73 mln vs. 2.748 mln the previous week. If so, both would continue to make new pandemic lows. This week brings an end to the emergency unemployment benefits, though some states have already eliminated them.

Bank of Canada delivered a dovish hold, as expected. Rates and the current QE pace were maintained even as the bank reiterated that the recent inflation spike is transitory. The bank added that future changes to QE will be guided by the economic recovery, with growth expected to pick up in H2 after the shock Q2 contraction. All of this was pretty much as expected, though the comment about future changes to QE suggests that the next round of tapering could be delayed if the economy remains weak in H2. It just tapered at the last meeting in July and most expect the next round in Q4. Of note, August Ivey PMI came in strong yesterday at 66.0 vs. 56.4 in July.

Peru central bank is expected to hike rates 25 bp to 0.75%. The bank started the tightening cycle with a 25 bp hike to 0.50% August 12. However, it said that expansionary policy is still needed as it sees the economy as running “below potential.” That said, CPI rose a whopping 4.95% in August vs. 3.81% in July, the highest since February 2009 and further above the 1-3% target range. The bank sees this spike as temporary, with inflation to return to target within 12 months. However, it is likely to deliver another hike this week to establish its credibility.


The European Central Bank decision is due out shortly and no change is expected. The debate is likely to be contentious, as higher inflation prints have emboldened the ECB hawks to become more vocal. We think it would be bad optics to pare back the accelerated pace of purchases at the meeting right after the ECB just pledged to extend easy monetary policy under its new framework. As such, we see no change to any of the policy settings. Any decisions on PEPP will likely be pushed back until the December 16 meeting.

Many of the hawks point to still-favorable financing conditions as justification to slow the pace of PEPP. Knot and Holzmann continued to sound hawkish in comments today. On the other hand, the doves are pushing back with the notion that the jump in inflation is temporary. Of course, the divide is a north-south one, with Germany, Austria, and the Netherlands all lining up on the hawkish side. The ECB meeting will be lively but we think the doves led by Lagarde remain in controll.

New macro forecasts will be unveiled. The June macro forecasts saw inflation at 1.5% in 2022 and 1.4% in 2023, which is the end of its current forecast horizon. Given the ongoing prolonged spike in inflation, we expect these forecasts could be nudged up modestly. However, that shouldn’t change the basic message under the new criteria that a hike is highly unlikely before 2024 and perhaps even 2025. 2024 will be added to the forecast horizon at the December 16 meeting and this will be another element of the new forward guidance.

The euro is a mixed bag on ECB decision days. It has weakened the past three but prior to that, it had strengthened three straight decision days. As the hawkish ECB chorus has risen, so too has the euro. We think a strong euro is the last thing policymakers want or need right now and so Madame Lagarde may serve a little warning to the markets at her press conference.

Germany reported trade and current account data. Exports rose 0.5% m/m vs. 0.1% expected, while imports contracted -3.8% m/m vs. an expected gain of 0.1%. As a result, the trade surplus came in higher than expected at EUR18.1 bln, up from EUR16.2 bln in June. The current account surplus narrowed, however, coming in at EUR17.6 bln vs. EUR22.6 bln in June.


Prime Minister Suga extended the state of emergency to September 30. Much of the nation is currently in lockdown due to high virus numbers. Nearly 20 prefectures will be impacted, including Tokyo and Osaka. The extension comes even as the government hopes to ease the restrictions in the coming weeks, with Suga saying that the government would use vaccination certificates and testing to help ease restrictions and help normalize economic activity. Economy Minister Nishimura told an advisory panel that “If the number of new infections continues to fall at the current rate and we bolster the health care system, the strains on medical care are expected to ease greatly by the end of the month.” Stay tuned.  Meanwhile, Japan reported August machine tool orders. Orders rose 86.2% y/y vs. 93.4% in July. So far in Q3, the economy has held up better than expected but the state of emergency may stretch into Q4 if the virus numbers don’t improve soon.

Chinese regulators are once again pushing restrictions on tech companies, with the latest round focused on the gaming industry. Their purported intention is reducing risk of addiction, especially relating to minors, and cutting violent content. All this seems like an ostensibly laudable objective. The problem, of course, is the context of the crackdown across the tech industry and the increasing interference of the state in the private sector. Not surprisingly, tech shares in China took another hit after having recovered some of their losses over the last few weeks. Tencent, for example, is down 7.6%.

On the data front, China CPI decelerated to 0.8% y/y in August vs. 1.0% expected. The latest wave of the pandemic took its toll on the consumer side, which is not a surprise, along with lower food prices. Producers prices, however, remain very elevated, highlighting the divergence between the two series. PPI surprised on the upside at 9.5% y/y, driven in large part by a strong rise in mining prices (41.8% y/y). All in all, we don’t think inflation is a major concern for Chinese policymaker at the moment. However, markets should be wary of the pass-through from higher mainland PPI as that may pass through into DM price pressures through the global supply chains.

Malaysia’s central bank kept rates steady at 1.75%, as most had expected. It noted that “Moving forward, the further easing of containment measures, rapid progress of the domestic vaccination program and continued expansion in global demand will support the growth momentum going into 2022.” Downside risk to growth and inflation are still a clear and present danger with the Delta variant, leading to sharp downgrades to growth forecasts, but it shouldn’t be enough to push them towards an easing bias. The vaccination effort has been picking up speed and the infection numbers are improving. Malaysia’s rates are still comparatively accommodative, well below those of Philippines (2.0%), Indonesia (3.5%) and India (4.0%). There was no reaction in local asset prices with MYR unchanged on the day.

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