Dollar Flat Ahead of Key PMI Readings

February 28, 2023
  • Global yields are rising as the fight against inflation proves difficult; Fed Governor Jefferson rejected the idea of raising the inflation target; Chicago PMI will be the data highlight; regional Fed surveys for February will continue rolling out; Canada reports Q4 and December GDP data
  • Eurozone February CPI data have so far surprised to the upside; ECB tightening expectations are drifting higher; U.K. and E.U. finally reached a deal on the Norther Ireland Protocols but there is absolutely nothing to get bullish about; Hungary is expected to keep the base rate steady at 13.0%
  • Confirmation hearings for the BOJ Deputy Governors nominations suggest policy continuity; expected BOJ liftoff is not imminent; Japan reported January IP, retail sales, and housing starts; Australia reported solid economic data

The dollar continues to consolidate ahead of key PMI readings this week. DXY is trading flat near 104.65 after trading yesterday at a new high for this move near 105.359. We look for a test of the January 6 high near 105.631. The euro is flat near $1.06 after trading yesterday at a new low for this move today near $1.0535. We look for a test of the January 6 low near $1.0485. Sterling is trading higher near $1.21 on the back of positive Brexit news (see below) but we would fade this bounce as we look for cable to eventually test the January 6 low near $1.1840. USD/JPY traded at a new high for this move today near 136.85 as hearings for the BOJ Deputy Governor nominees signal caution about removing accommodation prematurely (see below). We look for a test of the December 20 high near 137.50, right before the BOJ shocked markets with its YCC tweak. To state the obvious, the recent U.S. data have come around to support our more hawkish view on the Fed, which in turn supports our call for a stronger dollar. Market sentiment is finally swinging back in the dollar’s favor and we remain hopeful that the data continue to encourage this shift.


Global yields are rising as the fight against inflation proves difficult. France and Spain are the latest countries to report higher than expected inflation (see below) and confirms our long-held notion that inflation is proving to be much stickier than expected and that central banks will have to go higher for longer. Clearly, it’s not just the Fed and so global monetary conditions will continue to tighten. Any notions of 2023 easing by the major central banks should be put to rest. Period. This means global yields should move higher and global equities lower. The FX implications are not as clear-cut since virtually everyone is still hiking, but we continue to feel that the U.S. economy still outshines the rest and so we remain dollar bulls. The U.S. simply has a better growth/inflation mix than the other major economies.

Fed tightening expectations remain elevated. WIRP suggests 25 bp hikes in March, May, and June are priced in that takes Fed Funds to 5.25-5.50%. Right now, odds are running over 30% of a fourth hike in July but this should rise if the data continue to run hot. Strangely enough, an easing cycle is still expected to begin in Q4, albeit at much lower odds. Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing. There are plenty of Fed speakers this week and we expect them to tilt heavily hawkish. Goolsbee speaks today.

Yesterday, Fed Governor Jefferson rejected the idea of raising the inflation target. He predicted that such a move could “lead people to suspect that the target could be changed opportunistically in the future. If so, then these reputational costs will undermine the key benefits of well-anchored longer-run inflation expectations discussed above: an increased ability of monetary policy to fight economic downturns without sacrificing price stability.” We whole-heartedly agree and we simply see no convincing reason to do raise the target when the Fed is struggling to get inflation down to 4%, much less 2%. Raising the target now would simply send a terrible signal to the markets and lead to a huge loss of Fed credibility, as Jefferson notes. To be clear, we don't think anyone at the Fed is seriously thinking about this. However, this is a debate that is ongoing in Brazil and we believe that it would be wrong the wrong move there as well.

Chicago PMI will be the data highlight. The headline is expected at 45.5 vs. 44.3 in January. If so, it would be the highest since October. ISM manufacturing PMI will be reported tomorrow and the headline is expected at 48.0 vs. 47.4 in January. Keep an eye on prices paid and employment, which stood at 44.5 and 50.6 in January, respectively. ISM services PMI will be reported Friday and the headline is expected at 54.5 vs. 55.1 in January. Keep an eye on prices paid and employment, which stood at 67.8 and 50.0 in January, respectively. Preliminary S&P Global PMI readings last week suggest potential for upside surprises this week. Manufacturing came in at 47.8 vs. 47.2 expected and 46.9 in January, services came in at 50.5 vs. 47.3 expected and 46.8 in January, and the composite PMI came in at 50.2 vs. 47.5 expected and 46.8 in January.

Regional Fed surveys for February will continue rolling out. Richmond Fed reports its manufacturing index and is expected at -5 vs. -11 in January. Dallas Fed also reports its services index today. Yesterday, Dallas Fed manufacturing index came in at -13.5 vs. -9.3 expected and -8.4 in January. The manufacturing sector is clearly slowing, as is the housing sector. However, the services sector has remained strong enough to keep the economy humming along. Indeed, the Atlanta Fed’s GDPNow model is currently tracking 2.8% SAAR growth in Q1, up from 2.7% previously. The next model update comes tomorrow.

Other minor data will be reported today. Wholesale and retail inventories, advance goods trade, December FHFA and S&P house price indices, and February Conference Board consumer confidence (108.5 expected) will all be reported. Consumer confidence will be closely watched for any signs of deterioration. For now, the strong labor market and solid wage gains are keeping consumption relatively firm.

Canada reports Q4 and December GDP data. Growth is expected at 2.7% y/y in December vs. 2.8% in November and at 1.6% SAAR in Q4 vs. 2.9% in Q3. The economy is clearly slowing a bit but the labor market remains red hot.

Bank of Canada expectations have picked up after the second straight blowout jobs report. If data continue to come in firm, the bank will find it harder and harder to justify its pause. No change is expected at the next meeting March 8 but WIRP suggests a final 25 bp hike to 4.75% is priced in for Q3.


Eurozone February CPI data have so far surprised to the upside. France and Spain reported today and both accelerated for the second straight month. French EU Harmonised CPI came in at 7.2% y/y vs. 7.0% expected and actual in January, while Spain’s came in 6.1% y/y vs. 5.7% expected and 5.9% in January. The data support our view that the global fight against inflation is far from over and that it is turning out to be more difficult than markets assumed. Germany reports tomorrow and its EU Harmonised CPI is expected to fall two ticks to 9.0% y/y. Italy reports Thursday and its EU Harmonised CPI is expected to fall to 9.5% y/y vs. 10.7% in January. Eurozone also reports Thursday. Headline is expected at 8.3% y/y vs. 8.6% in January while core is expected to remains steady at 5.3%. After today’s data, there are upside risks to all these upcoming readings.

ECB tightening expectations are drifting higher. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 50 bp hike May 4 is nearly 50% priced in. Another 25 bp hike June 15 is fully priced in, as is a 25 bp hike July 27. There are rising odds of one final 25 bp hike that come in near 75% for early 2024 that would result in a peak policy rate near 4.0%, up from 3.75% at the start of this week and 3.5% at the start of this month. Given the recent inflation readings, it appears that the hawks remain in the driver’s seat. Vujcic speaks today. Yesterday, he said that “As long as core persists at the levels we’re talking about and this is significantly higher than our rates are and significantly higher than where are target is, we should persevere.”

The U.K. and E.U. finally reached a deal on the Norther Ireland Protocols. This had been widely reported for weeks but markets reacted positively to the news. Now comes the hard part, as Prime Minister Sunak must get Parliament to approve the agreement. The government needs the support of the Democratic Unionist Party as well as Tory Brexiteers. If not, Sunak will have to count on support from opposition Labour. Sunak is in Belfast today as he begins his PR mission to drum up support from politicians and businesses in Northern Ireland. DUP leader Donaldson said he saw progress but some issues remain, adding that his party will “take time to study the legal text” before announcing its position. However, Donaldson will have to convince hardline members of his party, some of whom have already suggested that they wouldn’t support the deal. 

We suspect the deal will eventually be passed but there is absolutely nothing to get bullish about. The agreement simply avoids a potential trade war as the U.K. had threatened to unilaterally change the Brexit deal, which would trigger sanctions from the E.U. When all is said and done, the U.K. has still left the E.U. and will continue to pay the price economically for this choice. In recent months, we have gotten all sorts of studies that have quantified the huge negative impact of Brexit on U.K. productivity, growth, inflation, etc. Those costs aren’t going away after this deal.

National Bank of Hungary is expected to keep the base rate steady at 13.0%. The bank has kept the base rate unchanged since the last 125 bp hike back in late September. However, it tightened policy in mid-October when it introduced a new 1-day deposit rate at 18.0%, which is now the key policy rate. Inflation continues to run well above the 2-4% target. While the bank left rates steady at the last meeting January 25, it pledged to keep policy tight for a “prolonged period.” Deputy Governor Virag said then that “The key word is patience. We’ll certainly need to maintain the 18% interest rate level until a trend-like improvement in risk assessment.” January PPI will be reported tomorrow and is running near 35% y/y. With CPI inflation running above 25%, policy remains too loose and expectations for an easing cycle over the next 3 months are misguided.


Confirmation hearings for the Bank of Japan Deputy Governors nominations suggest policy continuity. Shinichi Uchida said that “I feel it would be more appropriate for a new leadership to take time, a broader angle and conduct a wide-ranging review.” Uchida seemed to play down the side effects of the bank’s policies by noting that “It’s true there are side effects and it’s easy to say we should make revisions to account for them. But if the effectiveness of easing is lost, the impact on the economy will be negative.” Elsewhere, Ryozo Himino said that “As someone who has been in financial administration for a long time, I do understand the impact of monetary easing on bank profits. But I think it’s more appropriate to choose creating an environment where wages can rise, by supporting the economy through easing.” All in all, these hearings and those for Governor-elect Ueda all point to continuity in terms of monetary policy. While the BOJ always has the propensity to deliver a surprise, all signs suggest that a more cautious approach to removing accommodation will be taken by the new leadership.

Indeed, expected BOJ liftoff is not imminent. Next BOJ policy meeting March 9-10 will be the last one under current Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests over 20% odds of liftoff April 28, rising to over 60% June 16 and then nearly 90% for July 28. That said, the actual tightening path is seen as very mild as the market is pricing in 20 bp of tightening over the next 12 months followed by only 30 bp more over the subsequent 24 months. That is why we expect the knee-jerk drop in USD/JPY after liftoff to be fairly limited. BOJ Governor-elect Ueda suggested no imminent policy shift in his confirmation hearings last week. Nakagawa speaks Wednesday and Takata speaks Thursday.

Japan reported January IP, retail sales, and housing starts. IP came in at -4.6% m/m vs. -2.9% expected and 0.3% in December, while sales came in at 1.9% m/m vs. 0.4% expected and 1.1% in December. The improvement in consumption and the deterioration in IP is consistent with trends we are seeing in other countries. The mixed nature of this recovery will support the BOJ’s cautious stance for now.

Australia reported firm January retail sales and private sector credit data. Sales came in at 1.9% m/m vs. 1.5% expected and a revised -4.0% (was -3.9%) in December, while credit came in at 0.4% m/m vs. 0.3% expected and actual in December. While consumption has cooled, it remains fairly resilient to RBA tightening and so more needs to be done. WIRP suggests over 80% odds of a 25 bp hike at the next meeting March 7, while the swaps market is pricing in a peak policy rate near 4.45% over the next 12 months followed by an easing cycle over the subsequent 12 months, highlighting the “higher for longer” theme.

Current account data were also reported. The surplus came in at AUD14.1 bln vs. AUD5.5 bln expected and a revised AUD800 mln (was -AUD2.3 bln) in Q3. Of note, the OECD forecasts the current account balance at -0.2% of GDP this year vs. 0.9% in 2022. If the surplus trend is maintained in Q1 and beyond, the OECD may have to revise its forecast to a modest surplus instead. Much will depend on China and its appetite for iron ore and coal from Australia.

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