Dollar Continues to Firm Ahead of Jobs Report

January 06, 2023
  • December jobs report will be the highlight; many indicators suggest the U.S. labor market remains firm; we will also get December ISM services PMI; Fed messaging remains hawkish; we continue to believe markets are underestimating the Fed; the U.S. House remains without a speaker; Canada also reports jobs data
  • December eurozone inflation data was decidedly mixed; ECB tightening expectations have fallen; Germany reported November retail sales and factory orders; U.K. reported weak December construction PMI; BOE tightening expectations have risen again
  • Japan reported weak November labor cash earnings; reports suggest the BOJ sees little need to make another adjustment to YCC; the market continues to test the BOJ’s commitment to YCC; report suggest China will soon roll back existing restrictions on property developers

The dollar is firm ahead of the jobs report. DXY is trading at the highest since December 7 near 105.519 and is on track to test that day’s high near 105.822. After that is the November 30 high near 107.195. The euro is trading at the lowest since December 8 just below $1.05 and a break below $1.0460 would set up test of the November 30 low near $1.0290. Sterling remains heavy and is trading at the lowest since November 22 and nearing the November 21 low near $1.1780. Looking farther out, a break below $1.1760 would set up a test of the November 9 low near $1.1335. USD/JPY is trading at the highest level since December 20 near 134.60 and is on track to test that day’s high near 137.50. We continue to believe that dollar weakness in late 2022 was overdone and we expect the greenback to claw back much of those losses in the coming weeks and months. we see room for Fed tightening expectations to move higher, especially after the strong message being sent by Fed officials and the FOMC minutes (see below). A strong jobs report today would certainly help this process.


The December jobs report will be the highlight. Consensus for NFP stands at 202k vs. 263k in November, while the unemployment rate is seen steady at 3.7% and average hourly earnings are seen down a tick to 5.0% y/y. Annual revisions to the household survey will be seen. Of note, the unemployment rate is derived from the household survey and it will be interesting to see if its -328k reading last month was an outlier or a harbinger of things to come for the establishment survey’s NFP. Yesterday, ADP’s private sector job estimate came in at 235k vs. 150k expected and a revised 182k (was 127k) in November. It's worth noting that ADP has undershot NFP every month since July.

Many indicators suggest the U.S. labor market remains firm. Weekly initial jobless claims came in at 204k vs. 225k expected and a revised 223k (was 225k) the previous week. This was the lowest since late September and dragged the 4-week moving average down to 214k, the lowest since mid-October. Despite more and more headlines of layoffs, it hasn’t shown up materially yet in the weekly claims, ADP, or NFP. Perhaps this is because outside of Twitter (4k), many of the layoffs announced haven't actually been implemented yet. Reports suggest Salesforce will cut an estimate 8k jobs and Amazon will cut 18k. In finance , Goldman Sachs will reportedly cut 4k jobs this month, while Morgan Stanley cut almost 2k last month. These are not huge numbers individually but they are starting to add up. That said, it appears that the bulk of the major layoffs so far have been concentrated in tech and finance, two sectors that were amongst the frothiest due to super-easy monetary policies.

We will also get December ISM services PMI. Headline is expected at 55.0 vs. 56.5 in November. Keep an eye on the components. Prices paid has fallen but not by as much as seen in the manufacturing PMI. Activity and employment will also help determine whether the economy went into 2023 with much momentum. Recent data suggest the U.S. economy remains relatively firm. The Atlanta Fed’s GDPNow model is tracking 3.8% SAAR growth in Q4, down from 3.9% previously. The next model update will come next Tuesday. Of note, Bloomberg consensus sees SAAR growth slowing from 3.2% in Q3 to 1.1% in Q4 and 0.1% in Q1, which seems too low in light of recent data. November factory orders will also be reported and are expected at -1.0% m/m vs. 1.0% in October.

Fed messaging remains hawkish. Yesterday, George said “I have raised my forecast over 5%. I see staying there for some time, again, until we get the signals that inflation is really convincingly starting to fall back toward our 2% goal.” Of note, this comes after Kashkari said earlier this week that he wants to hike rates to 5.4% and then pausing, adding “Any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher.” Lastly, Bullard said “The policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer.” George and Bullard are no longer voters this year but Kashkari is. The December FOMC minutes made clear that the Fed does not want markets to doubt its commitment to lowering inflation. The Fed communication this week is clearly an effort to prevent financial conditions from loosening.

We continue to believe markets are underestimating the Fed. WIRP suggests a 25 bp hike February 1 is fully priced in, with nearly 50% odds of a larger 50 bp move. Another 25 bp hike March 22 is fully priced in, while one last 25 bp hike in Q2 is nearly 85% priced in that would take the Fed Funds rate ceiling up to 5.25%. However, the swaps market continues to price in an easing cycle by year-end and we just don’t see that happening. Barkin, Cook, George, and Bostic all speak today.

The U.S. House remains without a speaker. Despite making many concessions that would weaken the post, McCarthy failed to win the House speakership in the eleventh round of voting. There are still 20 Republican opposed. Of note, Pelosi said Democrats won't make a deal to help elect McCarthy. The last time it took more than one round of voting to choose a speaker was 1923, when it took 9 rounds to elect Frederick Gillett (R-Mass). McCarthy has now eclipsed that number and moves towards the next longest process that took place in 1859 with 44 rounds of voting. Nothing can be done legislatively until a speaker is in place. For now, markets are giving a collective shrug but at what point does a dysfunctional legislative branch start to weigh on U.S. assets? To be continued.

Canada also reports jobs data. Consensus sees 5.0k jobs added vs. 10.1k jobs in November, while the unemployment rate is seen rising a tick to 5.2%. December Ivey PMI will also be reported. Bank of Canada tightening expectations remain subdued. WIRP suggests nearly 75% odds of a 25 bp hike to 4.5% January 25, followed by around 65% odds of another 25 bp hike by mid-year.


December eurozone inflation data was decidedly mixed. Headline inflation came in at 9.2% y/y vs. 9.5% expected and 10.1% in November and was the lowest since August. However, core came in at 5.2% y/y vs. 5.1% expected and 5.0% in November and was a new all-time high. This mixed bag certainly complicates the ECB’s decision-making. While it targets only headline inflation, the bank must be concerned about the continued rise in core inflation. Still, the CPI report weighed on the euro. The euro is trading at the lowest since December 8 just below $1.05 and a break below $1.0460 would set up test of the November 30 low near $1.0290.

ECB tightening expectations have fallen. WIRP suggests a 50 bp hike February 2 is almost fully priced in, followed by 75% odds of another 50 bp hike March 16. A 25 bp hike May 4 is priced in, as is a last 25 bp hike in Q3 that would see the deposit rate peak near 3.5% vs. 3.75% last week. If inflation continues to slow, the expected peak rate is likely to move closer to 3.25% and perhaps even to 3.0%, which is where it stood back in mid-December. Yesterday, noted dove Villeroy said that the bank should be done with its tightening cycle by the summer. Echoing Fed Chair Powell, Villeroy stressed that “The sprint of rate increases in 2022 becomes more of a long-distance race, and the duration will count at least as much as the level.” Centeno and Lane speak today.

Germany reported November retail sales and factory orders. Sales came in at 1.1% m/m vs. 1.5% expected and -2.8% in October, while orders came in at -5.3% m/m vs. -0.5% expected and 0.8% in October. Both y/y rates remain deeply negative. IP will be reported Monday and is expected at 0.2% m/m vs. -0.1% in October. With Germany’s second largest trading partner China struggling with the pandemic, today’s data confirm our view that the recent bounce in the survey readings is unlikely to translate into strength in the real sector data. Of note, eurozone-wide retail sales came in at 0.8% m/m vs. 0.6% expected and a revised -1.5% (was -1.8%) in October.

U.K. reported weak December construction PMI. It fell to 48.8 vs. 50.4 in November, the lowest since May 2020 and joining all the other PMIs in contractionary territory. We continue to downplay the recent modest improvement in the U.K. sentiment indicators, especially as the ongoing rail, air, and border control strikes all but guarantee weaker January PMI readings. With both fiscal and monetary tightening in the pipeline, it’s hard to see where growth will come from over the near-term.

BOE tightening expectations have risen again. WIRP suggests 75% odds of a 50 bp hike February 2, while a 25 bp hike March 23 is now priced in rather than 50 bp previously. After that, a 25 bp hike is priced in May 11 followed by nearly 80% odds of final 25 bp hike in Q3 that would see the bank rate peak near 4.75% vs.4.5% earlier this week. Yet sterling remains heavy and is trading at the lowest since November 22 and nearing the November 21 low near $1.1780. Looking farther out, a break below $1.1760 would set up a test of the November 9 low near $1.1335.


Japan reported weak November labor cash earnings. Nominal earnings came in at a meager 0.5% y/y vs. 1.7% expected and 1.4% in October, while real earnings plunged -3.8% y/y vs. -2.8% expected and -2.9% in October. This was the worst reading for real earnings since 2014. Last week, Japan reported mixed labor market and retail sales data. The unemployment rate fell a tick to 2.5% but sales came in at -1.1% m/m vs. 0.2% expected and 0.3% in October. This suggests that despite the firm labor market, the ongoing erosion in real earnings is taking a toll on consumption and will likely continue to do so in 2023.

Reports suggest the Bank of Japan sees little need to make another adjustment to Yield Curve Control. Bank officials feels that the bank should wait to see the impact of last month’s tweak to the target band for the 10-year JGB yield. They added that price pressures are stronger now than they were back in October, when the last Outlook Report was published. However, they warned that the bank is not yet confident about sustainably achieving its 2% inflation target. These comments suggest there will be 1) no change in policy at the January 17-18 meeting and 2) revisions higher in the inflation forecasts in the Outlook Report for that meeting. This would confirm recent reports that the BOJ will raise its FY23 forecast to between 1.6-2.0% and its FY24 forecast to almost 2%.

BOJ tightening expectations remain elevated. WIRP suggests nearly 30% odds of liftoff at the March 9-10 meeting and is almost priced in at the April 27-28 meeting. We believe liftoff is likely to come earlier than we previously anticipated, with risks of a move in Q2 vs. H2 seen previously. After this month’s meeting, the next ones are March 9-10, April 27-28, and June 15-16. Given Kuroda’s penchant for surprises, we cannot rule anything out right now and even Q1 is possible. Yet the BOJ has said that not only must inflation be sustainably at the 2% target, but that wages have to rise more in order to justify tightening policy. We aren’t seeing that yet in wages and so the picture remains complicated.

The market continues to test the BOJ’s commitment to Yield Curve Control. After the new 10-year JGB was sold this week at an average yield of 0.50%, it continues to trade at that new upper limit under YCC. As a result, the BOJ had to buy an additional JPY300 bln of 5- to 10-year notes in addition to its scheduled purchases that include JPY1.23 trln of 5-year or less JGBs and JPY300 bln of 10- to 25-year bonds. It’s really hard to see how the recent tweak to YCC has improved market functioning, which was the bank’s stated goal. Instead, the BOJ has had to intervene even more to maintain YCC. It seems only a matter of time before YCC is adjusted again or even dropped.

Report suggest China will soon roll back existing restrictions on property developers. After stringent restrictions led to a collapse in the property sector, policymakers will reportedly allow some developers to increase their leverage by easing borrowing limits, and will also push back the grace period for meeting debt targets that have been set by the government. While this would be seen as a short-run positive, it’s hard for us to get excited about the government resorting once again to pumping money into a sector that remains over-extended. Imbalances remain and are likely to grow again as policymakers go back to default stance of simply putting more air back into the bubble rather than allowing it to deflate.

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