Dollar Flat Ahead of Record 2-year Note Auction

April 23, 2024

Win Thin

U.S. yields remain elevated ahead of heavy supply; highlight will be S&P Global preliminary April PMIs; regional Fed surveys for April will continue to roll out
Eurozone and U.K. reported firm preliminary April PMIs; there was no new policy guidance from ECB Vice President Guindos; Hungary is expected to cut rates 50 bp to 7.75%.
BOJ Governor Ueda stuck to the script; Japan and Australia reported firm preliminary April PMIs

The dollar is trading flat ahead of a record 2-year note auction. DXY is trading flat near 106.087 but remains on track to test the November 1 high near 107.113. The euro is trading flat near $1.0660 after trading as high as $1.07 earlier on stronger than expected PMIs (see below). Elsewhere, sterling is also trading flat near $1.2355 while USD/JPY traded at a marginal new high near 154.85 today, helped by dovish Ueda comments (see below). The dollar rally should continue as data confirm persistent inflation and robust growth in the U.S. This backdrop along with upcoming heavy UST supply (see below) should keep upward pressure on U.S. yields, which would be positive for the dollar. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

U.S. yields remain elevated ahead of heavy supply. The 2-year yield is trading at 4.99% and on track to test the October high near 5.26%, while the 10-year yield is trading near 4.61% and on track to test the October high near 5.02%. Heavy supply could help push yields higher. Treasury auctions a total of $183 bln in 2-, 5-, and 7-year notes this week. The first leg is today with $69 bln of 2-year notes to be auctioned. Bid/cover ratio was 2.62 at the previous auction, while indirect bidders took 65.8%. The auctions continue tomorrow with $70 bln of 5-year notes and end Thursday with $44 bln of 7-year notes.

The Fed media blackout went into effect at midnight Friday. The market often softens its Fed expectations during this quiet period. However, the Fed has been sending a consistently hawkish message in recent weeks and markets would do well not to forget that. Odds of a June cut have fallen to 15%, while odds of a July cut have fallen to 45%. Even a September cut is not fully priced in, with odds falling to 85%.

Highlight will be S&P Global preliminary April PMIs. Manufacturing is expected at 52.0 vs. 51.9 in March, services is expected at 52.0 vs. 51.7 in March, and the composite is expected at 52.0 vs. 52.1 in March. The more widely watched ISM PMIs won’t be reported until next week. March new home sales will also be reported and are expected at 1.1% m/m vs. -0.3% in February.

Regional Fed surveys for April will continue to roll out. Philly Fed non-manufacturing will be reported today, along with Richmond Fed’s manufacturing and services readings. Kansas City manufacturing will be reported Thursday, followed by Kansas City services Friday.

Chicago Fed reported its March National Activity Index. Headline came in at 0.15 vs. 0.07 expected and a revised 0.09 (was 0.05) in January. Recall that a positive reading means the economy is growing above trend. Q1 GDP data out Thursday should confirm this, with growth expected at 2.5% SAAR. Elsewhere, the 3-month moving average rose to -0.19 vs. a revised -0.28 (was -0.18) in January and moves further above the -0.7 threshold that signals recession.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported firm preliminary April PMIs. Headline manufacturing came in at 45.6 vs. 46.5 expected and 46.1 in March, services came in at 52.9 vs. 51.8 expected and 51.5 in March, and the composite came in at 51.4 vs. 50.7 expected and 50.3 in March. This was the highest composite reading since May 2023. Looking at the country breakdown, the German composite came in at 50.5 vs. 48.5 expected and 47.7 in March and was the first reading above 50 since June 2023. Elsewhere, the French composite came in at 49.9 vs. 48.8 expected and 48.3 in March. Italy and Spain will be reported with the final April readings due out in early May.

There was no new policy guidance from ECB Vice President Guindos. He said, “If things move in the same direction as they have in recent weeks, we will loosen our restrictive monetary policy stance in June.” However, Guindos added that “As for what happens afterwards, I’m inclined to be very cautious.” Most ECB officials have signaled that the first cut will come in June. After that, there isn’t much agreement, as Guindos clearly illustrates. Panetta and Nagel speak today.

U.K. reported preliminary April PMIs. Manufacturing came in at 48.7 vs. 50.4 expected and 50.3 in March, services came in at 54.9 vs. 53.0 expected and 53.1 in March, and the composite came in at 54.0 vs.52.6 expected and 52.8 in March. This was the highest composite reading since May 2023. Bank of England is expected to cut rates August 1. Haskel and Pill speak today.

National Bank of Hungary is expected to cut rates 50 bp to 7.75%. At the last meeting March 26, the bank cut rates 75 bp to 8.25% and Deputy Governor Virag said “in the second quarter, the rate-cut pace will slow”, adding that market expectations for a policy rate of 6.5-7.0% by mid-year were “realistic.” This would imply another 50 bp of cuts at the May and June policy meetings, bringing the policy rate to 6.75% by mid-year. However, ongoing forint weakness will make such easing difficult and the market sees the rate then at 7.5%.

ASIA

Bank of Japan Governor Ueda stuck to the script. He noted that it was “appropriate to keep easy monetary conditions for now as underlying inflation is still below 2%” but cautioned “if the price trend rises toward 2% in line with our outlook…it will mean raising the short-term interest rate.” Elsewhere, Finance Minister Suzuki delivered the usual does of verbal intervention on the yen and warned “I think it’s fair to assume that the environment for taking appropriate action on forex is in place, though I won’t say what the action is.” The BOJ meets this Thursday and Friday is widely expected to keep policy steady. However, the BOJ may raise its FY24 core inflation forecast; how much it’s raised will send some policy signals.

Japan reported preliminary April PMIs. Manufacturing came in at 49.9 vs. 48.2 in March, services came in at 54.6 vs. 54.1 in March, and the composite came in at 52.6 vs. 51.7 in March. The was the highest composite reading since August but we believe the upward momentum will be hard to sustain.

Australia reported preliminary April PMIs. Manufacturing came in at 49.9 vs. 47.3 in March, services came in at 54.2 vs. 54.4 in March, and the composite came in at 53.6 vs. 53.3 in March. This was the highest composite reading since April 2022, but we believe the upward momentum will be hard to sustain.

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