• Markets are still digesting last Friday’s blockbuster jobs report; U.S. yields are rising; growth remains robust; Fed officials remain cautious; NY Fed reports March inflation expectations
  
• Germany reported mixed data; the U.K. labor market is cooling; Israel is expected to keep rates steady at 4.5%
  
• Japan reported mixed February cash earnings data; Japan also reported February current account data; Australia reported February home loan data; Philippines kept rates steady at 6.5%, as expected

The dollar is trading flat as an eventful week begins. DXY is trading flat near 104.335 and should eventually test last week’s high near 105.10 as U.S. yields continue to rise (see below). The euro is trading lower near $1.0830 while sterling is trading lower near $1.2630. The yen is testing the 152 area after mixed cash earnings data, but upside will be slowed by jawboning and intervention risks (see below). The dollar rally should continue this week on signs of persistent inflation and robust growth in the U.S. The U.S. data continue to come in mostly firmer and it’s clear from recent comments that many Fed officials remain very cautious about easing too much or too soon. We believe that while market easing expectations have adjusted somewhat already (see below), there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

Markets are still digesting last Friday’s blockbuster jobs report. As long as the labor market remains firm, the U.S. economy is likely to continue growing at or above trend in H1 2024. In turn, this suggests inflation will take even longer to move back to target. Odds of a June cut have fallen to around 50% while odds of a July cut have fallen to around 90%. Both are the lowest since October and continues the much-needed repricing of the Fed easing cycle. Back then, DXY was trading near 107 and so we expect some catch-up dollar strength in the coming days.

U.S. yields are rising. The 2-year yield is trading at the highest level since late November near 4.78%. Next level to watch is the November 27 high near 4.98%, followed by the November 13 high near 5.08%. The 10-year yield is also trading at the highest level since late November near 4.45%. Next level to watch is the November 27 high near 4.51%, followed by the November 13 high near 4.70%. The rise in yields at the short end reflects Fed repricing, while the rise at the long end reflects persistent inflation pressures. Given our constructive fundamental outlook for the U.S., both ends of the yield curve should continue to edge higher. In turn, this should lead to further dollar gains.

Growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.5% SAAR and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.25% SAAR and Q2 growth at 2.6% SAAR. This model is updated every Friday. Financial conditions remain loose and so there is very little holding the economy back right now. The Fed will simply not be in any hurry to cut rates.

Fed officials remain cautious. Last Friday, Bowman said it was “much too soon” to think about cutting rates, and that she is increasingly concerned that inflation will stall out. Logan stressed that the risk of cutting rate too soon is higher than being late. There are many Fed speakers this week and we believe most share Logan’s view. Goolsbee and Kashkari speak today and take their places at opposite ends of the Fed hawk/dove spectrum. Recall that Goolsbee saw three cuts this year in the March Dot Plots while Kashkari saw two. However, Kashkari has since floated the possibility of no cuts this year.

New York Fed reports March inflation expectations. 1-year expectations have been stuck near 3% for three straight months, still well above the 2% target. Both 3- and 5-year expectations picked up in February, another development that will keep the Fed on its toes.

EUROPE/MIDDLE EAST/AFRICA

Germany reported mixed data. February IP came in at 2.1% m/m vs. 0.5% expected and a revised 1.3% (was 1.0%) in January. Elsewhere, exports came in at -2.0% m/m vs. -0.5% expected and 6.3% in January and imports came in at 3.2% m/m vs. -1.2% expected and a revised 3.3% (was 3.6%) in January. In y/y terms, exports fell -4.8% vs. 0.4% in January and imports fell -9.4% vs. -9.0% in January. The German economy is finally showing some signs of life, though the progress is spotty.

The ECB meets this week. While no change is expected, the bank is widely expected to tip the start of the easing cycle in June. We note that the ECB will very likely be cutting rates before the Fed and will also likely cut more over the next year than the Fed. This is euro-negative, to state the obvious.

The U.K. labor market is cooling. The jobs report released by the Recruitment & Employment Confederation, KPMG, and S&P Global showed wages for new permanent recruits rose at the slowest pace in three years in March even as the permanent hiring index slipped deeper into contraction territory. This weakness should eventually be picked up by the official data in the coming months. The market sees 75% odds that the BOE starts easing in June. Deputy Governor Breeden speaks today on a panel titled “Towards the future of the monetary system.”

Bank of Israel is expected to keep rates steady at 4.5%. However, the market is split as nearly half the analysts polled by Bloomberg see a 25 bp cut to 4.25%. At the last meeting February 26, the bank delivered a hawkish surprise and kept rates steady at 4.5% vs. an expected 25 bp cut. Governor Yaron warned of the inflationary risks from fiscal policy but said the bank can continue cutting rates if inflation stabilizes. The market is pricing in 75 bp of easing over the next year that would see the policy rate bottoming at 3.75%.

ASIA

Japan reported mixed February cash earnings data. Nominal earnings came in as expected at 1.8% y/y vs. a revised 1.5% (was 2.0% in January), while real earnings came in a tick higher than expected at -1.3% y/y vs. a revised -1.1% (was -0.6%) in January. Scheduled pay came in at 2.2% y/y vs. a revised 1.3% (was 1.4% y/y) in January and is the highest since October 1994. The Bank of Japan is closely monitoring whether a virtuous cycle between wages and prices will intensify to gage the extent of its normalizing cycles. So far, annual wage growth suggests the BOJ’s tightening process will be gradual. Indeed, Governor Ueda last week hinted that the next hike will likely come in H2. The market is pricing in only 50 bp of tightening over the next three years.

The dovish BOJ outlook is pushing USD/JPY higher. The pair is once again testing the cycle high near 152. Jawboning is likely to continue but a break above this level raises the risks of actual intervention. However, until the BOJ pushes a more hawkish narrative, monetary policy divergence with the Fed is likely to keep upward pressure on USD/JPY. Narrowing of that divergence was expected to come from the U.S. side but the Fed is keeping rates higher for longer.

Japan also reported February current account data. The adjusted surplus came in at JPY1.369 trln vs. JPY1.995 trln expected and a revised JPY2.75 trln (was JPY2.73 trln) in January. However, the investment flows will be of more interest. The February data showed that Japan investors stayed net buyers of U.S. bonds (JPY814 bln) for the sixth time in seven months. Japan investors stayed net sellers (-JPY106 bln) of Australian bonds for the second straight month and remained net sellers of Canadian bonds (-JPY600 mln) for the eighth straight month and for twelve of the past eleven months. Investors remained net sellers of Italian bonds (-JPY35 bln) for the second straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY1.04 trln) for the sixth time in seven months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.

Australia reported February home loan data. It appears that demand to purchase new dwellings remains subdued. The value of new home loan commitments rose 1.5% m/m vs. 2.0% expected and a revised -0.8% (was -3.9%) in January. This was driven largely by soft loan growth to both owner-occupiers (1.6% m/m) and investors (1.2% m/m). The “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey suggests buying sentiment will stay weak. The March NAB business survey and April Westpac consumer confidence index tomorrow will offer a timely update on the growth outlook. Despite some softness in the data, the market is not pricing in the first RBA cut until November.

Philippines central bank kept rates steady at 6.5%, as expected. The bank kept the policy rate at 6.5% as expected and “deems it appropriate to maintain the BSP’s tight monetary policy settings.” The central bank shifted its 2024 inflation projection a tick higher to 4% and warned the “risks to the inflation outlook continue to lean toward the upside.” Governor Remolona said “If we were relatively dovish, we might reduce rates in the third quarter, that would be no more than 25 bp. But now we are feeling a bit more hawkish than before, so I would say that we’re not gonna do it in 3Q, we may do it down the road.” Despite this guidance, the swaps market is still pricing in the start of an easing cycle over the next three months as well as 125 bp of total easing over the next year.