Dollar Remains Vulnerable as New Week Begins

March 11, 2024

Win Thin

The double whammy of Powell and mixed jobs data is likely to continue weighing on U.S. yields and the dollar; risks are asymmetric from this week’s data; NY Fed’s February survey of consumer inflation expectations will be the highlight
ECB policymakers are reinforcing the cautious message delivered last week; Spain reported weak data; Norway February CPI cooled; NBP publishes its quarterly inflation report; Bank of Israel releases its minutes
Japan reported revised Q4 GDP data; iron ore prices are sliding as inventories rise in China

The dollar remains vulnerable ahead of this week’s key data. DXY is trading flat near 102.703 vs. Friday’s low near 102.358. Clean break below 102.282 sets up a test of the late December low near 100.617. The euro is flat near $1.0940. Clean break above $1.0970 sets up a test of the December 28 high near $1.1140. Sterling is trading lower near $1.2845 after trading Friday at the highest since August 2023 near $1.2895. Cable remains on track to test the late July 2023 high near $1.30. USD/JPY is trading at the lowest since February 2 near 146.50 and remains on track to test the February 1 low near 145.90. We remain frustrated by the current dollar weakness. The U.S. data continue to come in mostly firmer and despite Powell’s dovish comments last week, most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should recover after this current period of weakness. This week’s inflation and retail sales data may be a spark for that move.

AMERICAS

The double whammy of Powell and mixed jobs data is likely to continue weighing on U.S. yields and the dollar. Recent U.S. economic data releases have not been strong enough to justify a material upward adjustment to Fed policy expectations. That along with Powell’s dovish comments last week seemed to confirm market pricing for a June cut. Furthermore, the market is now back to pricing in 100 bp of total easing this year after briefly matching the Fed’s 75 bp guidance.

Risks are asymmetric from this week’s data. Weaker than expected inflation or retail sales readings will simply reinforce the case for a rate cut in June and so market reaction should be relatively contained. However, stronger than expected data prints would likely trigger an upward adjustment to Fed funds futures in favor of a firmer USD and Treasury yields, similar to what we saw in mid-February after the higher-than-expected January CPI print.

The New York Fed’s February survey of consumer inflation expectations will be the highlight today. While 3- and 5-year expectations continue to fall, the 1-year measure was steady at 3.0% in January. Looking ahead, University of Michigan reports March consumer sentiment Friday. 1-year inflation expectations are expected to pick up a tick to 3.1%, while 5- to 10-year expectations are expected to pick up a tick to 3.0%. The Fed won’t be happy to see expectations remain so sticky.

EUROPE/MIDDLE EAST/AFRICA

ECB policymakers are reinforcing the cautious message delivered last week. With regards to easing, Kazimir said “Rushing isn’t smart and beneficial. Only in June, with new forecast at hand, will the level of confidence reach the threshold.” He stressed that he favors “a smooth and steady cycle of policy easing.” Makhlouf said ““When we get to the point of feeling, actually, you know, we’re confident enough about meeting our target, then we’ll recalibrate the stance and reduce our policy rates. But I expect the stance to remain restrictive for some time - but just not as restrictive.” Despite downside risks to the eurozone economy, the market is pricing in less than 20% odds of a cut April 11, but this becomes fully priced in for June 6. While the doves may continue to push for an April cut, Lagarde and the hawks are in control and June seems most likely.

Spain reported weak data. January retail sales came in at 0.3% y/y vs. 3.0% expected and a revised 2.7% (was 3.1%) in December. This was the weakest reading since November 2022 and bears watching, as Spain has been one of the bright spots in the eurozone. Italy reports January retail sales Friday.

Norway February CPI cooled. Headline came in at 4.5% y/y vs. 4.7% expected and actual in January, while underlying came in at 4.9% y/y vs. 5.3% expected and actual in January. Headline is the lowest since September but remains well above the 2% target and is consistent with the Norges Bank guidance that “the policy rate will likely be kept at 4.50% for some time ahead.” The December forecasts indicated that the policy rate will stay at 4.5% until Q3 2024 before gradually moving down. After today’s data, the market now sees nearly 90% odds of a 25 bp rate cut in August vs. 60% at the end of last week.

National Bank of Poland publishes its quarterly inflation report. According to the central bank, there is a 50% probability that inflation will be between 2.8-4.3% in 2024 (vs. 3.2-6.2% in the November projections), with risks skewed to the upside. This validates the bank’s neutral policy guidance at the arch 6 meeting of neither hikes nor cuts this year. February CPI will be reported Friday. Headline is expected at 3.2% y/y vs. 3.9% in January. If so, it would be the lowest since March 2021 and back within the 1.5-3.5% target range. Next policy meeting is April 4, and no change is expected then. However, with inflation falling, the swaps market is pricing in 25 bp of reading over the next six months.

Bank of Israel releases its minutes. At the February 26 meeting, the bank delivered a hawkish surprise and kept rates steady at 4.5% vs. an expected 25 bp cut to 4.25%. February CPI will be reported Friday. Headline is expected at 2.5% y/y vs. 2.6% in January. If so, it would be the lowest since November 2021 and further within the 1-3% target range. Next policy meeting is April 8 and a 25 bp cut seems likely if disinflation continues. The swaps market is pricing in 50 bp of easing over the next six months followed by another 50 bp over the subsequent six months that would see the policy rate bottom near 3.5%.

ASIA

Japan reported revised Q4 GDP data. Growth came in at 0.1% q/q vs. 0.3% expected and the preliminary -0.1% contraction. The improvement was due solely to business spending, which improved to 2.0% q/q vs. 2.4% expected and -0.1% preliminary. Private consumption fell a tick to -0.3% q/q and the weakness here remains worrisome. With the economy showing signs of weakness in Q1, we expect investment to slow in the coming quarters. Furthermore, it’s hard for us to see the Bank of Japan hiking rates when the economy is on its back foot.

Iron ore prices are sliding as inventories rise in China. Prices slid nearly 7% today and have fallen nearly 25% since the early January peak as inventories of the main steelmaking ingredient at Chinese ports increased in March to near a one year high. It’s clear that China is unable and unwilling to inject significant stimulus that would turn its beleaguered housing sector around, and so iron ore prices are adjusting accordingly. AUD is underperforming most major currencies as a result and this underperformance is likely to continue. Of note, most major energy and industrial commodity prices are close to where they were trading when China reopened back in December 2022.

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