Dollar Limps into the Weekend

April 23, 2021

Senate Republicans offered a $568 bln compromise spending package; President Biden will reportedly propose a hike in the capital gains tax; weekly jobless claims data point to a solid NFP reading; preliminary US Markit April PMI readings will be reported
ECB delivered a dovish hold, as expected; eurozone April preliminary PMIs came in higher than expected; U.K. data came in stronger than expected; Russia central bank hiked rates 50 bp to 5.0%, delivering a hawkish surprise
Japan reported March national CPI; Prime Minister Suga declared a new state of emergency in four major prefectures

Equity markets this week were directionally the opposite of last week: losses across DM and gains in EM. The Nasdaq is amongst the worst performing amongst major indices, down nearly 2% based on futures at the time of writing. The S&P500 and European indices are down just under 1% for the week. The broad MSCI EM basket is little changed after sizable gains last week, and the Shanghai Composite is outperforming, up 1.4% after falling nearly 1% last week.
 
Measures of cross-market implied volatility remain very subdued. The VIX is barely above 18, the G7 FX aggregate vol index (VXY) is around 6.5. Both measures are well below average since the start of 2020. U.S. interest rate implied vol, however, remains comparatively elevated. The MOVE index is trading around 60, right on the average since the start of last year.

 The dollar has given up its post- ECB gains.  With US yields still depressed, DXY is once again testing the 91 area.  A clean break below would set up a test of the February 25 low near 89.683.  Yet the euro feels heavy and has been unable to improve on its highest level since March 3 near $1.2080 earlier this week.  Sterling traded above $1.40 earlier this week for the first time since mid-March but there was no follow-through.  It also feels heavy but is seeing some support ahead of the $1.38 area.  Lastly, USD/JPY remains heavy and continue to trade around the lowest level since March 5 near 107.80.  Break of the 107.25 area would set up a test of the February 23 low near 104.90.

AMERICAS

Senate Republicans offered a $568 bln compromise spending package.  It is much lower than President Biden’s $2.25 trln proposed “American Jobs Plan” and is concentrated on more traditional infrastructure projects such as roads and bridges.  The five-year plan more than doubles the Biden proposal for spending on roads and bridges to $299 bln, with the rest on items including transit, rail, airports, water projects, and broadband.  It does not offer any specifics on how it would be funded beyond references to taxing electric cars and repurposing unspent funds.  However, It specifically opposes rolling back the 2017 tax cuts or adding to the national debt.   

President Biden will reportedly propose a hike in the capital gains tax to finance the second package on tap.  The rate for those earning $1 mln or more would rise to 39.6% from the current 20% rate.  An existing 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on capital gains well above 40%.  Biden is expected to unveil the proposal next week as part of the tax hikes planned to fund the upcoming “American Families Plan.”  However, White House Press Secretary Psaki said that “we’re still finalizing what the pay-fors look like.”  Of note, this is Biden’s first specific trial balloon for individual tax hikes, as funding for the planned “American Jobs Plan” centered solely on corporate tax hikes. Both are subject to horse-trading and likely to come in lower than these initial proposals.

Weekly jobless claims data point to a solid NFP reading.  Regular initial claims fell to 547k from a revised 586k the previous week.  This is a new cycle low and is for the BLS survey week containing the 12th of the month.  Elsewhere, regular continuing claims fell to 3.67 mln from a revised 3.71 mln the previous week.  However, this series is reported with a 1-week lag and so the reading for the BLS survey week will be reported next week.  Still, the low initial claims data is the first clue and point to another good NFP for April. Consensus is currently at 888k vs. 916k in March but will likely edge higher after the claims data.

Preliminary US Markit April PMI readings will be reported.  Manufacturing is expected at 61.0 vs. 59.1 in March, while services is expected at 61.5 vs. 60.4 in March.   Yesterday, Kansas City Fed survey came in at 31 vs. 28 expected and 26 in March.  Before that, Philly Fed came in at 50.2 vs. 44.5 in March and Empire survey came in at 26.3 vs. 17.4 in March, both stronger than expected.  The U.S. manufacturing sector remains in solid shape, with services expected to catch up quickly as lockdowns end.  March new home sales (14.2% m/m expected) will also be reported.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank delivered a dovish hold, as expected.  All policy settings and forward guidance were kept unchanged.  Lagarde said that the ECB didn’t discuss phasing out PEPP, adding that the pace of the purchase program is data-dependent, not time-dependent.  The account of the March meeting showed that the accelerated pace would be reviewed after three months so it's really not surprising that it wasn't discussed.  That makes the June meeting 10 very much "live."  Lagarde noted that eurozone financial conditions are broadly stable but stressed that fiscal stimulus is also needed.  Lastly, Lagarde revealed that the results of the ECB’s strategy review will be presented in the fall.

Eurozone April preliminary PMIs came in higher than expected.  Headline eurozone manufacturing PMI rose to 63.3 vs. 62.0 expected and 62.5 in March, services PMI rose to 50.3 vs. 49.1 expected and 49.6 in March, and composite PMI rose to 53.7 vs. 52.9 expected and 53.2 in March.   Of note, the French composite rose to 51.7 vs. 49.4 expected and 50.0 in March while the German composite fell to 56.0 vs. 57.0 expected and 57.3 in March.  This is all good news, of course, but the recovery remains uneven and very much skewed toward the manufacturing sector.
 
U.K. data came in stronger than expected.  Headline retail sales surged 5.4% m/m in March vs. 1.5% expected and a revised 2.2% (was 2.1%) in February, while sales ex-auto fuel rose 4.9% m/m vs. 2.0% expected and a revised 2.5% (was 2.4%) in February.  These  were stellar gains even though non-essential shops were shut over the period and bodes well for the view that a combination of excess savings and pent up demand will drive an accelerated recovery.  April preliminary PMIs were also strong.  Manufacturing PMI rose to 60.7 vs. 59.0 expected and 58.9 in March, services PMI rose to 60.1 vs. 58.9 expected and 56.3 in March, and composite PMI rose to 60.0 vs. 58.1 expected and 56.4 in March.  

Russia central bank hiked rates 50 bp to 5.0%, delivering a hawkish surprise.  Of the 42 analysts polled by Bloomberg, 13 saw the larger 50 bp hike while the rest saw 25 bp.  The bank said it will weigh another hike at one of its next meetings and sees the policy rate averaging 4.8-5.4% in 2021.  This suggests potential for 50 bp of tightening ahead.  Next policy meetings are June 11, July 23, and September 10 but we suspect further hikes will be front-loaded.  CPI rose 5.8% y/y in March, the highest since November 2016 and well above the 4% target.  However, the bank sees inflation returning back to the target in mid-2022. 



ASIA

Japan reported March national CPI.  Headline came in as expected at -0.2% y/y vs. -0.4% in February, while core (ex-fresh food) came in a tick higher than expected at -0.1% y/y vs. -0.4% in February.  Deflation may end in the coming  months but inflation is likely to remain weak.  Current BOJ forecasts see targeted core CPI at 0.5% for FY21 and at 0.7% for FY22.  These forecasts will be updated at the April 26-27 meeting, when FY23 forecasts will be added.  Bottom line is that even with the recent BOJ policy tweaks, inflation is likely to remain well below the 2% target through FY23 as well.  Preliminary April PMI readings were reported, with manufacturing PMI at 53.3 vs. 52.7 in March, services PMI steady at 48.3, and composite PMI rising to 50.2 from 49.9 in March.   This is the first composite reading above 50 since January 2020.  March department store sales were also reported up 21.8% y/y vs. -10.7% in February and bodes well for retail sales data out next week. 

The Q2 outlook is looking a bit worse after Prime Minister Suga declared a new state of emergency in some major prefectures.  Restrictions will begin this Sunday and run through the Golden Week holiday to May 11 for Tokyo, Osaka, Kyoto, and Hyogo prefectures.  Together, those four account for about a quarter of the population.  The new measures are stricter than those taken before, with bars and restaurants that serve alcohol instructed to close and fans banned from major sporting events.

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