Dollar Soft as U.S. Yields Continue to Sink

June 09, 2021
  • U.S. JOLTS job openings came in very strong in April; The U.S. growth outlook for Q2 also remains strong; BOC is expected to keep policy steady; last night, Chile delivered a hawkish hold and is yet another sign that the global liquidity story is at an inflection point; Brazil and Mexico report May inflation
  • The U.S. and the EU are on the way to trade reconciliation; Germany reported soft April trade and current account data; BOE Chief Economist Haldane remains upbeat; National Bank of Poland meets
  • RBA Assistant Governor Kent was upbeat about the economic outlook; May inflation data from China was mixed; while Western policymakers are taking down inflation concerns, China is adopting a more direct approach

The dollar is modestly lower as U.S. yields continue to sink. DXY trading just below 90, with the euro trading just below $1.22 and sterling trading just below $1.42. USD/JPY remains stuck around 109.50 after being unable to sustain the break above 110 Friday. While we believe the fundamental story favors the dollar, we need a move higher U.S. rates (both real and nominal). The 10-year yield is down 3 bp trading back near 1.51%, while the breakeven inflation rate has edged lower to around 2.37%, putting the real rate at around -0.86%. This is well below the -0.79% posted last Friday, the highest since late April.

AMERICAS

U.S. JOLTS job openings came in very strong in April. Openings rose to 9.286 mln vs. 8.2 mln expected and a revised 8.288 mln (was 8.123 mln) in March. This is the highest reading in the data series going back to 2000 and supports the notion that the recent soft U.S. job numbers are due to labor supply, not labor demand. The easiest way for this excess demand to be addressed is through higher wages. Yes, the pandemic is also causing some distortions but the clear signal is that demand for labor remains strong. This is yet another variable that the Fed must consider as it starts the debate about tapering.

The U.S. growth outlook for Q2 also remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 9.4% SAAR vs. 10.3% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 4.4% SAAR vs. 4.2% previously. The New York Fed model just started estimating Q3 and it currently stands at 5.4% SAAR. Of note, Bloomberg consensus sees 9.2% growth in Q2, easing to 6.8% in Q3 and 4.8% in Q4, all in SAAR terms. April wholesale inventories and trade sales will be reported today and will lead to another update to the Atlanta Fed model.

Bank of Canada is expected to keep policy steady. At the last meeting April 21, the bank delivered a hawkish hold as it tapered its weekly asset purchases to CAD3 bln from CAD4 bln previously while keeping rates unchanged at 0.25%. More importantly, the bank saw slack in the economy absorbed and inflation at the 2% target in 2022. It then added that its projections show the commitment to keep rates steady runs to H2 2022. Previously, the guidance suggested no hikes until "into 2023" so this was a very hawkish signal from the BOC. Since then, the labor market has posted two straight months of job losses and so we see no need for the bank to change anything now. There will be no updated macro forecasts until the next meeting July 14. The Loonie tends to strengthen on BOC decision days. It has weakened only once in the past five and twice in the past twelve.

Last night, Chile’s central bank delivered a hawkish hold. Rates were kept steady at 0.50% but the bank said that “The strong dynamism already present in consumption and the additional boost to private spending are an important change for the macroeconomic scenario of the coming months, which makes it necessary to recalibrate the expansiveness of monetary policy going forward.” Regarding QE, the bank said that the period of reinvestment of bank bond coupons concluded in early June and that “From now onwards, the stock will be gradually reduced as the assets in the portfolio are extinguished.” The next policy meetings are July 14, August 31, October 13, and December 14. Bloomberg consensus sees 25-50 bp of tightening in H2 that could take the policy rate to 1.0% by year-end, followed by 25 bp per quarter next year that takes the policy rate to 1.75% by Q3 22.

This move from Chile is yet another sign that the global liquidity story is at an inflection point. It’s not just EM, as the RBA also seems to be leaning now towards less accommodation (see below). Please see our recent Major Central Bank Roadmap for an in-depth view. We will be putting out our Emerging Market Central Bank Roadmap in the coming days.

Brazil reports May IPCA inflation. Headline inflation is expected to accelerate to 7.93% y/y from 6.76% in April. If so, it would be the highest since September 2016 and further above the 2.25-5.25% target range. Next COPOM meeting is June 16 and another 75 bp hike to 4.25% is expected. Bloomberg consensus sees another 100 bp of hikes in Q3, followed by 50 bp more in Q4 that would take the policy rates to 5.75% by year-end. Complicating matters is a severe drought that is likely to lead to considerable food price inflation ahead.

Mexico reports May CPI. Headline inflation is expected to decelerate to 5.90% y/y from 6.08% in April. If so, it would be the lowest since March but still well above the 2-4% target range. Next Banco de Mexico meeting is June 24 and rates are expected to remain steady at 4.0%. Bloomberg consensus sees no more easing now, with the first 25 bp hike likely by late 2021 or early 2021.

EUROPE/MIDDLE EAST/AFRICA

The U.S. and the EU are on the way to trade reconciliation. Reports suggest that the two sides will start removing Trump-era tariffs on steel and aluminum and will try to resolve the festering Boeing-Airbus dispute. While the matter of aircraft subsidies remains complicated, the shift towards negotiations and away from tariffs is a welcome change in tactics.

Germany reported soft April trade and current account data. Exports rose 0.3% m/m vs. 0.5% expected and 1.3% in March, while imports fell -1.7% m/m vs. -1.1% expected and a 7.1% gain in March. As a result, the trade and current account surpluses came in smaller than expected. Today’s data continues a string of weaker than expected hard data from Germany this week, which belies the firm survey data seen so far in Q2. Perhaps May will see some improvement but for now, softness in the eurozone’s largest economy should be enough to keep the ECB in dovish mode at tomorrow’s meeting.

Details of the ECB’s asset purchases for the week ending June 4 were reported. Redemptions were only EUR700 mln and so gross purchases were EUR21.3 bln vs. EUR25.0 bln for the week ending May 28 and EUR23.7 bln for the week ending May 21. Net purchases were EUR20.6 bln vs. EUR20.0 bln for the week ending May 28 and EUR21.7 bln for the week ending May 21, and so it seems that the ECB is aiming for net purchases to average around EUR20 bln per week. Both net and gross purchases have picked up noticeably over the last few weeks, and yet eurozone yields are still higher. We maintain our long-standing call that the ECB’s accelerated asset purchases will be extended through Q3 at this week’s meeting.

Bank of England Chief Economist Haldane remains upbeat. He said the economy is going “gangbusters” and that the central bank may need to start removing accommodation. Haldane has turned into the most hawkish on the MPC and was the lone vote last month to cut the size of QE to GBP825 bln. However, he is on the way out after the June meeting and so Haldane’s views don't carry as much weight as they otherwise might. Next decision is June 24 and no change is expected then. At the last decision May 6, the bank started tapering. By our calculations, the new pace would still see QE hit the $875 bln limit by mid-October. Given the bank’s intent to have QE run to year-end, this suggests another tapering is in the cards, either at the August 5 or September 23 meeting. The short sterling futures strip suggests small odds of the first hike in Q4 2021, rising significantly in Q1 and Q2 2022 to being fully priced by Q3 2022.

National Bank of Poland meets. While no change is expected, a hawkish hold seems likely and would challenge the steady rate narrative. MPC member Hardt recently called for a symbolic 15 bp hike at this meeting, while Deputy Prime Minister Gowin said he saw room for a hike. We think any hikes are unlikely until QE has first been halted and so tapering talk is what we should look for today. Minutes from its May 5 meeting will be released Friday and may contain some clues about tapering or ending QE. Markets are particularly sensitive to the notion that Poland may be falling behind the curve after Hungary and Czech Republic flagged outright rate hikes this month. Of note, Bloomberg consensus sees the policy rate steady at 0.10% until Q2 2022, when the tightening cycle is expected to begin.

ASIA

RBA Assistant Governor Kent was upbeat about the economic outlook. He sees “good prospects” for growth and eventual increases in wages and inflation, supported by RBA programs such as the bank lending facility that’s due to wind up at the end of June. Kent noted that “Household and business borrowers continue to benefit from record low interest rates on most loans, their balance sheets are in good shape, and the economy is benefiting from supportive fiscal policy.” Kent reiterated that the RBA estimates that QE has resulted in the 10-year sovereign yield being “30 bp lower than otherwise” and has also reduced the spreads of debt issued by the states and territories. He was not concerned with the recent rise in yields, noting “This is in response to the improved outlook for economic activity and inflation, both here and offshore. The RBA is set to decide whether to extend QE at its next meeting July 6. We had always thought it would be a close call but Kent’s stance suggests the RBA is leaning towards tapering, not extending.

May inflation data from China was mixed with higher-than-expected PPI but lower CPI. The CPI reading came in at 1.3% y/y vs. 1.6% expected and 0.9% in April, but the figures remain obfuscated by base effects from last year’s volatility in pork prices. PPI rose 9.0% y/y vs. 8.5% expected and 6.8% in April, boosted by commodity input prices such as metals and oil. The combination of the two data points suggest that producers are absorbing the costs, for now at least. New loan and money supply data may be released this week but no date has been set. New loans are expected to fall to CNY1.4 trln from CNY1.47 trln in April, while aggregate financing is expected to rise to CNY2 trln from CNY1.85 trln in April. With policymakers still pushing for deleveraging and rebalancing, we expect monetary stimulus to ebb in H2.

While Western policymakers are taking down inflation concerns, China is adopting a more direct approach. Officials are looking to impose price control measures to temper commodity-related cost pressures. The measure seems to be mostly directed towards the price of thermal coal which has been weighing on energy production. This follows concerted efforts to deter speculation in commodity markets, especially in the metals space.

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