Dollar Adds to Post-NFP Gains

September 09, 2024

Win Thin

The dollar continues to recover; Fed easing expectations have steadied; growth remains robust in Q3; New York Fed reports August inflation expectations; Mexico reports August CPI data
Eurozone September Sentix investor confidence softened
Japan Q2 growth was revised down; Japan reported July current account data; China reported soft CPI and PPI data

The dollar is building on its post-NFP gains. DXY is trading higher for the second straight day near 101.606 and is on track to test the September high near 101.917. The yen is underperforming, with USD/JPY trading higher near 143.65. The euro is trading lower near $1.1045 while sterling is trading lower near $1.3075. While the U.S. labor market is weakening, it is by no means weak and so we continue to believe that market expectations for aggressive Fed easing remain overdone. The dollar’s recent resilience is encouraging but the fundamental data will have to come in firm in order for the greenback to see further gains. This week’s inflation data have taken on great importance.

AMERICAS

The dollar continues to recover. After the soft jobs data led to initial losses Friday, the greenback staged a strong recovery throughout the day and posted bullish engulfing patterns against every major currency except for JPY and CHF. From a technical standpoint, further gains are likely and so far, that is holding true. However, the fundamental backdrop will have to cooperate and so all eyes turn to the inflation data this week.

Fed easing expectations have steadied. The odds of a 50 bp cut this month have fallen to 20-25% after rising to nearly 75% right after the jobs data. However, the market is still pricing in 100-125 bp of easing by year-end and 225 bp of easing over the next 12 months. Those remain elevated and we believe are hard to justify in light of continued resilience in the U.S. economy. The Fed media blackout went into effect at midnight Friday and so there will be no speakers until Chair Powell’s press conference September 18.

Indeed, growth remains robust in Q3. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.1% SAAR and will be updated today after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.6% SAAR and Q4 growth at 2.2% SAAR. Both estimates will be updated Friday.

New York Fed reports August inflation expectations. Expectations have been edging lower across the entire spectrum, which should give the Fed confidence to start cutting rates this month. Of note, breakeven inflation rates are hovering near 2%, also reflecting the drop in market inflation expectations. July wholesale inventories and trade sales as well as consumer credit will also be reported today.

Mexico reports August CPI data. Headline is expected at 5.06% y/y vs. 5.57% in July, while core is expected at 4.00% y/y vs. 4.05% in July. If so, it would be the first deceleration in headline since February but would remain well above the 2-4% target range. At the last meeting August 8, Banco de Mexico restarted the easing cycle with a 25 bp cut to 10.75%. The vote was 3-2, with the dissents in favor of steady rates. However, the bank stated that the inflation outlook would allow for the discussion of more rate cuts. Next meeting is September 26 and much will depend on the inflation trajectory as well as the peso. The market is pricing in 200 bp of easing over the next 12 months. The Senate will vote on judicial reforms sometime this week and the opposition believes they have the votes to block it. If so, the peso should stage a significant recovery.

EUROPE/MIDDLE EAST/AFRICA

Eurozone September Sentix investor confidence softened. Headline fell to -15.4 vs. -13.9 in August, the lowest since January and indicative of weaker economic activity. Current situation fell to -22.5 vs. -19.0 in August, while expectations improved slightly to -8.0 vs. -8.8 in August. Regardless, EUR will take its cue from Thursday’s ECB meeting and the updated macroeconomic projections. The swaps market continues to imply 50-75 bp of cuts by year-end.

ASIA

Japan Q2 growth was revised down. GDP rose 0.7% q/q vs. 0.8% expected and preliminary. Private consumption and business spending were both revised down to 0.9% q/q and 0.8% q/q, respectively. In SAAR terms, growth was revised to 2.9% vs. 3.2% expected and 3.1% preliminary. While the economy is still chugging along, Bank of Japan tightening expectations remain steady. The market does not price in the next hike until well into 2025, with only 25 bp of tightening seen over the next 12 months. Nakagawa speaks Wednesday. Tamura speaks Thursday.

Japan reported July current account data. The adjusted surplus came in at JPY2.803 trln vs. JPY2.117 trln expected vs. JPY1.776 trln in June. However, the investment flows will be of more interest. The July data showed that Japan investors turned net buyers of U.S. bonds (JPY1.182 trln) after one month of net selling. Japan investors stayed net buyers (JPY137.5 bln) of Australian bonds for the second straight month after five straight months of net selling and also stayed net buyers of Canadian bonds (JPY97.0 mln) for the second straight month. Investors stayed sellers of Italian bonds (-JPY42.5 bln) for the second straight month after two straight months of net buying. Overall, Japan investors stayed total net sellers of foreign bonds (-JPY1.9 trln) for the second straight month. With Japan yields likely to move even higher in Q4, it’s possible that Japan investors will stop chasing higher yields abroad, but we think it’s still too early to say.

China reported soft CPI and PPI data. CPI came in a tick lower than expected at 0.6% y/y vs. 0.5% in July, while PPI came in at -1.8% y/y vs. -1.5% expected and -0.8% in July. Food prices made the biggest contribution to CPI inflation, which was the highest since February, while PPI fell the most in four months. Core CPI inflation matched the March 2021 low and slowed to 0.3% y/y vs. 0.4% in July. It’s clear that deflationary risks remain intact. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption. China's consumption-to-GDP ratio is very low at round 30%, in large part due to high household savings. Of note, August money and new loan data sometime this week. New loans are expected at CNY1.05 trln vs. CNY261 bln in July, while aggregate financing is expected at CNY3.017 trln vs. CNY772 bln in July.

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