Dollar Consolidates Gains Ahead of the Weekend

October 01, 2021
  • The U.S. fiscal drama continues; our base case remains that the Democrats will eventually agree on a compromise; ISM manufacturing PMI will be the highlight; August core PCE data could help determine whether U.S. yields will continue rising
  • Eurozone September CPI and final manufacturing PMI readings were reported
  • Japan reported August labor market data and Q3 Tankan survey; China is on an extended holiday until next Friday

The dollar is consolidating its recent gains. DXY is down modestly for the second straight day after making new highs for this year just above 94.50. The September 2020 high near 94.742 is the next target. After that, there are no major chart points until the June 2020 high near 97.802. The euro traded at the lowest level since July 2020 yesterday near $1.1565. It remains heavy and on track to test the lows from June and July 2020 just below $1.12. Elsewhere, sterling is seeing a bit of a bounce and trading near $1.3520 after it tested support near $1.34. We believe the negatives continue to pile up and that cable remains on track to test the December 2020 low near $1.3135. Lastly, USD/JPY is lower today after making new highs for tis move near 112.10 yesterday. While the pair is now testing 111, we believe it will eventually test the February 2020 high near 112.25 and then the April 2019 high near 112.40. We believe the drivers that favored the dollar in Q3 will remain in play for Q4.


The U.S. fiscal drama continues. House Speaker Pelosi was forced to delay a planned vote on the $550 bln infrastructure bill yesterday after her party’s progressive wing maintained the threat of withholding support until the “human infrastructure” bill is passed first. Reports suggest Pelosi plans to hold a vote today as negotiations continued. Not with Republicans, but with members of her own party.

At the heart of the matter is the Democrats’ inability to agree on the next round of fiscal stimulus. Despite controlling both houses of Congress and the White House, the party’s bickering threatens Biden’s agenda. One the one hand, moderate Senators Manchin and Sinema are balking at the $3.5 trln price tag for the “human infrastructure” bill. Manchin finally came up with his bottom line number for supporting it, which at $1.5 trln is too low for the progressive wing of the party. The support of those progressives is needed to pass the traditional infrastructure bill in the House and that is how this standoff persists.

Our base case remains that the Democrats will eventually agree on a compromise. The human infrastructure bill will likely come in somewhere in between $1.5 and $3.5 trln, say at $2.5 trln. Given the lack of any Republican support, this bill will have to be folded in with an increase in the debt ceiling and passed by budget reconciliation. In turn, this should be enough to push the regular infrastructure deal through a bipartisan vote. Yet we should all be prepared for brinksmanship and posturing from all sides as they work towards that elusive compromise.

ISM manufacturing PMI will be the highlight. It is expected at 59.5 vs. 59.9 in August. Keep an eye on the employment component, which was 50.2 in August. Current consensus for September NFP is 500k vs. 235k in August, with the unemployment rate expected to fall a tick to a new cycle low of 5.0%. Average hourly earnings are expected to accelerate to 4.6% y/y from 4.3% in August. We believe any reading in the 400-500k range would meet the Fed’s criteria to announce tapering in November.

So far, the survey readings for September have been solid. Yesterday, Chicago PMI came in at 64.7 vs. 65.0 and 66.8 in August. This was a very strong reading and bodes well for other PMI readings for the month. Last week, preliminary September Markit PMI readings were reported. Manufacturing came in at 60.5 vs. 61.0 expected and 61.1 in August and services came in at 54.4 vs. 54.9 expected and 55.1 in August, which dragged the composite down to 54.5 vs. 55.4 in August.

August core PCE data could help determine whether U.S. yields will continue rising. Consensus sees core PCE inflation falling a tick to 3.5% y/y. Personal income and spending will also be reported at the same time and are expected to rise 0.2% m/m and 0.7% m/m, respectively. September auto sales (13.0 mln annualized expected), final September University of Michigan consumer sentiment (71.0 expected), and August construction spending (0.3% m/m expected) will also be reported. The Fed’s Harker and Mester speak.


Eurozone September CPI came in slightly higher than expected. Headline inflation picked up to 3.4% y/y vs. 3.3% expected and 3.0% in August, while core came in as expected at 1.9% y/y vs. 1.6% in August. Rising inflation will surely be keeping the ECB hawks up at night and will further their resolve to prevent extended monetary stimulus. That said, we believe Lagarde and the doves remain firmly in control. Earlier this week, she stressed that the ECB must not overreact to transitory supply shocks, adding that there are no “no signs that this increase in inflation is becoming broad-based across the economy.”
Next ECB policy meeting is October 28. While Lagarde has tipped the December 16 meeting as when the bank will decide the fate of PEPP, this month’s meeting will still be important and quite likely very contentious as the hawks have been getting more vocal as price pressures picked up.

Eurozone final manufacturing PMI readings were reported. Headline reading fell a tick from the preliminary to 58.6. Looking at the country breakdown, Germany fell a tick from the preliminary to 58.4 while France fell two ticks to 55.0. Italy and Spain were reported for the first time and came in at 59.7 and 58.1, down significantly from their August readings of 60.9 and 59.5, respectively. Lastly, Germany reported solid August retail sales. Sales rose 1.1% m/m vs. 1.5% expected and a revised -4.5% (was -5.1%) in July.


Japan reported August labor market data and Q3 Tankan survey. Unemployment was expected to rise a tick but instead remain steady at 2.8%, while the job-to-applicant ratio fell a tick to 1.14, as expected. The large manufacturing index came in at 18 vs. 13 expected and 14 in Q4, while the large manufacturing outlook came in at the expected 14 vs. 13 in Q2. Also, the large non-manufacturing index came in at 2 vs. 0 expected and 1 in Q4, while the large non- manufacturing outlook came in at 3 vs. 5 expected and 3 in Q2. Large all-industry Capex came in at 10.1% vs. 9.3% expected and 9.6% in Q2. With the economy reopening as virus numbers improve, Q4 is shaping up to be the start of a more sustainable recovery. The weak yen doesn’t hurt either.

China is on an extended holiday that began today and runs until next Friday, when markets reopen. Hong Kong was closed just today and reopens Monday. We expect policymakers will be working behind the scenes to come up with a negotiated solution for Evergrande.

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