Dollar Continues to Soften as U.S. and U.K. Return from Holiday

May 28, 2024
  • Fed officials remain cautious; Conference Board May consumer confidence will be the data highlight; Brazil reports mid-May IPCA inflation
  • ECB doves are starting to push back; ECB reported April inflation expectations; U.K. BRC shop price inflation eased sharply in May; U.K. CBI released firm May distributive trades survey results
  • Australia reported soft April retail sales; Thailand is forecasting larger budget deficits over the medium-term

The dollar remains under modest pressure as U.S. and U.K. return from holiday. After trading above 105 level last week, DXY is trading lower for the third straight day near 104.429. The euro is trading higher near $1.0875 while sterling is trading higher near $1.2775 on the back of favorable economic data (see below). Lastly, USD/JPY is trading lower near 156.85 as the 157 remains difficult to crack. We believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have already started to take back the dovish Fed easing expectations and so we look for the dollar recovery to resume after this current period of consolidation.

AMERICAS

Fed officials remain cautious. Kashkari said “U.S. consumers have remained remarkably resilient, the housing market has remained resilient. So I’m not seeing the need to hurry and do rate cuts. I think we should take our time and get it right.” Mester did not comment on policy but said “Enhancements to communications would make monetary policy more effective in normal times and also improve the effectiveness of nonconventional policy tools, such as forward guidance, in extraordinary times.” Bowman also did not comment on policy but noted that the Fed’s balance sheet runoff has proceeded relatively smoothly. Kashkari (again, Cook, and Daly speak today. Of note, the market sees around 80% odds of a November cut, which is near the pre-May 1 FOMC lows.

Conference Board May consumer confidence will be the data highlight. Headline is expected to drop a full point to 96.0. If so, this would be the lowest since July 2022 and consistent with softer consumer spending activity. Nevertheless, positive real wage growth, rising house prices and a strong labor market suggest household spending will remain an important tailwind to GDP growth.

Regional Fed surveys for May will wrap up this week. Dallas Fed manufacturing will be reported today and is expected at -12.5 vs. -14.5 in April. Richmond Fed manufacturing and services will both be reported tomorrow, along with Dallas Fed services. May Chicago PMI will also be reported Friday and is expected at 41.0 vs. 37.9 in April. ISM PMIs will be reported next week.

House prices will also be reported. Both FHFA and S&P CoreLogic report March house prices and are expected at 0.5% m/m and 0.3% m/m, respectively. In y/y terms, both have been moving higher in recent months, offering hope that the housing sector can recover despite high rates.

Brazil reports mid-May IPCA inflation. Headline is expected at 3.74% y/y vs. 3.77% in mid-April. If so, inflation would move closer to the mid-point of its 1.5-4.5% target range. At the last meeting May 8, COPOM cut rates 25 bp to 10.5% by a 5-4 vote, with the dissents in favor of a larger 50 bp cut. No forward guidance was given, and the bank expressed concern about loose fiscal policy. Next meeting is June 19, and no change is expected as markets believe the policy rate has bottomed at 10.5%.


EUROPE/MIDDLE EAST/AFRICA

ECB doves are starting to push back. Villeroy said “I sometimes read that we should cut rates only once a quarter when new economic projections are available, and hence exclude July. Why so, if we are meeting-by-meeting and data-driven? I don’t say that we should commit already on July, but let us keep our freedom on the timing and pace.” Most ECB officials remain cautious about the pace of the easing cycle after it begins cutting in June and so Villeroy’s view is seen as an outlier. Centeno and Knot speak today.

ECB reported April inflation expectations. 1-year expectations fell a tick to 2.9% while 3-year expectations fell a tick to 2.4%. The 1-year reading was the lowest since September 2021 while the 3-year reading has been gyrating around 2.5% for the past year. Both remain above the 2% target and should keep the ECB cautious.

U.K. BRC shop price inflation eased sharply in May. Overall prices rose at a 30-month low 0.6% y/y vs. 1.0% expected and 0.8% in April. The drop was due largely to lower non-food prices, as food prices rose 3.2% y/y in May. Shop price disinflation is unlikely to convince the BOE to move early with rate cuts, as the bank is more concerned with high services inflation. The market continues to price in the first cut in November.

U.K. CBI released firm May distributive trades survey results. Retailing reported sales jumped to 8 vs. -25 expected and -24 in April, while total distributive reported sales rose to 7 vs. -8 in April. This was the highest reading for retailing since December 2022 and bodes well for May retail sales data.

ASIA

Australia reported soft April retail sales. Headline came in a tick lower than expected at 0.1% m/m vs. -0.4% in March. A major reason the RBA held the policy rate steady in May was to mitigate against the risk that consumer spending remains subdued for a more prolonged period. Encouragingly, stabilization in real disposable income points to a modest recovery in consumption growth but so far, the recovery is unimpressive. This should prevent the RBA from hiking again and this should be a headwind for AUD.

Thailand is forecasting larger budget deficits over the medium-term. The cabinet approved a revised medium-term fiscal outlook that would see the budget deficit at -4.3% of GDP in the current FY24 and -4.5% in FY25 before narrowing to -3.5% in FY26. As a result, debt/GDP is seen at 65.7% in FY24 and rising steady to peak at 68.9% in FY27. Fiscal policy remains loose as the Srettha government relies on cash handouts to stimulate the economy. The government has also pressured the Bank of Thailand to cut rates, but looser fiscal policy will likely prevent it from easing anytime soon.  

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