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.  

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2