Dollar Correction Continues Ahead of Q1 GDP Data

April 25, 2024

Win Thin

U.S. yields remain elevated as heavy supply wraps up; Q1 GDP data will be the highlight; weekly jobless claims will be closely watched; the BOC Summary of Deliberations is worth discussing
ECB GC member Muller remains in the hawkish camp; German consumer confidence continues rise; U.K. CBI April distributive trades survey was weak; Turkey is expected to keep rates steady at 50.0%
Two-day BOJ meeting began today and ends tomorrow with an expected hold; BOJ intervention risk remains high; Malaysia reported March CPI

The dollar is soft ahead of Q1 GDP data. DXY is trading lower near 105.573 as the modest correction continues. DXY has only retraced about a third of the April rally. Retracement objectives ahead are 105.199 (50%) and 104.887 (62%). The euro is trading higher near $1.0725 after stronger than expected German consumer confidence (see below). Elsewhere, sterling is also trading higher near $1.2515 despite a weak CBI survey (see below). USD/JPY traded at another new high of this move near 155.75 ahead of the BOJ decision tomorrow (see below). The dollar rally should resume after this correction, as data confirm persistent inflation and robust growth in the U.S. This backdrop should keep upward pressure on U.S. yields, which in turn would be supportive of the dollar. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

U.S. yields remain elevated as heavy supply wraps up. The 2-year yield is trading at 4.92% and remains on track to test the October high near 5.26%, while the 10-year yield is trading near 4.64% and remains on track to test the October high near 5.02%. The heavy supply wraps up today with $44 bln of 7-year notes to be auctioned. Bid/cover ratio was 2.61 at the previous auction, while indirect bidders took 69.7%. Yesterday, there was weak demand for $70 bln of 5-year notes sold at a yield of 4.659% vs. 4.235% previously. Bid/cover fell to 2.39 from 2.41 previously and indirect bidders took 65.7% vs. 70.5% previously. All told, the market will have digested a total of $183 bln in 2-, 5-, and 7-year notes this week without much of a problem.

Q1 GDP data will be the highlight. Growth is expected at 2.5% SAAR vs. 3.4% in Q4 2023, with personal consumption the main growth driver at 2.8% SAAR. PCE is expected at 3.0% vs. 1.6% in Q4, while core PCE is expected at 3.4% vs. 2.0% in Q4. With the economy remaining strong, Fed easing expectations have adjusted. Odds of a June cut remain below 20%, while odds of a July cut remain below 50%. Even a September cut is not fully priced in, with odds below 100%.

The risks to growth remain skewed to the upside. The Atlanta Fed GDPNow model’s final estimate for Q1 growth was 2.7% SAAR. Its initial Q2 estimate will be released tomorrow. The New York Fed GDP nowcast model’s final estimate for Q1 growth was 2.2% SAAR. This model sees Q2 growth at 2.8% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June.

Weekly jobless claims will be closely watched. That’s because continuing claims are for the BLS survey week containing the 12th of the month and are expected at 1.814 mln vs. 1.812 mln last week. Initial claims are expected at 215k vs. 212k last week. April jobs data will be reported next Friday, with Bloomberg consensus for NFP at 246k vs. 303k in March. Its whisper number stands at 230k.

Regional Fed surveys for April will continue to roll out. Kansas City Fed manufacturing is expected at -5 vs. -7 in March. Kansas City Fed reports services tomorrow. March advance goods trade, wholesale and retail inventories, and pending home sales will also be reported today.

The Bank of Canada’s Summary of Deliberations is worth discussing. The summary showed there was a diversity of views at the April 10 meeting about when to start easing. However, there was broad agreement that monetary policy easing would probably be gradual. Some member emphasized that “the risk had diminished that restrictive monetary policy would slow the economy.” Other members “felt there was a risk of keeping monetary policy more restrictive than needed” given the progress made in bringing inflation down. The division within the BOC suggests the bar is high for rate cut at the next meeting June 5. The market sees 55% odds then but becomes fully priced in July 24.

EUROPE/MIDDLE EAST/AFRICA

ECB GC member Muller remains in the hawkish camp. He noted that as the easing cycle starts, “we certainly don’t have to lower rates at every subsequent meeting. It’s natural to move at a moderate pace with careful steps.” With regards to inflation, Muller said, “you could argue that risks are still to the upside” and added “We’re not that confident anymore about wage growth cooling down or some inflation metrics.” Most ECB officials have signaled that the first cut will come in June. After that, there isn’t much agreement as the split between the hawks and doves remains in place. That said, it’s really a question of whether the ECB cuts three times this year or four. While we favor the latter, the market is pricing in the former. Schnabel, Vujcic, Lagarde, Nagel, and Panetta speak today.

German consumer confidence continues rise. As measured by GfK/NIM, the headline rose to -24.2 in May vs. -26.0 expected and a revised -27.3 (was -27.4) in April. This was the highest since April 2022 and goes hand in hand with improving business confidence. NIM official said "Rising wages and salaries combined with a recent decline in the inflation rate form the foundation for increasing purchasing power among private households."

U.K. CBI April distributive trades survey was weak. Retailing reported sales came in at -44 vs. -3 expected and 2 in March, while total reported sales came in at -8 vs. 8 in March. This was the weakest reading for retailing reported sales since January and suggests weak retail sales in April following March’s flat m/m reading. April GfK consumer confidence will be reported later today and is expected at -20 vs. -21 in March. Bank of England is expected to cut rates August 1. A second cut in December is fully priced in.

Turkey central bank is expected to keep rates steady at 50.0%. At the last policy meeting March 21, the bank delivered a hawkish surprise and hiked rates 500 bp to 50.0% vs. no change expected. With inflation still accelerating, we see risks that the central bank delivers another hawkish surprise today. In March, headline CPI quickened to 68.50% y/y vs. 67.07% in February and core CPI surged to a new high of 75.21% vs. 72.89% in February. The market is pricing in steady rates over the next three months, followed by the start of an easing cycle over the subsequent three months. We think markets are mispricing the odds of further tightening.

ASIA

Two-day Bank of Japan meeting began today and ends tomorrow with an expected hold. We are sticking to our view that the BOJ tightening cycle will remain very modest. The market agrees and is pricing in only 20 bp of tightening in 2024 and 50 bp over the next two years. Such a modest cycle would likely keep upward pressure on USD/JPY. Of note, the yen tends to weaken on BOJ decision days. It has done so for eight straight and nine of the past ten.

BOJ intervention risk remains high after USD/JPY traded at a new cycle high near 155.75. Jawboning no longer has any effect. If the BOJ really wants to address the weak yen, we think a good opportunity to have a big impact would be to deliver a hawkish hold tomorrow and intervene aggressively at the same time. Despite this potential double whammy, we don't think the uptrend in USD/JPY ends until the BOJ actually delivers more tightening and/or the Fed delivers a rate cut.

Malaysia reported March CPI. Headline remained steady at 1.8% y/y vs. 2.1% expected. At the last meeting March 7, Bank Negara kept rates steady at 3.0% but the exchange rate was clearly seen as a risk as the bank noted “the ringgit is currently undervalued, given Malaysia's economic fundamentals and growth prospects.” This suggests the bank may eventually have to hike rates to support the ringgit. Indeed, the market is starting to price in low odds of a hike over the next year. If the ringgit continues to weaken, those odds should rise. USD/MYR recently tested the February high near 4.8055, which was the highest since January 1998.

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