Dollar Firm After Hawkish FOMC Minutes

February 23, 2023
  • FOMC minutes tilted hawkish; the Fed noted the importance of financial conditions matching policy; weekly jobless claims will be closely watched; January Chicago Fed NAI will be important; we get a revision to Q4 GDP
  • Final February eurozone inflation readings were revised higher; some BOE officials remain hawkish; Turkey cut rates 50 bp to 8.5% vs. 100 bp expected
  • RBNZ Governor Orr suggested jumbo rate hikes are a thing of the past; Korea kept rates steady at 3.5%, as expected

The dollar continues to firm after the FOMC minutes. DXY is up for the third straight day and trading near 104.610. We are nearing a test of last week’s high near 104.667 and a break above that would set up a test of the January 6 high near 105.631. The euro is trading at a new low for this move below $1.06 and is on track to test of the January 6 low near $1.0485. Sterling is trading lower near $1.2025 as recent moves above $1.21 have not been sustained. We look for cable to revisit last week’s low near $1.1915 and a break below that would set up a test of the January 6 low near $1.1840. USD/JPY is trading near 135 but has so far been unable to break above this week’s higher near 135.25. This should eventually break higher and we look for a test of the December 20 high near 137.50, right before the BOJ shocked markets with its YCC tweak. To state the obvious, the recent U.S. data have come around to support our more hawkish view on the Fed, which in turn supports our call for a stronger dollar. Market sentiment is finally swinging back in the dollar’s favor and we remain hopeful that the data continue to encourage this shift.


FOMC minutes tilted hawkish. “A few” officials favored or could have backed a larger 50 bp hike. This means that it wasn't just Mester and Bullard that favored a 50 bp hike and that there are probably two others that joined them. “Almost all” officials saw the benefit of slowing the pace of tightening and backed the 25 bp hike. Remember, they didn't have the strong January data in hand and so they've probably even gotten more hawkish since this meeting. “All” saw ongoing rate hikes as appropriate.

The minutes noted the importance of financial conditions matching policy. This reference to financial conditions suggests the Fed was more concerned about looseness than Powell let on. Recall that at his press conference, Powell did not push back at all against the loosening of financial conditions. He spoke about the Fed focusing on sustained changes in financial conditions but did not use the opportunity to say that the current loosening was unwarranted. As of February 10, conditions as measured by the Chicago Fed are the loosest since late February 2022. Its adjusted measure is the loosest since early February. This must be frustrating for the Fed but all it can do is to continue hiking rates and giving hawkish forward guidance. Bostic and Daly speak today.

Weekly jobless claims will be closely watched. That is because the initial claims data will be for the BLS survey week containing the 12th of the month. Bloomberg consensus for NFP currently sees 200k. If claims remain low, we should get another solid number (though obviously down from the whopping 517k in January). Initial claims are expected at 200k vs. 194k last week, while continuing claims are expected at 1.700 mln vs. 1.696 mln last week.

January Chicago Fed National Activity Index will be important. It is expected at -0.25 vs. -0.49 in December. A zero reading means the economy is growing at around trend. The 3-month moving average would fall to -0.42 vs. -0.33 in January. Recall that when that 3-month average moves below -0.7, that signals imminent recession. While it is still above that threshold, the 3-month moving average is the lowest since June 2020. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply.

We get a revision to Q4 GDP. Growth is seen steady at 2.9% SAAR. This is of course old news and markets are already looking ahead to Q1. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.5% SAAR and the next model update will come tomorrow. If this rate is maintained, it would be the third straight quarter of above trend growth in the U.S. Kansas City Fed manufacturing index will be reported today and is expected at -2 vs. -1 in January. Its services index will be reported tomorrow.


Final February eurozone inflation readings were revised higher. Both headline and core y/y rates were revised up a tick from the preliminary to 8.6% and 5.3%, respectively. Of note, core inflation is now at a new cycle high and will embolden the hawks to continue pushing for rate hikes. Preliminary February CPI data will be reported next week. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 50 bp hike May 4 is only around 40% priced in. Another 25 bp hike June 15 is priced in, followed by one last 25 bp hike either July 27 or September 14 that see the policy rate peak near 3.75%, up from 3.5% at the start of last week. De Cos speaks later today.

Some BOE officials remain hawkish. Mann said today that “I believe that more tightening is needed, and caution that a pivot is not imminent,” adding that not tightening enough now would mean “monetary policy will have to stay tighter for longer to ensure that inflation returns sustainably back to the 2% target.” She warned of “an extended persistence of inflation into this year and next.” Mann has emerged as one of the leading hawks at the BOE but is currently outnumbered by the doves. WIRP suggests a 25 bp hike March 23 is priced in. After that, a 25 bp hike is nearly priced in for May 11 followed by one last 25 bp hike in Q3 and so the expected terminal rate is now near 4.75% vs. 4.5% at the start of this week. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. Elsewhere, CBI distributive trades survey for February showed improvement with total distributive reported sales at -12 vs. -22 in January and retailing reported sales at 2 vs. -23 in January.

Turkey central bank cut rates 50 bp to 8.5% vs. 100 bp expected. Expectations are all over the place, however. Of the 20 analysts polled by Bloomberg, 6 saw no change, 11 saw a 100 bp cut, 2 saw a 150 cut, and 1 saw a 200 bp cut. Rates had been kept steady since the last 150 bp cut in November. The recent earthquakes have forced policymakers back into easing mode as the bank said “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.” However, it hinted at steady policy now by noting that rates are now “adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.” Rebuilding efforts will provide a boost and President Erdogan will be keen to add stimulus ahead of the planned May elections. It remains to be seen whether the earthquake response will cost Erdogan at the polls.


RBNZ Governor Orr suggested jumbo rate hikes are a thing of the past. After downshifting to a 50 bp move this week, Orr noted that “It would take a significant upside inflation shock from where we are” for the bank to consider a 75 bp move again, adding that “The economy has been unfolding fully as expected since our November statement, so we would need a significant surprise.” Regarding the impact of rebuilding from the floods, Orr estimated that “We’re looking at about a 1% addition to GDP over coming years. That is well manageable within the current monetary settings. But if inflation expectations continue, if core inflation is more persistent, then tighter for longer is certainly an outcome.” Next policy meeting is April 5 and WIRP suggests another downshift is likely as there are only 35% odds of another 50 bp move. However, two more 25 bp hikes May 24 and July 12 are mostly priced in, which would take the policy rate up to a peak near 5.5%.

Bank of Korea kept rates steady at 3.5%, as expected. It was the first pause since the bank started the tightening cycle back in April 2022. However, Governor Rhee signaled further hikes are likely by saying “I hope the hold this time isn’t going to be seen as meaning the rate hike stance is over.” He noted that there was one dissent in favor of a 25 bp hike, adding that five of the six board members were open to a peak policy rate of 3.75%. This was a hawkish tilt from the last meeting January 13, when three board members saw 3.5% as the terminal rate while three others saw the terminal rate at 3.75%. Next policy meeting is April 13 and while a hike then is possible, it will depend on the data. The swaps market is pricing in a peak policy rate near 3.75% over the next 6 months.

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