The dollar is trading firmer after the weekend U.S. attack on Iran. DXY is trading at the highest level since last May near 99.336. Clean break above 99.381 sets up a test of the May 29 high near 100.481. The euro is trading lower near $1.1470 while sterling is trading lower near $1.3385. Elsewhere, USD/JPY is trading at the highest since mid-May near 148 and is on track to test the May 12 high near 148.65. What’s strange about today’s dollar gains is that other assets are not suffering from a risk off move, with equity markets narrowly mixed and UST yields slightly higher (see below). While the dollar will see a modest haven bid from time to time given Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold last week. Market repricing of Fed easing along with fading risk off impulses should open up dollar downside again.
AMERICAS
Risk off impulses have been minimal after the weekend U.S. attack on Iran nuclear facilities. Despite ongoing risks and uncertainty, oil prices are only slightly higher, equity markets are narrowly mixed, UST yields are slightly higher, and gold is flat on the day. The big outlier is the dollar, which is trading firmer across the board. It’s difficult to make any sense of this price action and so we will simply wait a day or two for the dust to settle to see if these dollar gains can be sustained.
Markets are still digesting the Fed’s hawkish hold. The market is pricing in around 15% odds of a July cut, rising to 80% in September and fully priced in for October. Waller, Bowman, Goolsbee, Williams, and Kugler (twice) speak today. While most Fed officials are in Powell’s camp of wait and see, we know some are more dovish as the June Dots show two were in favor of three cuts this year. Governor Waller is likely to be one of the two, as he said he is in favor of cutting rates soon, perhaps as early as the July 29-30 meeting.
S&P Global preliminary June PMIs will be the data highlight. Manufacturing is expected at 51.0 vs. 52.0 in May, services is projected at 52.9 vs. 53.7 in May, and the composite index is expected at 52.1 vs. 53.0 in May. Of note, the ISM readings were weaker than S&P Global in May, with the ISM composite PMI falling to 49.8. June ISM PMIs will be reported next week.
The growth outlook is starting to deteriorate. The New York Fed Nowcast model now estimates Q2 growth at 1.9% SAAR vs. 2.3% the previous week and Q3 at 2.1% SAAR vs. 2.5% the previous week. These latest readings aren't bad but are clearly decelerating after weeks of strength. Next update is Friday. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 3.4% SAAR vs. 3.5% previously and will also be updated Friday.
EUROPE/MIDDLE EAST/AFRICA
Eurozone reported mixed preliminary June PMIs. Headline manufacturing came in at 49.4 vs. 49.7 expected and was steady from May, services came in as expected at 50.0 vs. 49.7 in May, and the composite index came in two ticks lower than expected at 50.2 and was steady from May. Looking at the country breakdown, the German composite came in at 50.4 vs. 49.1 expected and 48.5 in May and the French composite came in at 48.5 vs. 49.3 expected and actual in May. Of note, the German composite is the highest since March. Italy and Spain will be reported with the final PMI readings in early July. The ECB is nearing the end of its easing cycle. The swaps market is pricing in one more 25 bp cut over the next 12 months. Lagarde and Nagel speak later today.
U.K. reported firm preliminary June PMIs. Manufacturing came in at 47.7 vs. 46.8 expected and 46.4 in May, services came in as expected at 51.3 vs. 50.9 in May, and the composite index came in a tick higher than expected at 50.7 vs. 50.3 in May. The composite rose for the second straight month to the highest since March. The PMI input price subindex eased to a three-month low in June, while the output price subindex is the lowest since January 2021. Softening UK inflationary pressures argues for a rate cut in August, which is currently 80% priced-in.
ASIA
Japan reported firm preliminary June PMIs. Manufacturing came in at 50.4 vs. 49.4 in May, services came in at 51.5 vs. 51.0 in May, and the composite came in at 51.4 vs. 50.2 in May. This was the highest composite reading since February. Despite the improvement, the swaps market still sees only 25 bp of tightening over the next 12 months and the cautious normalization cycle is an ongoing headwind for JPY.
Australia reported firm preliminary June PMIs. Manufacturing remained steady at 51.0, services came in at 51.3 vs. 50.6 in May, and the composite came in at 51.2 vs. 50.5 in May. This was the highest composite reading since March.
Singapore reported soft May CPI data. Headline fell a tick to 0.8% y/y, while core fell a tick to 0.6% y/y, both as expected. Headline was the lowest since February 2021. While the Monetary Authority of Singapore does not have an explicit inflation target, low price pressures should allow it to easy policy again this year if the economy slows too much. At the last meeting April 14, the MAS loosened policy for the second straight quarterly meeting by reducing “slightly” the slope of its S$NEER trading band whilst keeping the width and midpoint unchanged. It noted that “There are downside risks to Singapore’s economic outlook stemming from episodes of financial market volatility and a sharper-than-expected fall in final demand abroad. A more abrupt or persistent weakening in global trade will have significant ramifications on Singapore’s trade-related sectors, and in turn, the broader economy.” Next meeting is in July and further loosening seems likely.
