Dollar Firm Ahead of ADP and Chicago PMI

June 30, 2021
  • ADP reports June private sector jobs; Chicago PMI will also be reported; U.S. equities made another all-time high yesterday; Fed officials continue to tilt hawkish; NYT article today plays up a split on the FOMC; Canada reports April GDP
  • Eurozone reported June CPI data; Turkey’s trade deficit widened to -$4.1 bln in May, as expected
  • Japan reported weak May IP; China official PMI readings for June softened; oil markets are caught in an air pocket of uncertainty as OPEC+ delayed its decision on supply

The dollar is getting more traction ahead of ADP jobs data. We believe markets are reassessing the U.S. outlook as key data this week are expected to show a strong economy as we move into H2. This stands in contrast to many other parts of the world, where lagging vaccine roll-outs are allowing the delta variant to quickly spread, forcing some to go back into lockdown. DXY is up for the sixth straight day and continues to trade above 92. The euro remains heavy after testing support near $1.38. Lastly, USD/JPY continues to edge lower, trading just below 110.50. Strong U.S. data today should help the dollar see broad-based gains.

AMERICAS

ADP reports June private sector jobs. They are expected at 600k vs. 978k in May and will serve as one of the biggest clues for the jobs data Friday. There, consensus sees 700k jobs added vs. 559k in May, with the unemployment rate expected to fall a couple of ticks to 5.6%. Average hourly earnings are expected to rise 3.6% y/y vs. 2.0% in May. By all accounts, the softer jobs numbers seen in recent months are due more to supply than demand, in which case wages will have to adjust higher. Perhaps this is behind the expected jump in average hourly earnings.

Chicago PMI will also be reported. It is expected at 70.0 vs. 75.2 in May. If so, it would still be at an abnormally high level. Last week, Markit reported preliminary June PMI readings, with manufacturing at 62.6 vs. 62.1 in May and services at 64.8 vs. 70.4 in May. Of note, ISM manufacturing PMI and auto sales will be reported tomorrow. The PMI is expected at 61.0 vs. 61.2 in May, while auto sales are expected at a 17.0 mln annual rate vs. 16.99 mln in May. May pending home sales (-1.0% m/m expected) will also be reported today.

U.S. equities made another all-time high yesterday. The year-to-date S&P 500 performance is now on par with that of the EuroStoxx index. Both are up close to 15% on the year, vastly outperforming major indices in the UK (+10%), Japan (+5.6%), and the broad MSCI EM index (+6.7%). Earnings will start trickling out next month and will likely be a test of the durability of the current equity rally. With strong U.S. economic expected in Q2 and Q3, we suspect earnings will prove to be supportive.

Fed officials continue to tilt hawkish. This time, it was Governor Waller’s turn. Waller joined the board back in January but has been conspicuously silent until now. Waller said that "we are now in a different phase of economic policy, and so it's appropriate to start thinking about pulling back on some of the stimulus." He favors tapering sooner rather than later and would prefer to concentrate tapering on the Fed’s MBS purchases first, noting "Right now the housing markets are on fire; they don't need any other unnecessary support." This is very similar to St. Louis Fed President Bullard’s view, who Waller once worked with. Waller was less sure about a rate hike, noting that "The unemployment rate would have to drop fairly substantially, or inflation would have to really continue at a very high rate, before we would take seriously a rate hike in 2022, but I'm not ruling it out." He also admitted that he was not one of the FOMC who pulled their dots forward.

The New York Times has an article today that plays up a split on the FOMC. It is entitled “Fed Unity Cracks as Inflation Rises and Officials Debate Future.” We think this exaggerates what we see as natural differences that develop between 19 policymakers. As the old joke goes, there are always two opinions in a conversation, but three if one of them is an economist. Bostic and Barkin speak today. While some on the FOMC remain in the more dovish camp, we expect more and more to tilt hawkish of the economic data remain strong. Indeed, Barkin remained upbeat yesterday, echoing his stance from Monday by noting “substantial progress” in meeting the inflation goal. He noted that the labor market can get “significantly further along” and expects to see good jobs numbers in August and September. He said that if we get labor progress too, he’d be “ready to taper” and wants to be ready to raise rates when conditions are met.

Canada reports April GDP. It is expected to fall -0.8% m/m vs. a 1.1% gain in March. Due to base effects, GDP would jump 19.1% y/y vs. 6.6% in March. For now, the Canadian economy appears to be healing but after two straight months of weak jobs, the Bank of Canada is likely to remain on hold for now. Next policy meeting is July 14 and no change is expected then. Ahead of that, June jobs data will be reported July 9. USD/CAD is on track to test the June 21 high near 1.2485. After that is the April 21 high near 1.2655.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported June CPI data. Headline inflation eased as expected to 1.9% y/y from 2.0% in May, while core eased as expected to 0.9% y/y vs. 1.0% in May. The softer eurozone CPI measures vindicates the ECB’s doves, at least for now. Today, Panetta speaks and is expected to maintain the dovish narrative.

Turkey’s trade deficit widened to -$4.1 bln in May, as expected. Exports were up 66% y/y and imports rose 54% y/y. The bottom line here is that the lira’s 15% year-to-date depreciation against the dollar has not been enough to offset other factors such as the higher cost of energy imports. That said, the trend for both the current account and trade balance has been positive for the last several months, suggesting that some adjustment is taking place. While this should provide some support for the lira in the medium-term, right now it’s all about the central bank, how soon they will begin easing, and the perceived political influence on its decision. The July 14 and August 12 meetings are very much live after President Erdogan’s push for easing earlier this month.

ASIA

Japan reported weak May IP. IP fell -5.9% m/m, nearly triple the consensus -2.1% and more than reversing the 2.9% gain in April. Chip shortages appear to have hurt auto production. Furthermore, the Q2 economic outlook remains cloudy due to the extended state of emergency, but Q3 may finally see some improvement if the virus numbers stay down. However, this is a very big if. Like much of Asia, Japan’s vaccination program has been very slow, leaving much of the population vulnerable to the delta variant. We continue to expect another fiscal package over the summer to help boost the economy and Prime Minister Suga’s popularity ahead of fall elections.

China official PMI readings for June softened. The manufacturing PMI came in at 50.9 vs. 50.8 expected and 51.0 in May, with continued declines in external demand for China’s exports. Also note that the chip shortage and supply disruptions in Guangdong’s ports could have suppressed activity somewhat. The services PMI declined to 53.5 vs. 55.3 expected and 55.2 in May, partially weighed down by transport and hospitality. The inflation component of the readings also suggests that the government’s strong-handed policy to contain rising commodity prices is working. While the recovery continues, the pace is likely to continue easing modestly as policymakers stress deleveraging, rebalancing , and regulating. Caixin reports its manufacturing PMI tomorrow, which is expected at 51.9 vs. 52.0 in May.

COMMODITIES AND ALTERNATIVE INVESTMENTS

Oil markets are caught in an air pocket of uncertainty as OPEC+ delayed its decision on supply. The group said it needs one more day to resolve internal divisions. We are seeing the usual split with Russia arguing for increase in output and Saudi Arabia wanting to keep tighter supply. Crude is taking a break from its long upward trend that took Brent from around $40 per barrel late last year to $75 now. Aside from supply considerations, the looming driving season in the U.S. promises stronger demand for oil, already seen in storage data. Of note, however, the 12-month curve remains in deep backwardation, suggesting that investors still expect longer-term trend in the energy prices to moderate.

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