Dollar Firm Ahead of ECB and PPI

April 11, 2024
  • March CPI inflation ran hot; Fed easing expectations have adjusted violently; U.S. yields are rising; PPI will be reported; FOMC minutes are worth discussing; BOC kept rates steady at 5.0%, as expected; the neutral rate debate is worth discussing; Peru is expected to keep rates steady at 6.25%.
  • The two-day ECB meeting ends shortly with a widely expected hold; monetary policy divergences should continue to favor the dollar; some BOE officials remain hawkish; BOE released its Q1 Bank Liabilities Survey
  • Jawboning on the weak yen has picked up; China reported soft March CPI and PPI data

The dollar remains firm ahead of PPI data. DXY is trading near 105.284, the highest since mid-November. The next target is the November 10 high near 106, but charts point to a test of the November 1 high near 107.113. The euro is trading lower near $1.0730 ahead of the ECB decision (see below) and a dovish hold would lead to further losses. Indeed, clean break below $1.0755 sets up a test of the November 1 low near $1.0515. Elsewhere, sterling is trading flat near $1.2535, helped by hawkish BOE comments (see below). USD/JPY is trading flat near 153.15 on continued jawboning and intervention concerns (see below). The dollar rally should continue as data confirm persistent inflation and robust growth in the U.S. The U.S. data continue to come in mostly firmer and should keep upward pressure on U.S. yields. We believe that while market easing expectations have adjusted violently after CPI (see below), there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further. Hopefully, today’s PPI data will add to the move that began yesterday with the CPI data.


March CPI inflation ran hot. Headline came in at 3.5% y/y vs. 3.2% in February, while core remained steady at 3.8% y/y. Both were a tick higher than expected, as were the m/m rates of 0.4%. In recent months, a one tick miss on either side has been enough to really move markets and that’s what we got yesterday. Furthermore, super core rose 0.7% m/m vs. 0.5% in February and pushed the y/y rate up to 4.8%, the highest since April 2023. The March CPI data suggest that the January and February readings were not a fluke, and that price pressures are picking up. Looking ahead, the Cleveland Fed’s Nowcast model forecasts April headline and core CPI at 3.4% and 3.7%, respectively.

Fed easing expectations have adjusted violently. Odds of a June cut have fallen below 20% vs. 60% pre-CPI, while odds of a July cut have fallen below 50% vs. 99% pre-data. The market only sees 90% odds of the first cut coming in September and only 60% odds that we get a second cut in December. Williams, Collins, and Bostic all speak today. Fed officials should remain very cautious in light of the inflation data.

U.S. yields are rising. The 2-year yield is trading at the highest level since late November near 4.98%, which matches the November 27 high. Next level to watch is the November 13 high near 5.08%, but charts point to a test of the October 19 cycle high near 5.26%. The 10-year yield is trading at the highest level since mid-November near 4.57%. Next level to watch is the November 13 high near 4.70% but clean break above 4.55% sets up a test of the October 23 high near 5.02%. The rise in yields at the short end reflects Fed repricing, while the rise at the long end reflects persistent inflation pressures. Given our constructive fundamental outlook for the U.S., both ends of the yield curve should continue to edge higher. In turn, this should lead to further dollar gains.

PPI will be reported. Headline is expected at 2.2% y/y vs. 1.6% in February and core is expected at 2.3% y/y vs. 2.0% in February. Keep an eye on PPI services ex-trade, transportation, and warehousing. This measure feeds into the calculation of the policy relevant PCE inflation and remains way too high, having picked up a tick to 4.2% y/y in February. After yesterday’s miss on CPI, we see upside risks to the PPI inflation readings today as well. Weekly jobless claims will also be reported.

FOMC minutes are worth discussing. We can't think of another time when the minutes became irrelevant so quickly. It was only 3 weeks ago and yet the Fed decision feels like ancient history. That said, there was a hawkish tone to the minutes, as Fed officials agreed to keep rates high if inflation progress stalls. Despite some seeing upside risks to inflation, almost all saw it appropriate to cut rates this year. The Fed spent a lot of time discussing QT, with minutes showing it favors reducing the monthly balance sheet runoff “fairly soon” by “roughly half.” The Fed said it prefers to adjust the Treasury cap ($60 bln per month) to slow the runoff rather than the MBS cap ($35 mln per month) and added that it was appropriate to take a cautious approach to further runoff. Our best guess is that the pace of runoff will be reduced at the June meeting, with an eye towards halting it at the December meeting. Bank reserves continue rising and so there should be no hurry to slow the pace of QT.

Bank of Canada kept rates steady at 5.0%, as expected. The tone was balanced and neutral, not as dovish as we expected given recent weakness in the Canadian data. The bank removed previous guidance that “it’s too early to loosen the restrictive policy” and instead cautioned “we don’t want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we’ve made bringing inflation down.”

Updated macro forecasts were released. 2026 was added to the forecast horizon. Of note, the bank lowered its Q1 2024 inflation forecast to 2.8% vs. 3.2% previously but still sees inflation reaching 2% by Q4 2025. The BOC raised its estimate of the nominal neutral interest rate. It was raised modestly to a range of 2.25%-3.25% from 2-3% previously in its annual April assessment in 2023. Taken at face value, this reduces the scope of BOC easing before monetary policy turns accommodative.

Governor Macklem channeled his inner Powell. After the BOC delivered a balanced message, Macklem undermined it by saying a June cut is within the realm of possibilities. He added that the rise in the estimated neutral rate doesn’t impact BOC policy near-term. Still, the market sees only 55% odds of a cut in June vs. 80% before the BOC decision. The first cut is fully priced in for July 24.

The neutral rate debate is worth discussing. “The Bank estimates that the nominal neutral rate in Canada has risen to lie within a range of 2.25% to 3.25%, which is 25 basis points higher than in the April 2023 assessment." By way of further explanation, "Because Canada is a small open economy, its neutral rate of interest is influenced by global economic conditions. The Bank uses an estimate of the neutral rate for the United States as a proxy for the global neutral interest rate. The nominal US neutral rate is currently estimated to be within a range of 2.25% to 3.25%. The current estimate of the neutral rate is 25 basis points higher than in the April 2023 Report and is largely explained by the stronger US potential output growth driven by higher population and productivity growth."

It's interesting that the BOC raised its estimate for r* here in the U.S. While the Fed really hasn't officially addressed the possible rise in r*, the March Dots reflect the debate: 1 Fed official sees r* at 2.375%, 8 remain stuck at 2.5%, 1 sees 2.625%, 1 sees 2.75%, 3 see 3.0%, 1 sees 3.125%, 2 see 3.5%, and 1 sees 3.75% for a median of 2.562%. Back in March 2022, when the Fed started hiking, 1 Fed official saw r* at 2.0%, 6 saw 2.25%, 1 saw 2.375%, 5 saw 2.5%, and 2 saw 3.0% for a median of 2.375%. We expect the median r* to continue edging higher.

Peru central bank is expected to keep rates steady at 6.25%. At the last meeting March 7, the bank delivered a hawkish surprise and kept rates steady at 6.25% vs. an expected 25 bp cut after February inflation unexpectedly accelerated to 3.29% vs. 3.02% in January. That was the first hold since the easing cycle began last September. Since that last meeting, March inflation came in at 3.05% y/y vs. 2.80% expected and remains above the 1-3% target range, which warrants another hold today. Indeed, we believe many EM central banks will have to recalibrate their easing cycles in light of the Fed outlook, lest their currencies come under withering pressure.


The two-day European Central Bank meeting ends shortly with a widely expected hold. The bank should also reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. The probability of a 25 bp cut is rather low at just under 5%. Most key ECB officials have telegraphed preference of a first rate cut in June, as they would have more information on wage dynamics as well as updated macro forecasts. President Lagarde’s post-meeting press conference will be key. Her comments will again be scrutinized for any hints about the timing and scope of future interest rate cuts.

Monetary policy divergences should continue to favor the dollar. The ECB is likely to cut sooner than the Fed and cut more than the Fed. While a June cut is only 80% priced in now, the market still sees three cuts this year from the ECB. It should come as no surprise that the 2-year interest rate differentials are moving sharply in the dollar’s favor. This should continue.

Some Bank of England officials remain hawkish. MPC member Megan Greene wrote in the Financial Time that rate cuts in the U.K. “should still be a way off.” Recall that Greene was the first of the hawks to shift to a hold at the February 1 meeting and was joined by both Mann and Haskel at the March 21 meeting. Greene speaks on a panel later today. Bank of England expectations have shifted. The first cut is still nearly priced in for August, but only two cuts total are seen in 2024 vs. three at the start of this week.

The BOE released its Q1 Bank Liabilities Survey. The survey points to a continued recovery in housing market activity. U.K. lenders reported that demand for secured lending for house purchase increased in Q1 to the highest since Q2 2023 and was expected to increase in Q2 as well. However, U.K. lenders reported rising default rates on secured and unsecured lending to households, which is a downside risk to the outlook for consumption spending.


Jawboning on the weak yen has picked up. Vice Finance Minister for International Affairs Kanda said, “Whether this involves currency intervention or not, we authorities are prepared for all situations all the time.” Elsewhere, Finance Minister Suzuki said officials are watching currency movements “with a high sense of urgency.” These comments come after USD/JPY traded at the highest level yesterday since June 1990 near 153.25. There aren't any major chart points between here and the April 1990 high near 160.20. However, we expect further gains to be slow as intervention risks have risen significantly on the break above 152. Indeed, USD/JPY has edged up only 5 pips today to 153.30. The BOJ could check rates or intervene at any time, even during North American hours. That said, this is a dollar move, not a yen move, and so any intervention impact is likely to be limited until the hawkish Fed story recedes.

China reported soft March CPI and PPI data. CPI came in at 0.1% y/y vs. 0.4% expected and 0.7% in February, while PPI came in as expected at -2.8% y/y vs. -2.7% in February. This was the deepest PPI deflation since November and suggests CPI inflation is likely to remain subdued. China reports March money and new loan data sometime over the next week. New loans are expected at CNY3.6 trln vs. CNY1.456 trln in February, while aggregate financing is expected at CNY4.65 trln vs. CNY1.521 trln in February. Policymakers will not (and cannot) be relying on debt-fueled fiscal stimulus to boost growth. At the same time, monetary policy is reaching the limits of what it can do in a deflationary environment and so the 5% growth target for this year will be difficult to meet.  

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