Dollar Firm Ahead of House Debt Ceiling Vote

May 31, 2023
  • The House is expected to vote on the debt ceiling suspension today; we believe passage of the deal leaves the door wide open for a 25 bp hike at the June 13-14 FOMC meeting; Fed Beige Book report for that meeting will be released; ADP private sector jobs estimate will be the data highlight; Canada highlight will be Q1 GDP data; Banco de Mexico releases its quarterly inflation report
  • Eurozone May CPI data continue to trickle out; the ECB released its Financial Stability Review; BOE tightening expectations remain elevated after last week’s CPI data; Bank of Israel Governor Yaron warned that it may have to hike rates again
  • Japan officials are starting to signal concern with yen strength; Japan reported soft April retail sales, IP, and housing starts data; Australia April CPI ran hot; China reported soft official May PMI readings; Thailand hiked rates 25 bp to 2.0%, as expected

The dollar is trading firm ahead of expected House passage of the debt ceiling deal. DXY is trading a new high for this move 104.631 and remains on track to test the mid-March high near 105.103. The euro is trading at a new low for this move near $1.660 and remains on track to test the mid-March low near $1.0515. Sterling is trading lower near $1.2350 and remains on track to test the April 3 low near $1.2275. The EUR/GBP continues to make new lows for this move. USD/JPY is lagging and trading below 140 due to some official warnings on yen strength (see below). However, we believe the pair remains on track to test the November 21 high near 142.25. Banking sector concerns and dovish market pricing for Fed policy had been major negative headwinds on the dollar in recent months, but those have finally begun to clear. Now, the potential passage of the debt ceiling deal (see below) would remove the final headwind for the dollar and so we see this really continuing.


The House is expected to vote on the debt ceiling suspension today. It cleared its first hurdle yesterday after being approved by the House Rules Committee by a 7-6 vote. Of note, several members of the Freedom Caucus have vowed to oppose it but quite frankly, the deal is modest enough that it should pass with the support from moderates in both parties. In the meantime, Speaker McCarthy is taking heat from the hard right faction of his party. Representative Dan Bishop said McCarthy had “capitulated” to Democrats and that he plans to trigger the formal process to remove the speaker. McCarthy dismissed the threat and said he is confident that his position is secure, adding that supporting the debt ceiling deal is “an easy vote for Republicans.” From what we can tell, any move to remove McCarthy should not prevent today’s debt ceiling vote from being held.

We believe passage of the deal leaves the door wide open for a 25 bp hike at the June 13-14 FOMC meeting. With banking sector stresses fading, a potential default was really the only thing that could have prevented a hike next month. That said, the decision will ultimately depend on the data between now and that meeting, starting with the jobs report this Friday. WIRP suggests odds of a hike then are nearly 65% and is pretty much priced in for the July 25-26 meeting. More importantly, multiple rates cuts by year-end are priced out, with some odds still seen of a cut in December. Fed repricing has finally gone our way but more needs to be seen.

Fed Beige Book report for the June FOMC meeting will be released. Since the May 2-3 meeting, there has been some cooling in some parts of the economy but the labor market remains fairly firm even as inflation remains elevated. More importantly, banking sector stresses have eased significantly and the much-feared credit crunch has yet to materialize. In all, we expect the Beige Book to leave the door wide open for further tightening. Between now and the June 13-14 FOMC meeting, we will still get one more jobs report as well as one more each of CPI, PPI, and retail sales data. Those readings will likely be the final determinant for the Fed decision. There will be several Fed speakers this week. Collins, Bowman, Harker, and Jefferson speak today.

ADP private sector jobs estimate will be the data highlight. It is expected at 170k vs. 296k in April. This will be an important clue for the May jobs report, where consensus for NFP stands at 195k vs. 253k in April. The unemployment rate is expected to rise a tick to 3.5% and average hourly earnings are seen steady at 4.4% y/y.

Other labor market data will be reported this week. April JOLTS data will also be reported today and is expected at 9.400 mln vs. 9.590 mln in March. May Challenger job cuts and weekly jobless claims will be reported tomorrow.

Key PMI readings for May will continue to roll out. Chicago PMI is expected at 47.2 vs. 48.6 in April. ISM manufacturing PMI will be reported tomorrow and the headline is expected to fall a tick to 47.0. Keep an eye on employment and prices paid, which stood at 50.2 and 53.2 in April, respectively. Of note, ISM services PMI will be reported next Monday. Last week, S&P Global reported mixed May PMI readings as manufacturing fell to 48.5 vs. 50.2 while services rose to 55.1 vs. 53.6 in April. This led to the composite PMI to rise to 54.5 vs. 53.4 in April and was the highest since April 2022. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth at 1.9% SAAR, down from 2.9% previously. Next model update comes tomorrow after the data.

Fed regional manufacturing surveys for May were uniformly weak. Dallas Fed manufacturing index came in at -29.1 vs. -18.0 expected and -23.4 in April. Dalles Fed reports its services index today.

Canada highlight will be Q1 GDP data. Annualized growth is expected at 2.5% vs. 0.0% in Q4. The Canadian economy remains fairly robust in spite of BOC tightening. With inflation still elevated, the market sees more hikes ahead despite the current pause. WIRP suggests another 25 bp hike is about 85% priced in for either September or October, with nearly 50% odds of a second hike in December. Similar to what we’ve seen for Fed expectations, a BOC rate cut by year-end is now totally priced out.

Banco de Mexico releases its quarterly inflation report. It then releases its minutes tomorrow. At the May 18 meeting, the bank paused for the first time since it began the tightening cycle in 2021 but said that “In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period.” It warned that “The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks.” The swaps market sees steady rates for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us in light of it updated forward guidance. Next policy meeting is June 22 and rates are likely to be kept steady at 11.25% again. However, the forward guidance then will be key.


Eurozone May CPI data continue to trickle out. France and Italy reported their EU Harmonised CPI y/y readings. France came in at 6.0% vs. 6.4% expected and 6.9% in April, while Italy came in at 8.1% y/y vs, 7.5% expected and 8.7% in April. Germany reports later today and is expected at 6.7% y/y vs. 7.6% in April. However, German state data already reported suggest downside risks to the national number. Eurozone reports May CPI tomorrow, with headline expected at 6.3% y/y vs. 7.0% in April and core expected at 5.5% y/y vs. 5.6% in April. If so, headline would be the lowest since February 2022 and would also be the first deceleration in core since June 2022. Elsewhere, France reported April consumer spending at -1.0% m/m vs. 0.3% expected and a revised -0.8% (was -1.3%) in March. Germany reported May unemployment steady at 5.6%, as expected.

The ECB released its Financial Stability Review. It warned that “Tighter financing conditions to forcefully address high inflation have contributed to a reappraisal of the economic outlook and to a reversal of overly compressed asset-price risk premia. As financial conditions normalize, this may expose fragilities and fault lines in the financial system.” In particular, the bank focused on the property sector because “The correction in property markets could turn disorderly in the event of negative macro-financial surprises.” The ECB acknowledged that “Financial markets remain vulnerable to less favorable growth and inflation outcomes. Adverse market dynamics could be amplified by forced sales of securities.” On a positive note, the ECB said “In all of these challenges, the resilience of euro-area banks has been noteworthy, but should not give way to complacency.”

ECB tightening expectation have fallen a bit. WIRP suggests another hike is priced in for June 15, while odds of another 25 bp hike top out near 85% in September or October. A third 25 bp hike is no longer seen vs. 40% in December that was priced in at the start of this week. Muller said “Looking at how fast inflation is right now, I think it’s very likely that we’re in for more than one more 0.25% interest rate hike. It also seems to me that it’s probably too optimistic to expect interest rates to drop early next year.” Villeroy said “We said inflation will reach its peak during this semester. We’re very likely there. It’s even likely that we’ve passed the peak and so inflation will come down in France, as we said, between now and the end of the year, even if it won’t be sufficient.” Visco said “Care must be taken to prevent the intensity of its transmission from causing an excessive brake on consumption and investment. This is a tough challenge.”

Bank of England tightening expectations remain elevated after last week’s CPI data. WIRP suggests a 25 bp hike June 22 is priced in, with around 20% odds of a larger 50 bp move. 25 bp hikes for August 3 and September 21 are fully priced in, while odds of one last hike December 14 are around 75%. This path would take the bank rate up to 5.5% vs. 4.5% currently. Yet this repricing has done little for cable, which has been overwhelmed by broad dollar strength. However, the EUR/GBP cross is trading at new lows for this move near .86260 and the more hawkish BOE could see this pair test the December low near .85475. Mann speaks today.

Bank of Israel Governor Yaron warned that it may have to hike rates again. The bank just hiked rates 25 bp to 4.75% last week but Yaron said that “Since then, we have experienced further depreciation of about 2-3%. If this trend continues, even more restrictive monetary policy may be required.” Next policy meeting is July 10 and if the shekel remains under pressure, another hike then seems likely. Of note, Yaron was critical of the budget passed last week and said it doesn’t contain enough drivers for growth.


Japan officials are starting to signal concern with yen strength. The Ministry of Finance’s top currency official Masato Kanda warned that “It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable.” Kanda added that “The government will continue to closely monitor market moves, and will take appropriate responses if necessary.” The comments came after the first meeting of officials from the Ministry of Finance, the Bank of Japan and the Financial Services Agency since March and was unscheduled. The BOJ has not intervened since last September and October, when USD/JPY was trading above 150. At around 140 currently, the pair is quite far from the October high near 152 but the pace of movement has picked up in recent weeks as the dollar rally got back on track. For now, we see little risk of intervention.

Japan reported soft April retail sales, IP, and housing starts data. Sales came in at -1.2% m/m vs. 0.5% expected and a revised 0.3% (was 0.6%) in March, while IP came in at-0.4% m/m vs. 1.4% expected and 1.1% in March. Housing starts came in at -11.9% y/y vs. -0.8% expected and -3.2% in March. The economy was losing momentum as Q1 ended and that has clearly carried over into the start of Q2. No wonder policymakers remain cautious about removing stimulus early. Q1 capital spending and company profits and final May manufacturing PMI will be reported tomorrow.

Bank of Japan tightening expectations remain fairly steady. WIRP suggests liftoff is likely at the December 18-19 meeting. However, the expected rate path remains very modest, with 15 bp of tightening seen over the next 12 months followed by another 15 bp over the subsequent 12 months. For now, BOJ officials have shown no signs of pivoting anytime soon.

Australia April CPI ran hot. Headline came in at 6.8% y/y vs. 6.4% expected and 6.3% in March. This was the first acceleration since December and moves inflation further above the 2-3% target range. The ABS noted that the gain was due in part to the end of a fuel subsidy that was introduced in April 2022. In terms of RBA policy, WIRP suggests odds of one more 25 bp hike top out around 85% September 5, up from 75% at the start of this week. Governor Lowe testified today and said “We’re in very much a data dependent mode” whilst noting that “We’ve increased interest rates a lot. Monetary policy is restrictive and it’s working..”

China reported soft official May PMI readings. Manufacturing came in at 48.8 vs. 49.5 expected and 49.2 in April and non-manufacturing came in at 54.5 vs. 55.2 expected and 56.4 in April. As a result, the composite fell a point and a half to 52.9 to the lowest since January, when reopening first took effect. Caixin reports its manufacturing PMI tomorrow and is expected to remain steady at 49.5. There are clear downside risks after the official readings. USD/CNY traded at the highest level since November 30 near 7.1130 and the clean break above 7.0845 sets up a test of the November cycle high near 7.3275. Elsewhere, CNH/USD traded near 7.1320 and the clean break above 7.1160 sets up a test of the October cycle high near 7.3750. With the economy clearly softening , we believe the PBOC will ease again in the coming months and this should translate into further yuan weakness.

Bank of Thailand hiked rates 25 bp to 2.0%, as expected. The decision was unanimous and the bank maintained a hawkish bias as Assistant Governor Piti said “It’s still appropriate to continue the current strategy that we have adopted.” Growth forecasts for this year and next were kept steady at 3.6% and 3.8%, respectively, while the 2023 inflation forecast was cut to 2.5% vs. 2.9% in March. The bank noted that “The Committee recognizes upside risks to domestic growth, in part owing to forthcoming government economic policies. At the same time, there is a need to monitor the uncertain economic and monetary policy outlook of major economies.” Given the hawkish bias, the market is now pricing in a policy rate near 2.5% over the next 12 months vs. between 2.0-2.25% at the start of this week.

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