Dollar Firm, Nokkie Shines as CPI Shows More Tightening Needed

June 09, 2023
  • Developments abroad continue to color our hawkish Fed view; yet Fed tightening expectations have remained fairly steady; the labor market may finally be softening; BOC Deputy Governor Beaudry explained the bank’s hawkish surprise; Canada reports May jobs data
  • Italy reported very weak April IP; eurozone data have been coming in consistently weak ahead of the ECB decision next week; SNB President Jordan was very hawkish; Norway May CPI ran hot; Turkey central bank has a new head
  • Reports suggest the BOJ is unlikely to tweak its YCC at next week’s meeting; China reported May CPI and PPI data

The dollar is trading firmer ahead of the weekend. NOK is outperforming as higher than expected May CPI data raises the odds of a 50 bp hike from Norges Bank this month (see below). This and other recent developments abroad color our more hawkish Fed outlook (see below). DXY is trading higher near 103.533 after two straight down days and we still look for a retest of last week’s cycle high near 104.699 and then the mid-March high near 105.103. The euro is trading lower near $1.0760 and we still look for a retest of last week’s low near $1.0635 and then the mid-March low near $1.0515. Sterling is trading lower near $1.2450 and we still look for a test of the late May low near $1.2310. USD/JPY is trading higher near 139.60 and we still look for a test of the late May high near 141. The headwinds on the dollar (banking sector weakness, debt ceiling battle) have been resolved even as the tailwinds (strong economy and robust labor market) remain in play. We look for the post-NFP rally to continue as markets continue to underestimate the risks of Fed tightening (see below).


Developments abroad continue to color our hawkish Fed view. Earlier this week, both RBA and BOC delivered hawkish surprises as current policy settings were deemed insufficiently tight as inflation pressures remain too high. Yesterday, SNB President Jordan signaled that the tightening cycle would likely go higher for longer. Today, Norway reported much higher than expected May CPI data that we believe cements a 50 bp hike from Norges Bank and a continuation of its hawkish stance when it meets June 22.

Yet Fed tightening expectations have remained fairly steady. WIRP suggests odds of a hike next week are stuck around 30% and rise to around 85% in July. Given recent global developments, we think these odds should be much higher and we continue to believe that markets are underestimating the notion that more than one hike may be needed. More importantly, WIRP suggests only 15% odds of a rate cut by year-end vs. nearly 50% at the start of this week. While there has been a bit of Fed repricing in recent weeks, more needs to be done.

The labor market may finally be softening. Initial claims came in at 261k vs. 235k expected and a revised 233k (was 232k) last week, while continuing claims came in at 1.757 mln vs. 1.802 mln expected and a revised 1.794 mln (was 1.795 mln) last week. The 4-week moving average for initial claims rose to 237k and was the highest since late April. Despite this spike, most other indicators suggest the labor market remains quite robust and so we expect another solid jobs reports for June. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.2% SAAR growth in Q2, steady from the previous reading. Next model update will come next Thursday after the retail sales data. There are no U.S. data reports nor Fed speakers today.

Bank of Canada Deputy Governor Beaudry explained the bank’s hawkish surprise. He admitted that at the April meeting, the bank was already starting to see signs that more tightening might be needed and that data since then led to this week’s hike. Beaudry said sharply higher household spending “surprised us” and added that “The bottom line is there appears to be more momentum in demand than we expected.” He said the bank was also concerned by the unexpected acceleration of inflation to 4.4% in April and that “We agreed the likelihood that total inflation could get stuck well above the 2% target had increased.” Beaudry also questioned “whether we may be entering a new environment of higher rates.” WIRP suggests nearly 70% odds of another hike July 12 and is fully priced in for September 6. Odds of another hike this year top out at over 60% December 6 and so a BOC rate cut by year-end is now totally priced out. Updated macro forecasts will be released at the July meeting and should see boosts to the inflation projections.

Canada reports May jobs data. Consensus sees 21.3k jobs added vs. 41.4k in April, with the unemployment rate expected to rise a tick to 5.1%. If so, it would be the first increase in the unemployment rate since August 2022 and suggests that the labor market remains very tight despite the BOC tightening seen so far.


Italy reported very weak April IP. It came in at -1.9% m/m vs. 0.2% expected and -0.6% in March. As a result, the WDA y/y rate fell sharply to -7.2% vs. -4.1% expected and -3.2% in March. This was the weakest since July 2020 and adds to our negative view on eurozone growth. Italy and Spain were the major drivers of eurozone growth in Q1 but data in both countries have softened even as Germany and France continue to struggle. Updated ECB macro forecasts should see lower eurozone growth for 2023 and 2024.

Eurozone data have been coming in consistently weak ahead of the ECB decision next week. WIRP suggests a 25 hike is priced in for next Thursday, followed by another 25 bp hike in either July or September. Odds of one last 25 bp hike after that top out near 25% in October. Guindos, de Cos, and Centeno speak today.

Swiss National Bank President Jordan was very hawkish. He said “Inflation is above our threshold for price stability. We have second-round effects, third-round effects, so inflation is more persistent than we initially thought.” Jordan added that the current policy rate of 1.5% “is relatively low, and it’s not a really good idea to wait and then have higher inflation later.” and so the hawk parade continues. SNB meets June 22 and while a 25 bp hike is fully priced in, I think the odds of another 50 bp move are going up. WIRP suggests those odds are around 45% vs. 25% at the start of this week. Looking ahead, 100 bp of further tightening is nearly priced in now vs. 50 bp at the start of this week.

Norway May CPI ran hot. Headline came in at 6.7% y/y vs. 6.3% expected and 6.4% in April, while underlying also came in at 6.7% y/y vs. 6.3% expected and actual in April. Headline is the highest since December and moves further above the 2% target. At the last policy meeting May 4, Norges Bank hiked rates 25 bp to 3.25% and said that “Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.” It noted that “Inflation is high and markedly above the target of 2%” and added that “Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead.” New forecasts will be released at the June 22 meeting and we think the odds now favor a 50 bp hike to 3.75% and a hawkish shift in the expected rate path as the swaps market now sees a peak policy rate near 4.0%.

Turkey central bank has a new head. As reports earlier this week suggested, Hafize Gaye Erkan has been named to the post. Erkan has a Ph.D. from Princeton University in financial engineering and applied mathematics and held the post of co-CEO at First Republic Bank before moving to become CEO of commercial property lender Greystone last year. As we have noted before, moving to orthodox monetary policy would require a massive hike in the nominal policy rate to something between 45-50% in order to get a sufficiently high positive real rate. Will Erdogan really allow that? In a word, no. This is why we just can’t get too excited about the potential return of orthodoxy to the economic team. Of note, USD/TRY traded at a new record high today near 23.561.


Reports suggest the Bank of Japan is unlikely to tweak its Yield Curve Control at next week’s meeting. They see no urgency to move given the recent improvement in the functioning of the JGB market and the current shape of the yield curve. That said, BOJ officials do recognize that inflation is running higher than expected and that could lead the bank to boost its inflation forecasts in its updated macro forecasts. Even then, the BOJ isn’t confident enough to say that the sustainable 2% target is within reach and so policymakers see the need for continued monetary stimulus. Indeed, Governor Ueda underscored this stance today by noting “There is still a little distance to attaining the 2% price target in a stable and sustainable manner. Therefore, our stance is to continue with monetary easing patiently.”

China reported May CPI and PPI data. CPI came in as expected at 0.2% y/y vs. 0.3% in April, while PPI came in at -4.6% y/y vs. -4.3% expected and -3.6% in April. It’s clear that China is facing deflation risks, which supports our view that the impact of reopening on growth (both domestic and global) remains very disappointing. That said, low price pressures should make it easier for the PBOC to justify additional stimulus in the coming months. The PBOC sets its key 1-year MLF rate next week. Most expect no change but a handful of analysts look for a 10 bp cut to 2.65%. Governor Yi Gang said the bank will keep monetary policy targeted and ensure credit growth is stable, suggesting he is in no hurry to cut policy rates. State banks did heed the call and cut their deposit rates this week and so a policy rate cut is likely to be a story for H2.

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