Dollar Firm as Central Bank Divergence Continues

July 01, 2021

• June ISM manufacturing PMI will be the highlight; weekly jobless claims data are expected to show continued improvement in the labor market; jobs data tomorrow are coming into focus; Fed speakers are likely to continue pushing the more hawkish narrative
• BOE Governor Bailey sounded very cautious; eurozone reported final June manufacturing PMI readings; Sweden’s Riksbank delivered a dovish hold, as expected
• BOJ released the results of its Q2 Tankan survey; Australia reported May trade data and final June manufacturing PMI; China has upped the geopolitical ante when it comes to Taiwan; PMIs across Asia were on the weak side; Korea reported strong June trade data

The dollar is getting more traction ahead of tomorrow’s jobs data. DXY is up for the seventh straight day and traded at the highest level since April 6 near 92.544. It is on track to test the March 31 high near 93.437. The euro traded at a new low for this move near $1.1838 and is on track to test the March 31 low near $1.1705. Likewise for sterling, which is on track to test the April 12 low near $1.3670. Lastly, USD/JPY is making new highs for this move just below the March 2020 high near 111.70. After that is the February 2020 high near 112.25 and the April 2019 high near 112.40.

AMERICAS

June ISM manufacturing PMI will be the highlight today. The PMI is expected at 60.9 vs. 61.2 in May, with prices paid expected to ease to 87.0 from 88.0 in May. Keep an eye on employment, which stood at 50.9 in May. ISM services will be reported next Tuesday and is expected to remain steady at 64.0. 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. Chicago PMI came in yesterday at 66.1 vs. 70.0 expected and 75.2 in May. This is consistent with most of the other survey data. That is, slightly softer but still very high by historical standards. The Chicago PMI’s 75.2 print in May was likely the peak but a reading in the mid-60s is still incredibly strong.

Weekly jobless claims data are expected to show continued improvement in the labor market. Initial claims are expected to fall to 388k from 411kht previous week, while continuing claims are expected to fall to 3.34 mln from 3.39 mln the previous week. Of note, emergency continuing claims are reported with a 2-week lag and so this reading will be for the BLS survey week containing the 12th of the month. Auto sales will also be reported and are expected at a 16.5 mln annual rate vs. 16.99 mln in May. June Challenger job cuts and May construction spending (0.4% m/m expected) will also be reported.

Jobs data tomorrow are coming into focus. Consensus now sees 711k jobs added vs. 559k in May and has been creeping up all week. The unemployment rate is expected to fall a couple of ticks to 5.8%. Average hourly earnings are expected to rise 3.6% y/y vs. 2.0% in May. Ahead of the jobs report, ADP yesterday reported private sector jobs at 692k vs. 600k expected and a revised 886k (was 978k) 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.

Fed speakers are likely to continue pushing the more hawkish narrative. Yesterday, Kaplan noted that markets have been put on notice that tapering is coming soon and that it’s just a matter of when. He said he supports tapering sooner rather than later, but stressed that is should be done gradually. Barkin sees strong labor demand amidst historic highs in job openings. Bostic sounded a little more cautious, however, noting that the U.S. is still down 9-10 mln jobs compared to pre-pandemic. He looks for clearer labor market signs in September. Bostic speaks again today.

EUROPE/MIDDLE EAST/AFRICA

Bank of England Governor Bailey sounded very cautious. He warned that the bank shouldn’t overreact to what he views as a temporary spike in inflation. Bailey said the U.K.’s rapid recovery after lockdowns end is likely to fade in the coming months, noting weaknesses in the labor market. He said “Our current view is that the economy will revert to the lower average underlying growth rates that we have seen since the financial crisis. Reverting to the pre-Covid pattern of lower trend growth will bring its own challenges.” The underlying dovish tone from Bailey is likely to be mirrored by the rest of the MPC, even more so after the lone hawk Chief Economist Haldane steps down this month. The short sterling strip has pushed out its tightening expectations a bit, though the first hike is still fully priced in by Q2 2022. Next policy meeting is August 5 and no change is expected then. Elsewhere, the U.K. reported final June manufacturing PMI at 63.9 vs. 64.2 preliminary.

Eurozone reported final June manufacturing PMI readings. The headline PMI rose to 63.4 vs. 63.1 preliminary. Germany improved to 65.1 vs. 64.9 preliminary, while France improved to 59.0 vs. 58.6 preliminary. Italy and Spain were now reported, with the former falling a tick from May to 62.2 and the latter rising a whole point from May to 60.4. Elsewhere, Germany reported May retail sales, up 4.2% m/m vs 4.6% expected and a revised -6.8% (was -5.5%) in April. Easing CPI inflation has vindicated the ECB doves, which should accommodative policy continue through H2 to help support the recovery.

Sweden’s Riksbank delivered a dovish hold, as expected. The bank noted progress but warned that “the pandemic is not over, and there are new variants of the virus that are creating uncertainty with the risk of setbacks.” It kept rates steady at 0.0% and maintained its QE program at SEK700 bln, adding that its QE program will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022. The flat rate path was extended another quarter to Q3 2024. Of note, the bank addressed the ongoing political uncertainty by noting that “Although the conditions for forming a government are currently uncertain, this is not expected to have a significant impact on economic developments in the short term.”

ASIA

Bank of Japan released the results of its Q2 Tankan survey. The large manufacturing index rose to 14 vs. 16 expected and 5 in Q1, while the large non-manufacturing rose to 1 vs. 3 expected and -1 in Q1. Of note, the large manufacturing outlook rose to 13 vs. 18 expected and 4 in Q1, while the large non-manufacturing outlook rose to 3 vs. 8 expected and -1 in Q1. Planned all-industry capex came in at 9.6% vs. 7.2% expected and 3.0% in Q1. The Q2 economic outlook remains cloudy due to the extended state of emergency, but Q3 may finally see some improvement if the Tankan survey is to be believed. However, it’s clear that Japan Inc. is not as bullish as consensus believed. Japan also reported final June manufacturing PMI, which rose to 52.4 vs. 51.5 preliminary.

Australia reported May trade data and final June manufacturing PMI. Exports rose 6% m/m, as expected, while imports rose 3% m/m vs. flat expected. The PMI rose to 58.6 vs. 58.4 preliminary. The data have remained firm, and yet half of the nation’s population is now under lockdown as the delta variant spreads. The RBA meets next week and we expect a cautious hold in light of the rising uncertainties. We do not think the RBA will taper yet, but will instead move to a more flexible review so that it can adjust its asset purchases later in H2 as economic circumstances change and the outlook becomes clearer.

China has upped the geopolitical ante when it comes to Taiwan. In a remarkable speech, President Xi Jinping said “we must take resolute action to utterly defeat any attempt toward Taiwan independence,” calling for “complete reunification.” Taiwan’s Mainland Affairs Council reacted to the speech by saying the government will not be intimidated and will “defend the nation’s sovereignty.” Needless to say, Taiwan will be the major geopolitical flashpoint for the region. With every rhetorical escalation, the risk of a policy mistake increases, along with the potential involvement of Western nations and further polarization.

On the data front, PMIs across Asia were on the weak side, suggesting that weaker external demand and supply disruptions are taking a toll. China’s Caixin manufacturing PMI declined to 51.3 in June vs. 52.0 in May, and mirrors the softness seen in the official manufacturing PMI. Taiwan’s reading fell to 57.6 from 62.0, and readings for Vietnam, India, Malaysia and Indonesia were all lower on the month. South Korea and the Philippines bucked the trend with minor increases. Despite the softer readings, PMIs across the region remained in expansionary territory in all cases aside from Vietnam (39.9) and Malaysia (44.1).

Korea reported strong June trade data. Exports rose 39.7% y/y vs. 33.8% expected and 45.6% in May, while imports rose 40.7% y/y vs. 33.6% expected and 37.9% in May. CPI will be reported tomorrow, with headline inflation expected at 2.5% y/y vs. 2.6% in May. Last week, BOK Governor Lee said that policy normalization was now expected to begin in 2021. While not imminent, we should expect the process of "orderly normalization” to start in Q4, pending more information on external demand and the virus outlook. As always, BOK officials are worried about financial stability risks from elevated household debt levels, so they won’t rush into tightening. Next policy meeting is July 15 and no change is expected.

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