Dollar Firm as Divergences Widen

June 21, 2024

Win Thin

Fed officials continue to counsel patience; S&P Global preliminary June PMIs will be the highlight; U.S. growth remains robust; Canada highlight will be April retail sales
Eurozone reported soft preliminary June PMIs; weak data support our belief that the ECB’s hawkish cut was driven by growth concerns; BOE delivered a dovish hold; U.K. reported strong May retail sales and soft preliminary June PMIs
Japan reported May national CPI data and soft preliminary June PMIs; Australia reported soft preliminary June PMIs

The dollar remains firm as divergences widen. DXY is trading higher for the second straight day near 105.768 and remains on track to test the April-May highs near 106.50. The euro is trading lower near $1.0685 after weak PMI readings (see below), while sterling is trading lower near $1.2640 in the wake of the BOE’s dovish hold (see below. USD/JPY traded at a new high for this move just above 159 and is on track to test the April high near 160.15. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. The Fed sees the same and delivered a hawkish hold last week. However, the weak June PMI readings for all the major economies reported so far underscores the widening economic divergences that support the U.S. dollar. This should continue in the coming weeks, but we’ll know more after the U.S. reports PMIs later today (see below). In addition, the dollar should also continue to gain from any risk off impulses emanating from France.

AMERICAS

Fed officials continue to counsel patience. Kashkari said, "There is some evidence of some softening around the margins." When asked about Fed policy, he said "Do you know what we're all basically saying? It depends what happens with the economy.” Barkin said “My personal view is let’s get more conviction before moving.” The market sees 70% odds of a cut in September, but it will really come down to the data, as the Fed continues to remind us. The Fed’s policy divergence with other major central banks continue to deepen and support a firmer USD. Yesterday, the SNB delivered a dovish cut and the BOE delivered a dovish hold.

S&P Global preliminary June PMIs will be the highlight. Manufacturing is expected at 51.0 vs. 51.3 in April, services is expected at 54.0 vs. 54.8 in April, and the composite is expected at 53.5 vs. 54.5 in April. If so, the U.S. would hold up better than the other major economies (see below). Chicago PMI will be reported next week, and ISM PMIs will be reported until the week after next.

U.S. growth remains robust. The New York Fed’s Nowcast model is tracking Q2 growth at 1.9% SAAR and Q3 growth at 2.1% SAAR and will be updated today. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.0% SAAR and will be updated next Thursday after the data.

Weekly jobless claims suggest some softening in the labor market. Initial claims came in at 238k vs. 235k expected and a revised 243k (was 242k) last week. This reading was for the BLS survey week containing the 12th of the month, and the 4-week moving average rose to 233k, the highest since early September. Elsewhere, continuing claims are reported with a one-week lag and came in at 1.828 mln vs.1.810 mln expected and a revised 1.813 mln (was 1.820 mln) last week. This was the highest since mid-January. Bloomberg consensus for June NFP is 200k vs. 272k in May, while its whisper number stands at 204k.

Housing data will remain in focus. May existing home sales are expected at -1.0% m/m vs. -1.9% in April. Yesterday, May building permits and housing starts came in much weaker than expected at -5.5% m/m and -3.8% m/m, respectively. May leading index will also be reported.

Canada highlight will be April retail sales. Headline is expected at 0.7% m/m vs. -0.2% in March, while ex-autos is expected at 0.6% m/m vs. -0.6% in March. Statistics Canada’s advanced retail indicator suggests sales increased 0.7% m/m in April. Overall, the economy is slowing and supports further easing by the BOC. The market sees nearly 65% odds of another cut at the next meeting July 24.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft preliminary June PMIs. Headline manufacturing came in at 45.6 vs. 47.9 expected and 47.3 in May, services came in at 52.6 vs. 53.4 expected and 53.2 in May, and the composite came in at 50.8 vs. 52.5 expected and 52.2 in May. The composite fell for the first since October and is the lowest since March. Moreover, the rapid decline in new orders and worsening business confidence point to a soggy growth outlook. Looking at the country breakdown, the German composite came in at 50.6 vs. 52.7 expected and 52.4 in May and the French composite came in at 48.2 vs. 49.4 expected and 48.9 in May. Italy and Spain will be reported with the final readings in early July. Of note, France May retail sales came in at -1.4% y/y vs. a revised -0.2% (was flat) in April.

Weak data support our belief that the ECB’s hawkish cut was driven by growth concerns. Despite the weak June PMIs, the market sees only 70% odds of a cut in September vs. 80% at the start of this week but has nearly priced in another cut in December.

Bank of England delivered a dovish hold. It left the policy rate at 5.25% and reiterated that monetary policy needs to be restrictive “for sufficiently long to return inflation to the 2% target.” The MPC vote split remained at 7-2, with Ramsden and Dhingra voting again for a 25 bp rate cut. However, the steady vote split was not a done deal, as the bank acknowledged that the vote to hold was “finely balanced” for at least three of the remaining seven on the MPC. Furthermore, the minutes suggest that an August rate cut may be in the pipeline. The BOE signaled it is generally not too worried about higher-than-expected UK services inflation, noting that the S&P Global/CIPS PMI services input price index had fallen back to close to its historical average in May and that the corresponding output price index had declined to its lowest level in three years. The swaps market sees 66% odds of a cut at the next meeting in August.

U.K. reported strong May retail sales data. Headline came in at 2.9% m/m vs. 1.8% expected and a revised -1.8% (was -2.3%) weather-related slump in April, while sales ex-auto fuel also came in at 2.9% m/m vs. 1.8% expected and a revised -1.4% (was -2.0%) in April. Despite the recovery in consumer spending activity, we believe the disinflationary trajectory is intact and so we expect the BOE to cut rates in August, which can further weigh on GBP.

U.K. also reported soft preliminary June PMIs. Headline manufacturing came in at 51.4 vs. 51.1 expected and 51.2 in May, services came in at 51.2 vs. 53.0 expected and 52.9 in May, and the composite came in at 51.7 vs. 53.0 expected and actual in May. This was the second straight drop in the composite and is the lowest since November. However, services inflationary pressures were back on the rise, which will keep the BOE cautious. Input prices were driven by wages, shipping and software costs while output prices rose to a four-month high. Yesterday’s decision reminded us that the BOE pays close attention to S&P Global/CIPS PMI services input and output price indexes.

ASIA

Japan reported May national CPI data. Headline came in at 2.8% y/y vs. 2.5% in April, core (ex-fresh food) came in at 2.5% y/y vs. 2.2% in April, and core ex-energy came in at 2.1% y/y vs. 2.4% in April. All three were a tick lower than expected. The increases in headline and core were due to higher electricity prices, as core ex-energy fell to the lowest since September 2022. Despite this modest hiccup, underlying inflation is in a firm downtrend and nearing the BOJ’s 2% target. As such, the bar for an aggressive BOJ tightening cycle is high and remains a drag for JPY.

Japan also reported soft preliminary June PMIs. Manufacturing came in at 50.1 vs. 50.4 in May, services came in at 49.8 vs. 53.8 in May, and the composite came in at 50.0 vs. 52.6 in May. This was the first drop in the composite PMI since February but is the lowest since December. Ongoing softness in the data support our view that the BOJ is unlikely to tighten aggressively, and the swaps market sees only 30 bp of tightening over the next 12 months. As such, Japan real bond yields will remain negative and a drag on JPY.

Australia reported soft preliminary June PMIs. Manufacturing came in at 47.5 vs. 49.7 in May, services came in at 51.0 vs. 52.5 in May, and the composite came in at 50.6 vs. 52.1 in May. The composite PMI has fallen three straight months to the lowest since January and suggests that ongoing tightness in monetary policy is having a significant impact on the economy.

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