Dollar Firm as Two-day FOMC Meeting Begins

April 30, 2024

Win Thin

The two-day FOMC starts today and ends tomorrow with an expected hawkish hold; Q1 ECI will be the data highlight; Chicago PMI and Conference Board April consumer confidence will also be reported; Canada reports February GDP; Colombia central bank is expected to cut rates 50 bp to 11.75%
Eurozone reported April CPI data; eurozone reported firm Q1 GDP data; U.K. BRC shop price inflation cooled
Japan MOF data showed no FX intervention between March 28 and April 25; Japan reported mixed March labor market and soft real sector data; Australia reported soft March private sector credit and retail sales; China reported soft official April PMIs

The dollar is firm as the two-day FOMC meeting gets under way. DXY is trading higher near 105.681. USD/JPY is flat lining just below 157 as markets remain wary of further BOJ intervention (see below). The euro is trading higher near $1.0730 after stronger than expected GDP data (see below) while sterling is trading lower near $1.2545. Despite the BOJ intervention, monetary policy divergences continue to favor the dollar and so the rally should resume after this correction. The FOMC meeting should see a hawkish hold, while the ongoing backdrop of persistent inflation and robust growth in the U.S. should keep upward pressure on U.S. yields, which in turn should be supportive of the dollar. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

The two-day FOMC starts today and ends tomorrow with an expected hawkish hold. The tone of the policy statement and Fed Chair Jay Powell’s post-meeting press conference will most likely be on the hawkish side. Before the media blackout, virtually all key Fed officials have signaled patience before easing and a couple have even floated the possibility of rate hikes. As such, the bar for a hawkish surprise is high. There are no updated macroeconomic projections until the June meeting.

Fed easing expectations have been pushed out even further. Odds of a June cut have fallen to around 10%, while July odds have fallen to 33% and September odds have fallen below 75%. Even a November cut is not fully priced in, with odds around 95%. Even though "higher for longer" has been our mantra throughout this tightening cycle, we can't help but wonder whether markets are going too far the other way. It's not yet May and so it's very hard to predict what happens to the economy in H2. We think Powell and company still want to deliver some insurance cuts in H2. As always, though, it will all come down to the data.

Q1 Employment Cost Index will be the data highlight. This is often a second-tier report but with the Fed’s focus on inflation, markets will be looking for any signs of wage pressures picking up. ECI expected at 1.0% q/q vs. 0.9% in Q4.

Chicago PMI will be reported. Headline is expected at 45.0 vs. 41.4 in March. S&P Global preliminary April PMIs were softer than expected but this week’s ISM PMIs are more widely followed.

Conference Board reports April consumer confidence. Headline is expected at 104.0 vs. 104.7 in March. The focus will be on the expectations index, which slipped in March to the lowest level since October 2023.

Canada reports February GDP. Canada’s economy is expected at 0.3% m/m vs. 0.6% in January, while the y/y rate is expected to pick up two ticks to 1.1%. However, the -0.3% monthly decline in retail sales volumes in February points to downside risk to growth. The Bank of Canada projects Q1 GDP growth of 2.8% SAAR, driven largely by exports and consumption.

Colombia central bank is expected to cut rates 50 bp to 11.75%. At the last meeting March 22, the bank cut rates 50 bp to 12.25% but it was a dovish 5-2 vote as the dissents were in favor of larger 75 and 100 bp cuts. Since then, economic activity has picked up and Governor Villar leaned against more aggressive than expected rate cuts, noting that “big surprises can generate nervousness and significant changes in the direction of capital flows.” The market is pricing in 325 bp of total easing over the 12 months, which would likely weigh on the peso. The central bank releases its quarterly inflation report Friday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported April CPI data. Headline remained steady as expected at 2.4% y/y while core came in a tick higher than expected at 2.7% y/y vs. 2.9% in March. Spain and Germany reported yesterday. Today, France’s EU Harmonised inflation came in two ticks higher than expected at 2.4% y/y, while Italy’s came in a tick lower than expected at 1.0% y/y.

European Central Bank expectations remain steady. Overall, the eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June. However, the hawks remain cautious and continue to push back against the notion of a follow-up July cut. GC member Knot said, “We will have to take a cautious approach after June,” adding that it’s “too early” to comment on policy beyond that meeting.

Eurozone reported firm Q1 GDP data. Headline growth came in two ticks higher than expected at 0.3% q/q vs. -0.1% in Q4. Looking at the country breakdown, Germany came in a tick higher than expected at 0.2% q/q vs. a revised -0.5% (was -0.3%) in Q4, France came in a tick higher than expected at 0.2% q/q vs. 0.1% in Q4, Italy came in two ticks higher than expected at 0.3% q/q vs. a revised 0.1% (was 0.2%) in Q4, and Spain came in three ticks higher than expected at 0.7% q/q vs. a revised 0.7% (was 0.6%) in Q4.

U.K. BRC shop price inflation cooled. It fell sharply to 0.8% y/y in April vs. 1.3% in March, the lowest since December 2021. While the data is welcome, shop price disinflation is unlikely to convince the BOE to move early with policy rate cuts, as it is more concerned with high and sticky services inflation. The first cut is still seen in August.

ASIA

Japan Ministry of Finance data showed no FX intervention between March 28 and April 25. As of those dates, Japan has not intervened in the FX market since October 2022. Of course, that all changed on Monday, but any intervention won’t be picked up until the next MOF report at the end of May, which will cover the period from April 26 to May 29. Markets remain on alert for further intervention and so far, have been unwilling to take USD/JPY higher. However, until monetary policy divergences narrow (either from the U.S. or Japan side), yen weakness is likely to persist.

Japan reported mixed March labor market data. The unemployment rate came in a tick higher than expected and remained steady at 2.6%, while the job-to-applicant ratio rose two ticks more than expected to 1.28. These two typically move in opposition directions.

Elsewhere, real sector activity was soft. Retail sales came in at 1.2% y/y vs. 2.4% expected and 4.7% in February, IP came in at -6.7% y/y vs. -6.3% expected and -3.9% in February, and starts came in at -12.8 y/y vs. -7.5% expected and -8.2% in February. Overall, the economy ended Q1 on a weak note and the data support the BOJ’s cautious approach to removing accommodation.

Australia reported soft March private sector credit and retail sales. Sales came in at -0.4% m/m vs. 0.2% expected and a revised 0.2% (was 0.3%) in February, while credit came in a tick weaker than expected at 0.3% m/m vs. 0.5% in February. There is scope for a further downward adjustment to RBA rate cut expectations, as leading indicators point to a sluggish household spending outlook.

China reported soft official April PMIs. Manufacturing came in a tick higher than expected at 50.4 vs. 50.8 in March, while non-manufacturing came in at 51.2 vs. 52.3 expected and 53.0 in March. As a result, the composite fell a full point to 51.7, the lowest since February. Caixin also reported its April manufacturing PMI at 51.4 vs. 51.0 expected and 51.1 in March. The PMIs suggests stabilizing economic activity, whereas a sustained pick-up in growth remains unlikely without policies that cause growth to shift from unproductive debt-fueled investment-led growth to consumption.

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