Dollar Flat Ahead of PCE and Powell

March 29, 2024

Win Thin

Fed Chair Powell’s speech today will be important; February PCE will be the data highlight; personal income and spending will be reported at the same time; consumer sentiment ended March on a strong note; March Chicago PMI was very weak
Eurozone March CPI data continue to roll out; the ECB is on track to cut rates in June; Poland inflation fell below target in March
Jawboning on the yen continues; March Tokyo CPI came in softer; the labor market softened a bit; real sector activity was mixed; China reports official March PMIs over the weekend

The dollar is trading flat ahead of PCE and Powell. DXY is trading flat near 104.549 after trading yesterday at the highest since February near 104.727. It is on track to test the mid-February high near 105. The euro traded today at the lowest since February 20 near $1.0770 and is on track to test its mid-February low near $1.07. Sterling is trading lower near $1.2615. The yen continues to trade sideways on jawboning and intervention risks (see below), with USD/JPY flat near 151.30. The dollar recovery should continue, not just on hawkish Fed repricing but also from dovish developments from other central banks. The U.S. data continue to come in mostly firmer and it’s clear from recent comments that many Fed officials remain very cautious about easing too much or too soon. Today’s speech by Powell will be key (see below). We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.

AMERICAS

Fed Chair Powell’s speech today will be important. Other Fed speakers have tilted hawkish after last week’s FOMC meeting and markets will be watching to see if Powell follows suit or maintains the dovish tone from his press conference. With Powell, it’s always a coin toss but as we’ve said countless times before, the data will ultimately decide the timing of the first cut. As things stand, odds of a cut June 12 have fallen to 66% after rising to 85% post-FOMC. We think these odds will move lower as the data remain firm. Daly also speaks today.

February PCE will be the data highlight. Headline is expected to pick up a tick to 2.5% y/y while core is expected to remain steady at 2.8% y/y. The Cleveland Fed’s Nowcast model suggests headline at 2.5% y/y and core at 2.8% y/y, smack at consensus. Looking ahead to March, the model suggests headline at 2.6% y/y and core at 2.7% y/y. If so, the data would support our belief that inflation remains too sticky for the Fed to cut anytime soon.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 1.0% in January, while spending is expected at 0.5% m/m vs. 0.2% in January. Real personal spending is expected at 0.1% m/m vs. -0.1% in January. February retail sales data rebounded from January weather-related weakness, and we expect a similar rebound in the personal spending data, which includes services.

Consumer sentiment ended March on a strong note. Final March University of Michigan consumer sentiment reading came in at 79.4 vs. 76.5 preliminary. This is the highest headline reading since July 2021, driven by gains in both current conditions and expectations. This is at odds with recent softness seen in the Conference Board's consumer confidence. Lastly, the University of Michigan 1- and 5 to 10-year inflation expectations both fell a tick to 2.9% and 2.8%, respectively, and so it's the best of both worlds here.

March Chicago PMI was very weak. Headline came in at 41.4 vs. 46.0 expected and 44.0 in February. This is the lowest since May 2023, but the Chicago PMI has always been a poor indicator of how the wider economy is faring. The ISM PMIs out next week will give a better snapshot so stay tuned. Last week, S&P Global preliminary March PMIs came in mixed, with the composite falling to 52.2 vs. 52.5 in February.

We got another revision to Q4 GDP data. Growth was revised up to 3.4% SAAR vs. 3.2% previously. Personal consumption, fixed investment, and government consumption all contributed more to growth, but this was offset by net export and inventories, which subtracted more from growth.

However, this is old news as markets are already looking ahead to Q1 and Q2. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 1.9% SAAR and Q2 growth at 2.2% SAAR. Both estimates will also be updated today.

EUROPE/MIDDLE EAST/AFRICA

Eurozone March CPI data continue to roll out. France and Italy reported today. France’s EU Harmonised inflation came in at 2.4% y/y vs. 2.8% expected and 3.2% in February, while Italy’s came in at 1.3% y/y vs. 1.5% expected and 0.8% in February. Earlier this week, Spain reported its EU Harmonised inflation at 3.2% y/y vs. 3.3% expected and 2.9% in February. Germany reports next Tuesday and is expected at 2.4% y/y vs. 2.7% in February. Lastly, eurozone reports CPI data next Wednesday. Both headline and core are expected to fall a tick to 2.5% y/y and 3.0% y/y, respectively.

The ECB is on track to cut rates in June. Official messaging has led the market to price in the first cut at the June 6 meeting. Cuts are then fully priced in for September 12 and October 17, while the market sees 55% odds of a fourth cut December 12.

Poland inflation fell below target in March. Headline came in at 1.9% y/y vs. 2.3% expected and 2.8% in February. This is the lowest since March 2019 and below the 2.5% midpoint of the 1.5-3.5% target range for the first time since February 2021. Yet the central bank is showing no signs of resuming its easing cycle. The bank meets next Thursday and is expected to keep rates steady at 5.75% and reiterate its neutral guidance that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Indeed, MPC member Duda noted “I don’t see room for interest rate cuts this year” while MPC member Maslowska said “I think it will be possible to think about rate cuts in the second half of next year or early 2026.” The market is pricing in only 25 bp of easing over the next 12 months and we see risks that the central bank delivers more easing than expected.

ASIA

Jawboning on the yen continues. Vice Minister for international affairs Kanda said “I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the U.S. Many people think the yen is now moving in the opposite direction of where it should be going.” He added that “We are currently monitoring developments in the foreign exchange market with a high sense of urgency. We will take appropriate measures against excessive foreign exchange moves without ruling out any options.” Intervention becomes more likely on a break above 152.

March Tokyo CPI came in softer. Headline came in a tick higher than expected at 2.6% y/y vs. a revised 2.5% (was 2.6%) in February, core (ex-fresh food) came in as expected and fell a tick to 2.4% y/y, and core ex-energy came in as expected and fell two ticks to 2.9% y/y. With inflation ebbing, the bar for an aggressive BOJ tightening cycle is high. Indeed, the market is pricing in 50 bp of tightening over the next three years and so we think it’s only a matter of time before USD/JPY makes new cyclical highs.

The labor market softened a bit. Unemployment came in two ticks higher than expected at 2.6% vs. 2.4% in January, while the job-to-applicant ratio came in a tick lower than expected at 1.26 vs. 1.27 in January. This is the first rise in unemployment since July 2023. Still, the labor market remains relatively tight, which explains why labor unions so far have been able to get significant wage concessions from many firms.

Real sector activity was mixed. Sales came in at 1.5% m/m vs. 0.6% expected and 0.2% in January, while IP came in at-0.1% m/m vs. 1.3% expected and -6.7% in January. In y/y terms, sales still picked up to 4.6% vs. 2.1% in January, while IP worsened to -3.4% vs. -1.5% in January. Lastly, housing starts came in at -8.2% y/y vs. -5.5% expected and -7.5% in January. The economy has been a bit lackluster in recent months. Bloomberg consensus for Q1 growth at 0.2% SAAR vs. 0.4% in Q4, but this could easily tip into contraction.

China reports official March PMIs over the weekend. Manufacturing is expected at 50.1 vs. 49.1 in February. If so, it would be the first reading above 50 since September. Non-manufacturing is expected to pick up a tick to 51.5. We do not expect much of a pickup in the economy this year as stimulus efforts remain quite modest. Caixin PMIs will be reported next week.

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