Dollar Flat as Eventful Week Begins

March 04, 2024

Win Thin

This very eventful week in the U.S. starts off slowly; Q1 growth estimates have been marked down but remain solid; Fed speakers will remain cautious
U.K. Chancellor Hunt said his spring budget Wednesday will be prudent; Switzerland reported February CPI; Turkey February CPI ran hot
Japan reported solid Q4 capital spending; Australian economic data released overnight did not have much market impact; New Zealand’s terms of trade moved sharply lower in Q4

The dollar is trading sideways as an eventful week begins. DXY is trading flat near 103.821 due to a lack of fresh drivers today. However, the data deluge begins tomorrow and runs strong right into NFP Friday (see below). The euro is trading higher near $1.0855, while sterling is trading higher near $1.2675. The yen is underperforming today, with USD/JPY trading higher near 150.45. TRY is the worst EM performer as inflation continues to run hot. Recent developments support our view that the Fed is unlikely to cut rates anytime soon even as other major central banks tilt more dovish. The U.S. data continue to come in mostly firmer while Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation. This week’s data may be a spark for that move.

AMERICAS

This very eventful week in the U.S. starts off slowly. There are no data reports today, but the calendar gets quite full quickly with February ISM services PMI tomorrow, ADP and JOLTS data Wednesday, and of course the jobs report Friday. Consensus for NFP has crept higher from 150k initially to 200k currently. While this would be down from 353k in January, a 200k gain would still generate significant new income that supports consumption.

Q1 growth estimates have been marked down but remains solid. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.3% SAAR and will be updated Friday. Its first Q2 growth estimate should be released this week.

Fed speakers will remain cautious. Harker speaks today. In recent remarks, Harker has warned against cutting rates too soon. In late February, Harker said “I believe that we may be in the position to see the rate decrease this year. But I would caution anyone from looking for it right now and right away. We have time to get this right, as we must.” While Harker is not a voter in 2024, the messaging from all FOMC members have been disciplined and consistent since the January 30-31 meeting. With data remaining quite firm, we do not anticipate any shift in tone at the upcoming March 19-20 meeting. Market sees no odds of a cut then, rising to 25% May 1 and 90% June 12.

EUROPE/MIDDLE EAST/AFRICA

U.K. Chancellor of the Exchequer Hunt said his spring budget Wednesday will be “prudent.” He stressed that “I do want, where it’s possible to do so responsibly, to move towards a lower-tax economy. I hope to show a path in that direction.” Of note, the Office for Budget Responsibility has estimated that Hunt has about GBP13 bln of headroom before he breaches his own fiscal plan for lowering the national debt in five years. Hunt has promised not to borrow to fund any tax cuts.

Switzerland reported February CPI. Headline came in a tick higher than expected at 1.2% y/y vs. 1.3% in January, while core came in a tick higher than expected at 1.1% y/y vs. 1.2% in January. This was the lowest headline reading since October 2021. Of note, inflation has been running under the 2% target since June 2023, leaving plenty of room for the SNB to ease policy. We expect the SNB to cut the policy rate by 25 bp at its March 21 meeting, while the market sees over 50% odds of a cut then.

Turkey February CPI ran hot. Headline came in at 67.07% y/y vs. 66.0% expected and 64.86% in January, while core came in at 72.89% y/y vs. 71.90% expected and 70.48% in January. Headline continues to accelerate and is the highest since November 2022 and further above the 3-7% target range. Next central bank policy meeting is March 21 and rates are expected to remain steady at 45%. In our view, Turkey’s central bank will need to do more tightening to get inflation down towards their end-2024 projection of 36%. However, the market sees steady rates over the next six months followed by 800 bp of easing over the subsequent six months.

ASIA

Japan reported solid Q4 capital spending. Headline came in at 16.4% vs. 2.8% expected and 3.4% in Q3, while ex-software came in at 11.7% vs. 1.5% expected and 1.7% in Q3. The boost in capital spending should feed into stronger growth in the revised Q4 GDP data due out next week. However, a note of caution is needed after Q4 company profits came in at 13.0% y/y vs. 21.3% expected and 20.1% in Q3, while company sales came in at 4.2% y/y vs. 4.5% expected and 5.0% in Q3.

Australian economic data released overnight did not have much market impact. Building approvals unexpectedly declined by -1.0% m/m in January vs. 4% expected and a revised -10.1% (was -9.5%) in December, pointing to further drag from dwelling investments. Inventories plunged by -1.7% q/q in Q4 vs. 0% expected and 1.2% in Q3, offsetting some of the positive tailwind to growth from consumer spending and business investment. Job ads fell by -2.8% m/m in February vs. a revised 3.4% (was 1.7%), suggesting labor demand continues to ease. Q4 GDP will be reported Wednesday. Market participants anticipate real GDP to increase at a quarterly pace of 0.2% (or 1.4% y/y), roughly in line with the RBA’s projection.

New Zealand’s terms of trade moved sharply lower in Q4. The terms of trade index (export/import prices) plunged by -7.8% q/q in Q4 vs. -0.1% expected and -0.6% in Q3. This is a drag on New Zealand economic activity and reduces the long-term fundamental value of NZD. Going forward, firmer whole milk power prices point to a potential recovery in the terms of trade.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.