Dollar Flat as Markets Await Fresh Drivers

November 28, 2023

Win Thin

U.S. yields continue to edge lower; November Conference Board consumer confidence will be the data highlight; Brazil reports mid-November IPCA inflation and October central government budget data
ECB officials continue to push back against market easing expectations; Lagarde broached the idea of QT coming sooner than planned; U.K. shop price inflation continues to fall; the dovish BOE narrative remains intact
Australia reported soft October retail sales; RBA Governor Bullock maintained her recent hawkishness; PBOC signaled that massive stimulus to boost the property sector is unlikely; Taiwan cut this year’s growth forecast

The dollar is flat as markets await fresh drivers. DXY is trading flat near 103.175 and is on track to test the August 30 low near 102.936. The euro is trading flat near $1.0950 and is on track to retest the key retracement objective near $1.0960. Break above would set up a test of the July 18 high near $1.1275. Sterling is trading flat near $1.2625 and is on track to test the August 30 high near $1.2745. USD/JPY is trading lower near 148.50 after failing repeatedly to break above stiff resistance near 149.70. With the dollar rally stalled, it will take some firm real sector data to challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. That said, the dollar remains vulnerable until we see a shift in market expectations for the Fed and that may be a 2024 story.

AMERICAS

U.S. yields continue to edge lower. The 10-year yield traded as low as 4.37% today, down from the October peak near 5.02%, while the 30-year yield traded as low as 4.52% today, down from the October peak near 5.18%. Even the 2-year yield remains under pressure as it traded as low as 4.85% today, down from the October peak near 5.26%. Until we get some strong U.S. data to challenge this narrative, markets will be more than happy to continue running with this trend of low yields into year-end. Data this week are unlikely to provide much in the way of a challenge, as the PCE data are expected to show continued disinflation. Yields are likely to edge lower and that will continue to take a toll on the dollar.

Fed easing expectations remain in play. WIRP suggests less than 5% odds of a hike then, rising modestly to 10% January 31. After that, the easing cycle comes into focus and the first cut is fully priced in for June 12. Goolsbee, Waller, Bowman, Barr, and Paese all speak today, with Goolsbee and Barr speaking twice.

November Conference Board consumer confidence will be the data highlight. Headline is expected at 101.0 vs. 102.6 in October. Can consumption hold up as confidence drops? The early reads suggest Black Friday and Cyber Monday sales were strong.

Regional Fed surveys for November will continue rolling out. Richmond Fed manufacturing is expected today at 1 vs. 3 in October. Richmond Fed and Dallas Fed services will both be reported today as well and stood at -15 and -18.2 in October, respectively. Yesterday, Dallas Fed manufacturing survey came in at -19.9 vs. -16.0 expected and -19.2 in October.

Housing data will remain in focus. September FHFA and S&P CoreLogic house prices will be reported today and are expected to show further improvement off the lows. Yesterday, October new home sales came in at -5.6% m/m vs. -5.1% expected and a revised 8.6% (was 12.3%) in September. October pending home sales will be reported Thursday and are expected at -1.8% m/m vs. 1.1% in September.

Brazil reports mid-November IPCA inflation and October central government budget data. Headline inflation is expected at 4.82% y/y vs. 5.05% in mid-October. If so, it would be the first deceleration since mid-July. The central bank has been looking through this recent acceleration and has continued cutting rates at 50 bp clips throughout the summer. Next COPOM meeting is December 13 and another 50 bp cut to 11.75% is expected. Elsewhere, the primary surplus is expected at BRL15.4 bln vs. BRL11.5 bln in September.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank officials continue to push back against market easing expectations. Nagel said “It would be premature to lower interest rates soon or to speculate about such steps. It is not just the level of interest rates that matters for the stance, but also expectations about the future path of interest rates. The main effect of the policy tightening on inflation is yet to unfold.” Villeroy said “It’s not a question of raising the dose. Barring shocks or surprises we’ll keep rates at their current level rather than raising again, but we need a length of treatment to ensure the proper transmission of monetary policy.” WIRP suggests no odds of a hike either December 14 or January 25. After that, a cut is about 60% priced in for April 11 and fully priced in for June 6. Lagarde and Lane speak later today.

ECB President Lagarde broached the idea of Quantitative Tightening coming sooner than planned. She said “We have indicated that we would continue reinvesting until at least 2024. This is a matter which will come probably for discussion and consideration within the Governing Council in the not-too-distant future, and we will reexamine possibly this proposal.” After the last policy meeting October 26, Lagarde said the issue hadn’t been discussed, which we found surprising. That said, QT now seems likely to be on the agenda at the December 14 meeting. Of note, the ECB’s balance sheet has already been shrinking in recent months as existing TLTROS have rolled off.

Eurozone October money supply data were reported. M3 came in a tick lower than expected at 1.0% y/y vs. -1.2% in September. This is unlikely to recover anytime soon.

December German GfK consumer confidence was reported. Headline came in at -27.8 vs. -28.2 expected and a revised -28.3 (was -28.1) in November. The recent improvement in German sentiment appears to be stalling.

U.K. shop price inflation continues to fall. The British Retail Consortium reported that prices rose 4.3% y/y in November, down nearly a full percentage point from 5.2% in October and the lowest since June 2022. The drop in overall shop price inflation was led by food prices, which rose 7.8% y/y in November, the slowest since July 2022. The data bode well for this month’s CPI data, which will be reported December 20.

The dovish Bank of England narrative remains intact. WIRP suggests less than 5% odds of a hike December 14, rising modestly to top out near 15% in Q1. After that, the easing cycle comes into focus and a rate cut is fully priced in for August 1. Haskel speaks later today. Of note, Haskel along with Mann and Greene were the three dissents in favor of a 25 bp hike at the last decision November 2. As such, expect some hawkish comments to emerge.

ASIA

Australia reported soft October retail sales. Sales came in at -0.2% m/m vs. 0.1% expected and 0.9% in September. As a result, the y/y rate slowed to 1.2% vs. 2.0% in September and was the lowest since August 2021. ABS official noted that “It looks like consumers hit the pause button on some discretionary spending in October, likely waiting to take advantage of discounts during Black Friday sales events in November. This is a pattern we have seen develop in recent years.” Private sector credit and building approvals will be reported Thursday, with credit expected at 0.4% m/m vs. 0.5% in September and approvals expected at 1.4% m/m vs. -4.6% in September.

Reserve Bank of Australia Governor Bullock maintained her recent hawkishness. She said “What I think we’re starting to observe is second-round effects of some of these costs. Businesses are finding that demand is sufficient that they are able to pass those costs through.” As a result, services inflation in particular is “quite sticky” and the bank has been “observing a bit more domestic price pressures than we’d expected.” Bullock admitted that “We’ve been surprised a little bit on the strength of activity.” Lastly, she said “We’re in a period now where we have to be a little bit careful” as the bank is trying to bring down inflation without pushing up unemployment too much. WIRP suggests no odds of a hike December 5, 30% odds February 6, then rising modestly to top out near 65% June 18.

People’s Bank of China signaled that massive stimulus to boost the property sector is unlikely. In its quarterly monetary policy report, the bank said that there’s greater urgency to accelerate the transition away from “debt-driven growth,” which it said is increasingly inefficient. The PBOC reaffirmed it will make counter-cyclical policy adjustments even as the supply/demand relationship in the property sector has shifted. It noted that new loans are flowing into strategic sectors such as technology and manufacturing, while lending to the property sector and local governments is slowing. It’s clear to us that anyone looking for massive monetary stimulus to support the property sector is likely to be disappointed. Lastly, the PBOC played down deflation risks. The bank noted that CPI has been flat due largely to high base effects from pork prices last year, adding that momentum is building for prices to rise again.

Taiwan cut this year’s growth forecast. The statistics bureau sees 1.42% growth this year vs. 1.60% forecast in August, the slowest since the financial crisis. It noted that weak exports and investment were the main drags this year. However, it sees 3.35% growth in 2024 vs. 3.32% previously. We remain amazed that so many forecasts are looking for faster growth next year. With global monetary conditions likely to remain tight for most of 2024, we do not see the impetus for faster growth, especially with China continuing to struggle and the U.S. likely to slip into recession.

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