Dollar Flat as Markets Await Fresh Drivers

June 25, 2024

Win Thin

Fed officials appear to be getting a bit nervous; consumer confidence will be closely watched; Chicago Fed NAI will be reported; Canada highlight will be May CPI; Brazil central bank minutes will be released
Eurozone spreads have stabilized as the French election approaches
Australia highlight was June Westpac Melbourne Institute consumer confidence

The dollar is treading water as markets await fresh drivers. DXY is trading flat near 105.515 but remains on track to test the April-May highs near 106.50. The euro is trading lower near $1.0730, while sterling is trading flat near $1.2690. USD/JPY traded at a new high for this move just below 160 yesterday but has fallen back to trade near 159.30 as markets remain jitter about BOJ intervention risks. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed is on hold for now. At the same time, weak June PMI readings for the major economies reported so far underscore the widening monetary policy divergences that should continue to support the dollar.

AMERICAS

Fed officials appear to be getting a bit nervous. Goolsbee said “If we get more months like what we have just seen in the last month on inflation, coupled with slowing conditions in some of the other parts of the real economy, then you would have to start questioning, ‘Should we remain as restrictive as we’ve been?’” Elsewhere, Daly said "The bumpiness of inflation data so far this year has not inspired confidence. Recent readings are more encouraging, but it is hard to know if we are truly on track to sustainable price stability." However, she added that “So far, the labor market has adjusted slowly, and the unemployment rate has only edged up. But we are getting nearer to a point where that benign outcome could be less likely. Future labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs. At this point, inflation is not the only risk we face.”

These comments are the first cracks in the Fed’s hawkish façade since its hawkish hold this month. Yes, there have been some signs of slowing in the U.S. economy but overall, growth remains solid and job growth continues apace. That said, the market continues to see November as the most likely meeting for a cut, though there are 75% odds of a cut in September. As always, it will come down to the data. Cook and Bowman (twice) speak today.

Consumer confidence will be closely watched. Conference Board confidence for June will be reported today. Headline is expected to fall two points to 100.0 and would be consistent with softer consumer spending activity. Nevertheless, positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind to GDP growth. Final University of Michigan sentiment will be reported Friday and is expected at 66.0 vs. 65.6 preliminary.

Chicago Fed National Activity Index for May will be reported. Headline is expected at -0.25 vs. -0.23 in April. If so, the three-month moving average would fall to -0.17 vs. 0.01 in April. Recall that when this average drops below -0.7, it signals imminent recession, and we are far from that threshold.

Regional Fed surveys will continue rolling out. Philly Fed non-manufacturing, Richmond Fed manufacturing and services, and Dallas Fed services will all be reported today. Yesterday, Dallas Fed manufacturing came in a tick lower than expected at -15.1 vs. -19.4 in May.

Housing data will remain in focus. April FHFA and S&P CoreLogic house prices will be reported today. Prices have been recovering, and the recent drop in mortgage rates should help the housing sector. May new home sales will be reported tomorrow and are expected at 1.7% m/m vs. -4.7% in April. Pending home sales will be reported Thursday and are expected at 1.1% m/m vs. -7.7% in April. Last week, existing home sales came in at -0.7% m/m vs. -1.0% expected and -1.9% in April.

Canada highlight will be May CPI. Headline is expected to fall a tick to 2.6% y/y, core trim is expected to fall a tick to 2.8% y/y, and core median is expected to remain steady at 2.6% y/y. If so, headline would be the lowest since March 2021 and further within the 1-3% target range. The Bank of Canada anticipates further easing in inflation, as three- and six-month measures of core inflation have been running lower than the y/y rates. Also, the breadth of price increases above 3% has declined closer to its historical average.

Bank of Canada Governor Macklem spoke yesterday. He focused on the health of the Canadian labor market and the path to a soft-landing scenario. Macklem noted that “we are more confident that inflation will continue to move closer to the target” without a large rise in the unemployment rate. Macklem added it was “reasonable” to expect further policy rate cuts. The market sees over 60% odds of a cut in July while a September rate cut is more than fully priced-in.

Brazil central bank minutes will be released. At last week’s meeting, the bank voted unanimously to “interrupt” the easing cycle and kept rates steady at 10.5%. It gave no forward guidance as it noted “Monetary policy should continue being contractionary for sufficient time at a level that consolidates both the disinflation process and the anchoring of expectations around the targets.” Minutes may provide clues about the start of the tightening cycle, which the market sees over the next 3-6 months. Mid-June IPCA inflation will be reported tomorrow and is expected at 4.11% y/y vs. 3.70% in mid-May. If so, this would be the first acceleration since mid-February. BCB releases its quarterly inflation report Thursday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone spreads have stabilized as the French election approaches. The first and second rounds of the French legislative elections are June 30 and July 7, respectively. The latest Ifop-Fiducial poll of voting intentions shows that the most likely election scenario is a hung parliament. According to the poll, the hard-right National Rally would get 220-260 seats out of 577 in the National Assembly, the hard left alliance would get 185-215, and Macron’s centrist Ensemble group would get 70-100. A hung parliament will likely generate more political instability, further weighing on French bonds and the euro.

ASIA

Australia highlight was June Westpac Melbourne Institute consumer confidence. Headline rose 1.7% to 83.6 in June vs. 82.2 in May. It was the first rise since February, but consumer sentiment remains deeply pessimistic with the index well below 100. Regardless, the RBA is in no rush to loosen policy as it expects it will be some time before inflation is sustainably in the 2-3% target range. Tomorrow’s May CPI data will offer greater near-term RBA policy guidance. The swaps market currently sees less than 25% odds of a rate cut by December 2024, rising to around 65% in February 2025.

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