Dollar Flat in the Wake of Hot CPI Data

March 13, 2024
  • February CPI ran hot; the details were concerning; the Fed will be in no hurry to cut rates
  • U.K. reported mixed January real sector activity; ECB officials continue to follow President Lagarde’s lead in highlighting a June cut; eurozone reported weak January IP; Hungary central bank releases its minutes
  • Reports suggest China will end its tariffs on Australian wine; RBNZ Chief Economist Conway speaks about the February Monetary Policy Statement; Chinese developer Country Garden missed a coupon payment on a yuan bond for the first time; Thailand may be a big beneficiary of U.S. “friend-shoring”

The dollar is treading water as markets await more U.S. data. DXY is trading flat near 102.954 and has hung on to its post-CPI gains. The euro is trading flat near $1.0930 while sterling is trading lower near $1.2785 after mixed U.K. data reported (see below). USD/JPY is trading higher near 148 but is likely to remain volatile as markets continue to debate possible BOJ liftoff next week. We remain frustrated by the current dollar weakness. The U.S. data continue to come in mostly firmer and despite Powell’s dovish comments last week, most 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 recover after this current period of weakness. This week’s inflation and retail sales data may be a spark for that move.


February CPI ran hot. Headline came in a tick higher than expected at 3.2% y/y vs. 3.1% in January, while core came in a tick higher than expected at 3.8% y/y vs. 3.7% in January. In m/m terms, both came in at 0.4%. Of note, the Cleveland Fed’s inflation nowcast model shows March headline and core at 3.3% and 3.7%, respectively, suggesting persistent price pressures. PPI will be reported tomorrow. Headline is expected at 1.2% y/y vs. 0.9% in January, while core is expected to fall a tick to 1.9% y/y. There are no U.S. data reports today.

The details were concerning. OER slowed to 6.0% y/y vs. 6.2% in January, while super core was steady at 4.3% y/y and remains the highest since May 2023. Super core rose "only" 0.5% m/m vs. 0.9% in January. We're going to get low base effects for super core over the next four months and so we see upside risks ahead to the y/y rate. To wit: in 2023, super core rose 0.22% m/m in March, 0.35% in April, 0.08% in May, and 0.10% in June. If we get m/m readings in the 0.4-0.5% range over the next few months, the y/y rates will rise pretty significantly. There is a similar dynamic in play for headline CPI as well.

The Fed will be in no hurry to cut rates. No one expects a move at next week’s FOMC meeting. Looking ahead, odds of a May cut have fallen below 15% and odds of June cut have fallen to around 75%. Three cuts are still priced in, but we continue to see some risks of a hawkish shift in the March Dot Plots. It would only take two FOMC members to switch their 2024 Dot from 4.625% to 4.875% to get the same move higher in the median Dot.


U.K. reported mixed January real sector activity. GDP came in as expected at 0.2% m/m vs. -0.1% in December, IP came in at -0.2% m/m vs. flat expected and 0.6% in December, services came in as expected at 0.2% m/m vs. -0.1% in December, and construction came in at 1.1% m/m vs. -0.1% expected and -0.5% in December. All of the y/y rates worsened except for construction. However, the U.K. economy is on track to recover quickly from its technical recession at the end of 2023, supporting the case for no immediate Bank of England rate cuts. The first 25 bp rate cut is more than fully priced in by the market for August.

ECB officials continue to follow President Lagarde’s lead in highlighting a June cut. Governing Council member Kazaks emphasized that if the economy “roughly follows” the bank’s forecasts, “then the decision to start reducing interest rates could be made within the next few meetings.” Elsewhere, Governing Council member Villeroy said “We will probably cut rates in spring, and spring in Europe is from April to June 21. It’s perhaps more probable in June - we are very pragmatic and will see depending on the data.” Lastly, Governing Council member Holzmann warned yesterday that it could be premature to cut in April because “we also won’t have any ECB projections, so it could be premature to make a judgment.” Cipollone and Stournaras speak later today. The market is pricing in less than 15% odds of a cut April 11, but this rises to around 90% June 6.

Eurozone reported weak January IP. It came in at -3.2% m/m vs. -1.8% expected and a revised 1.6% (was 2.6%) in December. As a result, the y/y rate fell to -6.7% vs. -3.0% expected and a revised 0.2% (was 1.2%) in December. Eurozone manufacturing PMI fell a tick in February to 46.5, suggesting that the contraction in IP is likely to continue. It’s clear from the country breakdown that Germany remains the weak link in the eurozone.

Hungary central bank releases its minutes. At the February 27 meeting, the bank cut rates 100 bp to 9.0%, as expected, and said it still saw the policy rate at 6-7% by the end of June. Since then, the feud between the central bank and the government has intensified, so much so that the bank warned that the tensions could limit the scope of further easing. Next policy meeting is March 26, and the size of the cut will depend in large part on how the forint is trading. Of note, the swaps market is pricing in 300 bp of total easing over the next 12 months that would see the policy rate bottom near 6.0%.


Reports suggest China will end its tariffs on Australian wine. Relations between the two nations have been on the mend and so this may mark the end of the three-year trade dispute. Australian Trade Minister Farrell said “The interim recommendation to remove tariffs on Australian wine is a welcome development. It vindicates the government’s preferred approach of resolving trade issues through dialogue rather than disputation.” Elsewhere, Australian Foreign Minister Wong pledged to continue pushing “for all remaining trade impediments to be removed.” Of note, wine makes up a relatively small share of Australia’s exports to China, with the bulk of the shipments consisting of iron ore and coal.

Reserve Bank of New Zealand Chief Economist Conway speaks about the February Monetary Policy Statement. We don’t expect new policy guidance from Conway. Recall that the RBNZ softened its hawkish guidance at last month’s meeting as the updated projections implied a lower probability (40% versus 75% previously) of another 25 bp hike. The next meeting is April 10, and no change is expected. New Zealand’s OIS curve has priced in slightly more than 50 bp of rate cuts this year beginning in August, which remains a headwind for NZD.

Chinese developer Country Garden missed a coupon payment on a yuan bond for the first time. It defaulted on its dollar-denominated debt in October but had been able to stay current on its yuan-denominated obligations. Until now. The company said “Sales recovery has fallen short of expectations, so fund allocation remains under pressure. The company will make all efforts possible to raise cash during the grace period, including through sales, asset disposal and expenditure cuts.” It noted that there is a 30 trading-day grace period for the interest payment. Iron ore prices remain under pressure, down nearly 4% today and 25% below the early January peak.

Thailand may be a big beneficiary of U.S. “friend-shoring.” Commerce Secretary Raimondo said she expects U.S. companies to “supercharge” their investment in Thailand over the next 24 months, with a focus on expanding semiconductor supply chains. She added that the U.S. will continue to prioritize Indo-Pacific countries for additional investment in semiconductor supply chains. In related news, a New York Times story today highlights Malaysia’s growing role in global semiconductor supply chains. As mainland China continues to cast a pall over the region, increased U.S. investment is one of the bright spots ahead.

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