Dollar Gains as France Roils Global Markets

June 14, 2024
  • The dollar rally continues; we do not think the May inflation data will move the Fed needle very much; University of Michigan reports preliminary June consumer sentiment; U.S. growth remains solid; Peru unexpectedly kept rates steady at 5.75%
  • France seems to be the source of the risk off impulses; ECB officials continue to try and manage market expectations; BOE quarterly inflation attitudes survey was reported; Sweden May CPI ran a little hot
  • Two-day BOJ meeting ended with the expected hold; China reported May new loan and money supply data

The dollar continues to gain as risk off impulses grow. DXY has recouped its post-CPI losses and traded today at the highest since early May near 105.725. The euro traded as low as $1.0670, while sterling traded as low as $1.2695. USD/JPY initially rose to 158.25 after the BOJ delivered a dovish hold (see below) but is now trading near 157.10 on growing risk off impulses. MXN once again underperforming despite reports this week of possible Banxico support measures, while ZAR is outperforming after an ANC-DA alliance was finally reached. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. The Fed sees the same and delivered a hawkish hold this week. Overall, recent developments underscore the widening economic and monetary policy divergences that support the U.S. dollar and that should continue.


The dollar rally continues. Despite the soft PPI and claims data yesterday (see below), the dollar has now recouped all of its post-CPI losses on Wednesday and is trading at the highest since May 9. It is on track to test the May 1 high near 106.490. UST yields remain near this week’s lows and so it feels more like a risk off vibe and suggests that the dollar smile remains in play. Of note, EM FX is broadly lower while safe havens JPY and CHF (along with USD) are outperforming. Global equity markets are mostly lower, with futures pointing to a lower U.S. open. European stocks are underperforming, as French political uncertainty continues to weigh on global markets and risk sentiment.

PPI came in soft, confirming the favorable CPI readings reported earlier. Headline remained steady at 2.2% y/y vs. 2.5% expected, while core came in two ticks lower than expected at 2.3% y/y vs. 2.4% in April. However, PPI ex-trade, transportation, and warehousing came in at 4.5% y/y, steady from a revised (was 4.4%) April and at the cycle high. This is an input into PCE and warns of some upside risks when the data are released June 28. The Cleveland Fed’s Nowcast model sees headline PCE at 2.62% y/y and core PCE at 2.56% y/y.

We do not think the May inflation data will move the Fed needle very much. Powell himself said that more than one good month is needed, but also refrained from saying how many more were needed. June CPI (out July 11) and PCE (July 26) will come before the July 30-31 FOMC meeting. Another good month of inflation data then could put that meeting more in play, where the market currently sees around 10% odds of a cut. Still, it's more likely that the Fed waits for July CPI (out August 14) and PCE (August 30) before deciding on a possible cut at the September 17-18 meeting, where the odds are now around 80%. As always, it will come down to the data and right now, the data say hold. Mester (thrice), Goolsbee, and Cook speak today.

University of Michigan reports preliminary June consumer sentiment. Headline is expected at 72.0 vs. 69.1 in April. If so, it would be the first improvement since March but would fall short of that month’s cycle high of 79.4. it would also be consistent with softer household spending activity. Keep an eye on 1- and 5 to 10-year inflation expectations, which are expected at 3.2% and 3.0%, respectively. Both have been moving higher and should keep the Fed quite cautious. While consumer confidence measures softened in recent months, continued job growth should continue to fuel consumption.

U.S. growth remains solid. The New York Fed's Nowcast model is tracking Q2 growth at 1.9% SAAR vs. 1.8% previously. We also got its first estimate for Q3 at 2.0% SAAR. Both will be updated today. Elsewhere, the Atlanta Fed's GDPNow model is now tracking Q2 growth at 3.1% SAAR, up from 2.6% previously. Next update comes June 18 after the data.

Weekly jobless claims rose. Initial claims came in at 242k vs. 225k expected and 229k the previous week. This was the highest since mid-August 2023 and pulled the 4-week moving average up to 227k, the highest since mid-September 2023. If this rise is sustained next week, it will be very important as that will be for the BLS survey week containing the 12th of the month. Elsewhere, continuing claims came in at 1.82 mln vs. 1.795 mln expected and a revised 1.79 mln (was 1.792 mln) the previous week. This was the highest since mid-January. There is no Bloomberg consensus yet for June NFP, but its whisper number stands at 215k vs. 272k actual in May.

Peru central bank unexpectedly kept rates steady at 5.75%. A 25 bp cut to 5.5% was widely expected. It noted that “Inflation excluding food and energy is showing some persistence associated with the services industry.” Headline inflation slowed to target last month for the first time since December 2020, but core remained elevated at 3.1% y/y. This was only the second pause in this easing cycle, the last one coming back in March. We suspect that the deteriorating outlook for EM FX may have contributed to the hold.


France seems to be the source of the risk off impulses. While there has been no new news, a look at how bond spreads are moving higher in unison suggests that political uncertainty in France is having a contagion effect on other eurozone countries. When the second largest country in the eurozone is trading at nearly the same spread to Germany as tiny peripheral Portugal, that’s a big problem. This is also weighing on the euro.

ECB officials continue to try and manage market expectations. Centeno said “The natural interest rate in Europe is certainly below the current level of interest rates, so the path forward on the basis of what we know today is clear. When it happens, it will be data dependent.” Vasle said “There’s a high probability that the process of cutting rates will be significantly different, slower, than the process of hiking rates was.” While most officials have remained noncommittal, Kazaks said “Currently the market pricing seems to be reasonable but there’s no autopilot.” The market still sees around 75% odds of a 25 bp cut September 12, while another cut December 12 is nearly priced in. In our view, the ECB has room to deliver those cuts. With the Fed delivering a hawkish hold this week, the monetary policy divergences will continue to widen. Lagarde speaks later today.

BOE quarterly inflation attitudes survey was reported. The quarterly sample was surveyed between May 10-13, which was before the April CPI print. The key takeaway is that near-term inflation expectations continue to trend lower. 1-year expectations came in at 2.8% vs. 3.0% in February, while 2-year expectations came in at 2.6% vs. 2.8% in February. Longer term, 5-year expectations remain sticky at 3.1%, unchanged from February. Easing near-term inflation expectations should offer the BOE some support for starting the easing cycle sooner rather than later. We believe the swaps market has room to raise odds of a rate cut in August from around roughly 50% currently, which could further undermine GBP/USD.

Sweden May CPI ran a little hot. Headline came in at 3.5% y/y vs. 3.7% expected and 3.9% in April, CPIF came in at 2.3% y/y vs. 2.1% expected and 2.3% in April, and CPIF ex-energy came in at 3.0% y/y vs. 2.6% expected and 2.9% in April. Overall, CPIF inflation is close to target and should not derail the Riksbank’s guidance to cut the policy rate two more times during the second half of the year. Next meeting is June 27, and no change is expected then. However, a 25 bp cut in August is fully priced in, while a November cut is about 90% priced in.


Two-day Bank of Japan meeting ended with the expected hold. However, the BOJ failed to deliver the anticipated reduction in its purchase amount of JGBs. Instead, the BOJ said, “It will collect view from market participants and, at the next Monetary Policy Meeting (July 31), will decide on a detailed plan for the reduction of its purchases amount during the next one to two years or so.” In the meantime, the BOJ said it plans to continue its JGB purchases with broadly the same amount as before (roughly JPY6 trln per month). Governor Ueda said, “Of course it’s possible for us to raise the short-term interest rate and adjust the degree of monetary easing at the same time depending on the information available then on the economy and prices.” Given its ongoing cautiousness, the market is now pricing in an even shallower tightening cycle, with 60 bp seen over the next three years vs. 75 bp previously. Bottom line: Japan real yields will remain negative and a drag on JPY. Updated macro forecasts will come at the July 30-31 meeting.

China reported May new loan and money supply data. New loans came in at CNY949 bln vs. CNY732 bln in April, while aggregate financing came in at CNY2.069 trln vs -CNY72 bln in April. Both were slightly lower than expected as it’s clear that policymakers are reaching the limits of what they can do to stimulate the economy.

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