Dollar Gets Some Traction Ahead of ISM Services PMI

October 05, 2021
  • September ISM services PMI will be the highlight; chatter is rising that Powell's chances of remaining Fed Chair have fallen due to the trading scandals; higher U.S. yields are lending some support to the dollar
  • U.K.-EU tensions continue to rise; eurozone final September services and composite PMI readings were reported; ECB officials remain split on the inflation outlook
  • Japan reported final September services and composite PMI readings and September Tokyo CPI; RBA kept rates steady at 0.10%, as expected; Chinese property developer Fantasia failed to repay a loan this week, adding tension to the local financial system; Brent futures reached $82 per barrel yesterday, the highest level since late 2018, after OPEC+ kept its supply agreement unchanged

The dollar is finally getting some traction. DXY is up today after three straight down day and trading just below 94. The euro feels heavy and is trading just below $1.16 after its bounce ran out of steam yesterday near $1.1640, while sterling is trying to hold above $1.36 even as tensions with the EU pick up (see below). Lastly, USD/JPY is trading back above 111 after a brief foray below. We believe the drivers that favored the dollar in Q3 will remain in play for Q4.


September ISM services PMI will be the highlight. It is expected at 59.9 vs. 61.7 in August. The employment component will be closely watched and stood at 53.7 in August. Last week, the manufacturing PMI employment component rose to 50.2 from 49.0 in August. Obviously, all eyes are on the September jobs data Friday. Consensus sees NFP up 488k vs. 235k in August, with the unemployment rate is expected to fall a tick to 5.1%. Average hourly earnings are expected to rise 4.6% y/y vs. 4.3% in August. Tomorrow, ADP reports its private sector jobs data Wednesday, with consensus at 430k vs. 374k in August. August trade data (-$70.8 bln expected) will be reported today. Canada also reports August trade data (CAD430 mln expected).

Chatter is rising that Powell's chances of remaining Fed Chair have fallen due to the trading scandals. According to Predict It, the odds of Powell staying on were around 80% over the summer but fell to around 60% as the scandals hit before recovery to 68% currently. Of course, Brainard's stock has been rising at the same time and her odds are currently around 24%. Powell remains the favorite, but less so. He has not been implicated in any of the trading scandals but will surely take heat from the progressives for not running a tighter ship. We've said it before, Powell deserves a second term but he is on shaky ground. Any more serious revelations could sink his nomination altogether. Quarles speak today.

Higher U.S. yields are lending some support to the dollar. The 10-year yield is trading around 1.50%, up from yesterday’s low near 1.45%. One of the narratives in the fixed income market is to put on curve steepening trades as Brainard is seen as more dovish than Powell. One really can't get much more dovish than Powell, but for what it's worth, the steepening narrative fits in with the tapering narrative. The 2- to 10-year curve is currently around 122 bp, up sharply from 97 bp back in mid-July but well below the March peak near 158 bp.


U.K.-EU tensions continue to rise. To no one’s surprise except perhaps the Johnson government, France’s European Affairs Minister Beaune noted that “The Channel Islands, the U.K. are dependent on us for their energy supply. They think they can live on their own and badmouth Europe as well. And because it doesn’t work, they indulge in one-upmanship, and in an aggressive way.” He added that the EU will take action in the next few days to increase the pressure on the U.K. to grant greater EU access to its fishing waters. And of course, this is just getting started if the U.K. really does go ahead with an ill-conceived plan to unilaterally change the Northern Ireland Protocols.

Eurozone final September services and composite PMI readings were reported. Headline eurozone readings both rose a tick from the preliminary to 56.4 and 56.2, respectively. Looking at the country breakdown, the German and French composites both improved a couple of ticks to 55.5 and 55.3, respectively. Italy and Spain were reported for the first time and their composite PMIs fell sharply from August to 56.6 and 57.0, respectively. Lastly, August PPI was also reported and suggests upside risks to CPI ahead. It rose 13.4% y/y vs. 13.5% expected and a revised 12.4% (was 12.1%) in July.

ECB officials remain split on the inflation outlook. Holzmann and Lagarde speak today and their views should highlight this split. Yet we believe Madame Lagarde and the doves remain in the driver's seat. Next policy meeting October 28 is likely to be contentious as both sides argue their cases on the fate of QE. The ECB account of the September 9 meeting to be published Thursday should highlight just how difficult it will be to reach a consensus by the December 16 meeting.


Japan reported final September services and composite PMI readings and September Tokyo CPI. Headline rose 0.3% y/y vs. -0.1% expected and -0.4% in August, while core (ex-fresh food) rose 0.1% y/y vs. 0.2% expected and flat in August. This was the first positive reading for core since July 2020 and bodes well for national CPI, which was flat y/y in August. That said, core inflation is expected to remain well below the 2% target until FY24 at the earliest. Elsewhere, final services PMI came in at 47.8 vs. 47.4 preliminary, helping to drag the composite PMI up a couple of ticks to 47.9. As the state of emergency was just lifted, the PMI readings should pick up in Q4.

Reserve Bank of Australia kept rates steady at 0.10%, as expected. At the last policy meeting September 7, the RBA started tapering but moved the next review of its QE program from November to February. Governor Lowe sounded upbeat, noting “This setback to the economic expansion in Australia is expected to be only temporary. As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back.” That said, the RBA affirmed its forward guidance that rates would likely remain steady until 2024. Lowe did warn of financial stability risks as he said “The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates. In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.” The RBA will release its semi-annual Financial Stability Review this Friday and the housing market is likely to be the major focus.

Australia reported some solid data as well. Final September services PMI came in at 45.5 vs. 44.9 preliminary, but weakness in the manufacturing PMI offset this and kept the composite PMI steady at 46.0. As the lockdowns are lifted, the PMI readings should pick up in Q4. Lastly, August trade data was reported. Exports rose 4% m/m vs. -3% expected and 5% in July, while imports fell -1% m/m vs. 1% expected and a revised 4% (was 3%) in July.

Chinese property developer Fantasia failed to repay a loan this week, adding tension to the local financial system. The missed payment was worth $205.7 mln (of its near $13 bln liabilities), as smaller developers struggle for funding in the wake of the Evergrande debacle. While we still don’t expect too much contagion outside China (unless the issue becomes systemic), we should see strong internal contagion. Shares of China’s developers traded in Hong Kong took another hit but are still off their recent lows.

Equity markets in Asia continue to sink deeper into underperformance territory. The Korean Kospi is nearly flat on the year, down some 12% from its peak. Hong Kong is down nearly 12% this year, and China’s CSI 300 is off 6.5%. There is no secret to what’s happening. It’s a combination of negative news about China (from Evergrande to the tech crackdown), a comparatively worse virus and vaccination outcome this year, higher commodity prices, a stronger dollar trend, and a less buoyant global recovery. These drivers are likely to remain in place in Q4.


Brent futures reached $82 per barrel yesterday, the highest level since late 2018, after OPEC+ kept its supply agreement unchanged. The cartel will continue with its 400K per day increase in supply. There was some speculation that they would increase supply considering the recent spike in prices. Brent is now at $81.50 per barrel and the curve continues to move deeper in backwardation, still suggesting a lower price in the future.

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