Dollar Hurt By Weak Data and Dovish Powell

December 01, 2022

Win Thin

Fed Chair Powell was surprisingly timid; U.S. data yesterday came in soft; October core PCE will be important; ISM manufacturing PMI will be closely watched; Chicago PMI came in much weaker than expected
Germany reported weak October retail sales; eurozone final November manufacturing PMI readings were reported; ECB tightening expectations have fallen
Japan reported final November manufacturing PMI; China has loosened some Covid restrictions

The dollar is softer in the wake of weak U.S. data and a dovish Powell. DXY is down for the second straight day and is trading near 105.50. The 200-day moving average near 105.527 today has provided some support so far but a clean break below would set up a test of the August 10 low near 104.636. The euro has broken above its 200-day moving average near $1.0370 and is trading near $1.0435, while sterling is testing its 200-day moving average near $1.2155 today. USD/JPY traded at a new cycle low today near 135.85 and is coming up on its 200-day moving average near 134.40. While we still believe the fundamental outlook favors the dollar, we acknowledge that near-term dollar weakness is likely to continue after Powell’s unexpected dovish turn (see below).

AMERICAS

Fed Chair Powell was surprisingly timid. As per his November 2 press conference, he noted that the Fed would moderate its rate hikes, perhaps as soon as December, but added that the rate peak will likely be “somewhat higher” than the September forecasts and that restrictive policy will be needed for “some time.” So far, so good. However, he said in the Q&A that “we don’t want to overtighten, which is why we’re slowing down.” Powell then said that “we don’t want to crash the economy through rate hikes.” With these two remarks, Chair Powell has really diluted the Fed's message. We are back to the old vacillating Powell vs. the new hardline Powell that we had gotten used to since Jackson Hole in August. No wonder risk ripped higher after his speech. Logan, Bowman, and Barr speak today.

The U.S. data yesterday came in soft. ADP private sector jobs estimate came in at 127k vs. 200k expected and 239k in October. Consensus for Friday’s NFP stands at 200k. While this may fall after ADP, the two series don't always line up, to put it mildly. Of note, ADP reported -100k manufacturing jobs in November, which accounted for the bulk of the downside miss to the headline. We haven't seen a drop in manufacturing jobs of this magnitude since April 2020 (-1.294 mln). Before that, it was June 2009 (-138k). Our point is that it is very unusual to see a drop like what ADP is reporting and so we may get a NFP number Friday that's much closer to the consensus 200k. On the other hand, the extremely weak Chicago PMI reading argues for some caution.

October core PCE will be important. It is expected to fall a tick to 5.0% y/y. If so, it would be the first deceleration since July but still well above the Fed’s 2% target. We believe markets overreacted to the October CPI data and will be looking for confirmation that price pressures remain. Personal income and spending will be reported at the same time and are expected at 0.4% m/m and 0.8% m/m, respectively.

ISM manufacturing PMI will be closely watched. Headline is expected at 49.7 vs. 50.2 in October. Keep an eye on the sub-components. Employment is expected to remain steady at 50.0, prices paid is expected at 45.9 vs. 46.6 in October, and new orders are expected at 48.5 vs. 49.2 in October. November Challenger job cuts, weekly jobless claims, October construction spending, and November vehicle sales will also be reported today.

Chicago PMI came in much weaker than expected. At 37.2, the headline was nearly 10 points lower than the expected 47.0 and compares to 45.2 in October. Last week, S&P Global preliminary November PMI readings came in weaker than expected too. Today’s ISM manufacturing PMI will be key in determining the state of this key sector.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak October retail sales. Sales came in at -2.8% m/m vs. -0.5% expected and a revised 1.2% (was 0.9%) in September. As a result, the y/y WDA rate plunged to -5.0% vs. -0.6% in September. Yesterday, France and Spain reported weak consumption data and point to a weak reading for the eurozone data next Monday.

Eurozone final November manufacturing PMI readings were reported. Headline fell two ticks from the preliminary to 47.1. Germany came in at 46.2 vs. 46.7 preliminary, while France came in at 48.3 vs. 49.1 preliminary. Italy and Spain reported for the first time and came in at 48.4 and 45.7, both up significantly from October. Final services and composite PMI readings will be reported next Monday.

ECB tightening expectations have fallen. WIRP suggests a 75 bp hike December 15 is less than 20% priced in, down from 45% at the start of this week and fully priced in right after the October decision. Elsewhere, the swaps market is still pricing in a peak policy rate closer to 2.75% vs. 3.0% at the start of this 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Stournaras said “Additional rate increases must be gradual and depend on the inflation outlook while considering the recession risks and the impact on financial stability.” Lane and Lagarde also speak today.

Switzerland reported November CPI and October real retail sales. Headline inflation came in steady as expected at 3.0% y/y while core rose a tick as expected to 1.9% y/y. At the last policy meeting September 22, the Swiss National Bank hiked rates 75 bp to 0.5%, as expected. SNB President Jordan said “It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term” and stressed that the bank could move intra-meeting if needed. The updated forecasts didn’t suggest any greater urgency to tighten. Next meeting is December 15 and a 50 bp hike to 1.0% seems likely. Looking ahead, the swaps market is pricing in a peak policy rate near 1.25%, down from 1.5% at the start of this week and 2.0% right after the September meeting.

ASIA

Japan reported final November manufacturing PMI. It came in at 49.0 vs. 49.4 preliminary. Final services and composite PMI readings will be reported Monday. Recent weakness in the data point to downside risks to Q4 GDP. This will support the BOJ’s ultra-dovish stance, domestic and global headwinds are growing. Next policy meeting is December 19-20 and no change is expected then.

China has loosened some Covid restrictions. Reports suggest low-risk infected people will be allowed to isolate at home rather being sent to a government-run quarantine site. The move will start in Beijing’s most populous district of Chaoyang. We can’t get too excited about this as the economy will still continue to suffer from other restrictions. It appears, however, that authorities are responding to the recent protests and that’s a good sign. Elsewhere, Caixin reported its November manufacturing PMI at 49.4 vs. 48.9 expected and 49.2 in October. Last week, official manufacturing PMI came in at 48.0 vs. 49.2 in October.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.