Dollar Mixed Ahead of ISM Services PMI

April 03, 2024

Dollar Mixed Ahead of ISM Services PMI

  • The US ADP employment report and ISM services index are the data highlights. There are also plenty of Fed speakers, including Fed Chair Powell.
  • The Eurozone disinflationary process is well on track.
  • Inflation in Turkey remains red-hot.

USD has retraced most of its ISM manufacturing index triggered gains from Monday. However, 2 and 10-year Treasury yields are holding firm near recent highs. This suggests the USD pullback is more technical rather than fundamentally driven. Indeed, yesterday’s US Job Openings and Labor Turnover Summary (JOLTS) remained indicative of resilient labour market conditions. In February, the job opening rate printed at 5.3% for a third consecutive month (which is still above the 4.5% threshold consistent with a significant increase in the unemployment rate) and the hiring rate ticked up 0.1pts to 3.7%.

Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly delivered a similar message yesterday. Both see 3 rate cuts in 2024 as reasonable expectation but it’s too soon to pull the trigger and June can’t be ruled out. As such, the probability of a cut in May is almost zero but June is live with 68% odds. It will probably take a robust ISM services index and/or non-farm payrolls report to sustainably curtail the likelihood of a June rate cut.

There’s another good roster of Fed speakers today: Atlanta Fed President Bostic gives a TV interview (8:30am New York). Bostic is one of two officials who voted for 1 cut in 2024. Fed Governor Michelle Bowman talks on bank liquidity, regulation and the Fed's role as the lender of last resort (9:45am New York). Chicago Fed President Austan Goolsbee gives opening remarks (12:00pm New York). Goolsbee is one of nine who voted for 3 cuts in 2024. Fed Chair Jay Powell speaks about the economic outlook (12:10pm New York). Fed Vice Chair for Supervision Michael Barr discusses the Community Reinvestment Act (1:10pm New York). Fed Governor Adriana Kugler speaks on the outlook for the US economy and monetary policy (4:30pm New York).

The US ADP employment report (8:15am New York) and ISM services index (10:00am New York) are the data highlights. ADP private sector jobs is expected to rise by 150k in March versus 140k in February. Of note, non-farm payrolls has outperformed ADP for the past seven months. Meanwhile, the headline ISM services index is forecast to rise to 52.8 in March from 52.6 in February. Keep on eye on prices paid, which fell to 58.6 in February vs. 64.0 in January. Prices paid remains in inflationary territory and will keep the Fed cautious.

Crude oil prices are consolidating near recent highs. The expansion in global manufacturing activity and OPEC+ production cutbacks will continue to underpin firm crude oil prices. OPEC+ is expected to affirm current supply cuts at today’s meeting (7:00am New York).

EUR/USD is range-bound around 1.0770. The Eurozone disinflationary process is well on track. In March, annual headline CPI inflation slowed more than expected to 2.4% (consensus: 2.5%) from 2.6% in February. Annual core CPI inflation dropped to drop to 2.9% in March (consensus: 3.0%) from 3.1% in February. Services CPI remained sticky at 4% y/y for a fifth consecutive month in March validating the case for the ECB to stand pat next week. In our view, narrowing EU-US long-term bond yield spreads can further weigh on EUR/USD.

USD/CAD is directionless around 1.3575. Canada’s March S&P Global Services PMI (9:30am New York) will not shift the dial on BOC interest rate expectations. As a background, the contraction in services sector activity eased in February as the PMI rose to 46.6 from 45.8 in January. The Bank of Canada (BOC) pays more attention to its business outlook survey which has improved in Q1 but remains weak. Bottom line: a BOC rate cut next week is highly unlikely (13% priced-in) but June remains a possibility (56% priced-in).

Inflation in Turkey remains red-hot. Annual headline CPI inflation quickened to 68.50% (consensus: 69.10%, prior: 67.07%), the most since November 2022. Annual core CPI inflation surged to a new high of 75.21% (consensus: 75.19%, prior: 72.89%). Regardless, the money market is pricing 17% of easing over the next twelve months as domestic economic activity remains subdued. Bottom line: real interest rates can turn more negative and drag TRY lower.

USD/CNH is trading in tight range around 7.2500. In line with consensus, China’s services and compositive Caixin PMI rose 0.2pts in March to 52.7. Overall, China’s official and Caixin PMIs suggest the economy is gaining growth traction which bodes well for the commodity complex. Regardless, until the nation’s huge debt overhang is addressed, it’s hard for us to get excited about a modest cyclical upturn.

USD/TWD is holding above 32.000. It's too soon to gage the global economic fallout from Taiwan’s tragic earthquake. Taiwan is the major supplier of the world’s most advanced semiconductor chips. Nonetheless, central banks will look through shocks to inflation form a temporary disruption to the chip supply-chain.

Banco Central De Chile slashed yesterday the overnight rate target by 75bps to 6.50% (expected) and noted the policy “will be further reduced”. The decision was unanimous. Chile’s central bank has cut the policy rate by 475bps since July 2023 as inflation is moving closer to the 3% target. Interest rate futures imply almost 225bps of easing over the next 12 months. The quarterly Monetary Policy report is released today (8:00am New York).

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