Dollar Mixed as Key U.S. Data Week Begins

October 28, 2024

Win Thin

Recent data have supported the global divergence theme; the U.S. economy remains robust; Dallas Fed manufacturing survey is the only U.S. data today
ECB officials have been trying to manage market easing expectations; late Friday, Moody’s cut the outlook on France’s Aa2 rating
The LDP and its coalition partner lost their majority in the lower house; heightened political risks are yen-negative
Crude oil prices have plunged by over 5%

The dollar is mixed as a busy data week for the U.S. begins. DXY is trading flat near 104.236 after making at a new high for this move earlier near 104.573. It remains on track to test the July 30 high near 104.799. USD/JPY is trading higher near 152.50 but the yen has recovered after the pair traded just below 154 in the wake of the election results. We see further yen weakness after the LDP lost its majority (see below). The euro is trading higher near $1.0815 while sterling is trading flat near $1.2975. After the dollar ended last week on a firm note, firm U.S. data this week should keep the rally going. Indeed, the dollar is looking to extend its streak of four straight weeks of gains. In the meantime, the weaker growth outlook for the rest of the world highlights the ongoing divergences that favor the greenback (see below).

AMERICAS

Recent data have supported the global divergence theme. October PMIs saw Japan slip below 50, the U.K. drop sharply, and Europe and Australia remaining below 50. China reports official PMIs Thursday and its composite is likely to remain above 50, albeit barely. With much of the world clearly slowing, the U.S. economy continues to power on.

The U.S. economy remains robust. We get our first read of Q3 GDP Wednesday. Growth is expected at 3.0% SAAR, same as the final Q2 reading, while personal consumption is expected at 3.2% SAAR vs. 2.8% in Q2. Of note, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.3% SAAR and the final update will come tomorrow. Its initial forecast for Q4 will come Thursday. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 2.9% SAAR and Q4 growth at 2.5% SAAR. Its Q4 forecast will be updated Friday, while its initial forecast for Q1 2025 will come at the end of November.

Dallas Fed manufacturing survey is the only U.S. data report today. It is expected at -9.2 vs. -9.0 in September. These regional surveys have for the most part improved this month, which is probably why consensus sees the ISM manufacturing PMI rising four ticks to 47.6 when it’s reported this Friday. Of note, the S&P Global U.S. manufacturing PMI rose to a 2-month high of 47.8 vs. 47.3 in September.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank officials have been trying to manage market easing expectations. The disinflation process should allow the bank to continue cutting rates gradually. However, the market is pricing in nearly 50% odds of a jumbo 50 bp cut in December. Wunsch speaks today. Last week, Wunsch pushed back against the notion of a 50 bp cut in December saying, “I think really it’s premature.”

Late Friday, Moody’s cut the outlook on France’s Aa2 rating. The agency wrote that “The decision to change the outlook to negative from stable reflects the increasing risk that France’s government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability. The risks to France’s credit profile are heightened by a political and institutional environment that is not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance. As a result, budget management is weaker than we had previously assessed.” Ongoing concerns about France are another headwind for the euro.

ASIA

The LDP and its coalition partner lost their majority in the lower house. NHK projects that the LDP and Komeito together won 215 seats while main opposition Constitutional Democratic Party of Japan won 148 seats. Both fall short of the 233 seats needed for a majority in the 465-seat lower house and so we are in for a period of horse-trading. The Japan Innovation Party won 38 seats and the Democratic Party for the People won 28 seats. As the largest party, the LDP will try to widen its coalition but so far, no other party has shown any willingness to join. Elsewhere, CDP leader Noda said he would try to form a government. Parties have thirty days to form a government.

More parties would likely mean more instability. Even if the LDP hangs onto power, it will become much more difficult for Prime Minister Ishiba to move forward with fiscal and monetary tightening. Some observers also feel that Ishiba will be severely weakened as LDP leader and may be challenged ahead of upper house elections scheduled for next year.

Heightened political risks are yen-negative. Indeed, USD/JPY traded above the 153.40 level earlier before falling back below 153. That level is the 62% retracement objective of the July-September drop and clean break above sets up a test of the July 3 high near 162. It seems crazy to even talk about 162 and yet a prolonged period of political uncertainty coupled with weak economic data should lead to ongoing yen weakness. Policymakers would be forced to intervene but until the BOJ pivots, it would have little lasting impact.

COMMODITIES

Crude oil prices have plunged by over 5%. Israel’s response to the ballistic missile attack by Iran on October 1 was more restrained than expected. Israel struck multiple military targets rather than Iran’s oil infrastructure or nuclear facilities, as was feared. Still, Iran’s Foreign Ministry said, “The nature of our response will correspond to the type of attack carried out.” The prospect of a full-blown war between Iran and Israel may have diminished but it remains a significant source of geopolitical risk. Brent crude is on track to test the September 10 low for this cycle near $68.70.

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