Dollar Rally Stalls Ahead of PCE

June 28, 2024
  • Virtually every political pundit called former President Trump as the clear winner of last night’s debate; Fed officials remain cautious; May PCE will be the data highlight; personal income and spending and Chicago PMI will also be reported; Canada highlight is April GDP; Colombia is expected to cut rates 50 bp to 11.25%; Mexico delivered a dovish hold
  • French bond spreads over Germany widened to fresh highs ahead of Sunday’s vote; eurozone June CPI data started rolling out; ECB inflation expectations fell in May; U.K. Q1 GDP growth was revised higher
  • Japan appointed Atsushi Mimura as the new Vice Finance Minister for International Affairs; June Tokyo CPI data ran a little hot; Japan also reported May IP, housing starts, and labor market data; China reports official June PMIs over the weekend

The dollar rally is taking a breather ahead of PCE data. DXY is trading lower for the second straight day near 105.852 after trading at a new cycle high near 106.13 this week. It remains on track to test the April-May highs near 106.50. USD/JPY is trading lower near 160.55 after Tokyo CPI ran a bit hot (see below). We see no change to Japan’s FX policy under incoming currency czar Mimura (see below). The euro is trading flat near $1.07 even as French spreads widen out ahead of Sunday’s elections (see below), while sterling is trading slightly higher near $1.2650. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed remains in hawkish mode. At the same time, weaker data in many of the major economies underscore the widening economic and monetary policy divergences that should continue to support the dollar.


Virtually every political pundit called former President Trump as the clear winner of last night’s debate. Trump plans to slash taxes and raise tariffs if elected. This combination is inflationary and could force the Fed to keep policy restrictive for longer. A loose fiscal/tight monetary policy mix is generally positive for a currency and supports higher bond yields, but there are many other factors to consider. We will be putting out a US election primer over the summer that discusses the likely policy implications under different scenarios, including the makeup of Congress. Of note, the second debate is scheduled for September 10.

Fed officials remain cautious. Bostic said he continues to see one cut this year coming in Q4. He added that he has penciled in four cuts for 2025 but stressed that he didn’t have high confidence in projections that far distant. Bostic said “Inflation still remains the chief concern. But the risks are becoming more balanced across our two mandate items, and we’ll just have to think about that. I’m just going to let the data show me what happens.” Barkin said “The U.S. economy, particularly its consumer, has been much more resilient to rate increases than most expected and is likely to stay so as long as valuations remain elevated, and unemployment remains low.” Bowman and Daly (twice) speak later today.

May PCE will be the data highlight. Both headline and core PCE are expected to ease to 2.6% y/y vs. 2.7% and 2.8% in April, respectively. The Cleveland Fed’s inflation Nowcast model also sees both headline and core PCE at 2.6% y/y in May. Looking ahead, the model sees June headline at 2.5% and core at 2.6%. The progress on inflation is encouraging but most Fed officials, including Chair Powell, cautioned markets not to overreact to a month or two of good data.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.3% in April while spending is expected at 0.3% m/m vs. 0.2% in April. Real personal spending is expected at 0.3% m/m vs. -0.1% in April. Of note, the so-called control group retail sales used for GDP calculations rose 0.4% m/m in May after dropping a revised -0.5% (was -0.3%) in April. Final June University of Michigan sentiment and Kansas City services will also be reported today.

June Chicago PMI will be reported. Headline is expected at 40.0 vs. 35.4 in May, but this series has been diverging significantly all year from the nationwide readings. Last week, S&P Global preliminary June PMIs came in strong. Manufacturing came in at 51.7 vs. 51.0 expected and 51.3 in May, services came in at 55.1 vs. 54.0 expected and 54.8 in May, and the composite came in at 54.6 vs. 53.5 expected and 54.5 in May. Of course, the ISM PMIs are more widely followed but those won't be reported until next week and so S&P Global has the last word for now.

We got another revision to Q1 GDP. Growth was revised a tick higher to 1.4% SAAR, as expected. However, the mix is worth noting. Personal consumption contributed 0.98 ppt vs. 1.34 previously, fixed investment contributed 1.19 ppt vs. 1.02 previously, government consumption contributed 0.31 vs. 0.23 previously, and net exports subtracted -0.65 ppt vs. -0.89 previously. Overall, private domestic demand remained pretty firm at 2.6% SAAR vs. 2.80% previously. Of course, this is old news as markets look ahead to Q2 and Q3.

Indeed, Q2 growth remains robust. The Atlanta Fed GDPNow model is currently tracking Q2 growth at 2.7% SAAR and will be updated today after the data. Elsewhere, the New York Fed Nowcast model is tracking Q2 at 1.9% SAAR and Q3 at 2.2% SAAR and will also be updated today.

Weekly claims suggest some softening in the labor market. Initial claims came in at 233k vs. 235k expected and a revised 239k (was 238k) the previous week. The 4-week moving average rose to 236k and is the highest since early September. More importantly, continuing claims rose to 1.839 mln vs. 1.828 mln expected and a revised 1.821 mln (was 1.828 mln) and are the highest since November 2021. These are reported with a one-week lag and so this reading is for the BLS survey week containing the 12th of the month. NFP will be reported next Friday. Bloomberg consensus is 188k vs. 272k in May, while its whisper number stands at 198k currently.

Canada highlight is April GDP data. GDP is expected to rise 0.3% m/m after stalling in March, while the y/y rate is expected at 1.1% vs. 0.6% in March. Of note, other measures of economic activity picked up in April and so there are modest upside risks to the GDP data. The Bank of Canada projects Q2 GDP growth of 1.5% SAAR.

Colombia central bank is expected to cut rates 50 bp to 11.25%. At the last meeting April 30, the bank cut rates 50 bp for the second straight time after starting the easing cycle with two straight 25 bp cuts. However, it was a dovish 5-2 vote as the dissents were in favor of larger 75 and 100 bp cuts. Since then, the recovery in economic activity has been sluggish but Governor Villar warned of the risks associated with a faster easing cycle. The market is pricing in 300 bp of total easing over the next 12 months, which would surely weigh on the peso.

Banco de Mexico delivered a dovish hold. Rates were kept steady at 11.0% but said “Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments.” The vote was 4-1, with the lone dissent in favor of a 25 bp cut. The vote was a unanimous 5-0 to hold in May and so dovish cracks are appearing. In addition, the bank downplayed the impact of the weak peso and noted that the inflationary impact was offset by the slowing economy. Overall, we feel the decision was marginally negative for MXN. Next meeting is August 8 and whether the bank cuts then will all depend on the data and the peso. Of note, the market is pricing in 100 bp of easing over the next 12 months.


French bond spreads over Germany widened to fresh highs ahead of Sunday’s first round of the French legislative elections. The latest Elabe poll of voting intentions shows the hard-right National Rally party would get 36% of the vote in the first round, unchanged from the last survey. The hard left alliance would get 27.5%, up 0.5 ppt, while Macron’s centrist Ensemble group would get 20%, unchanged from the last survey.

Eurozone June CPI data started rolling out. France, Spain, and Italy all reported today. France’s EU Harmonised inflation fell a tick as expected to 2.5% y/y, Spain’s fell three ticks as expected to 3.5% y/y, and Italy’s rose a tick as expected to 0.9% y/y. Of note, Spain is one of the only eurozone countries to report core inflation and it remained steady at 3.0% y/y. Next week, Germany reports Monday, and its EUR Harmonised inflation is expected to fall two ticks to 2.6% y/y. Eurozone-wide CPI will be reported Tuesday, with both headline and core expected to fall a tick to 2.5% y/y and 2.8% y/y, respectively.

ECB inflation expectations survey for May fell. 1-year inflation expectations fell a tick as expected to 2.8%, the lowest since September 2021, while 3-year expectations eased a tick to 2.3%, the lowest since February 2022.

Yet the ECB remains unlikely to cut rates at the July meeting. Currently, the market sees around 10% of a cut then, but rising to 75% in September. A second cut in December is nearly priced in. Most ECB officials have been pushing back against the notion even as they counsel a data-dependent approach to policy. Villeroy seemed to downplay the bumpy inflation scenario that Lagarde has set forth, noting that “Data are inherently noisy and there is a risk of overreacting to volatile news, especially until the end of this year. So ‘data-driven,’ in the current inflation environment, does not mean ‘flash-driven.’”

U.K. Q1 GDP growth was revised higher. Growth was 0.7% q/q in Q1, revised up a tick from the first estimate. The y/y rate was also revised up a tick to 0.3%. Greater than previously reported increases in net exports and household spending were partially offset by downward revisions to gross fixed capital formation and government consumption. In our view, the disinflationary trajectory supports the case for a rate cut in August, though the market only sees 65% odds of move then.


Japan has appointed Atsushi Mimura as the new Vice Finance Minister for International Affairs. He would replace the retiring Masato Kanda effective July 31, and so the move is simply part of the normal personnel rotation. Mimura is currently Director General of the MOF’s international bureau. The switch comes at a very delicate time, as the yen remains under relentless pressure. Yet regardless of who’s in charge, until the BOJ outlines a more hawkish tightening cycle, any FX intervention will only slow rather than reverse the uptrend in USD/JPY.

June Tokyo CPI data ran a little hot. Headline picked up a tick as expected to 2.3% y/y, while core (ex-fresh food) came in a tick higher than expected at 2.1% vs. 1.9% in May. Core ex-energy also came in a tick higher than expected at 1.8% y/y vs. 1.7% in May. Despite the slight upside miss, the data reinforce our view that underlying inflation is in a firm downtrend and that the bar for an aggressive BOJ tightening cycle remains high. Given its ongoing cautiousness, the market is still pricing in an even shallower tightening cycle, with 70 bp seen over the next three years vs. 75 bp before the meeting. This will continue to weaken the yen.

Japan reported May IP and housing starts. IP came in at 0.3% y/y vs. flat expected and -1.8% in April, while starts came in at -5.3% y/y vs. -6.1% expected and 13.9% in April. Despite the modest upside misses, the drop in the composite PMI to 50.0 in June warns of growing headwinds and downside risks for the economy ahead.

Labor market data were also reported. Unemployment remained steady as expected at 2.6%, while the job-to-applicant ratio fell two ticks to 1.24, the lowest since April 2022 and suggesting a softer labor market. Indeed, wage pressures remain contained, giving little urgency to the BOJ to tighten more aggressively.

China reports official June PMIs over the weekend. Manufacturing is expected to remain steady at 49.5 and non-manufacturing is expected to drop a tick to 51.0. If so, the composite should also drop a tick from 51.0 in May. Caixin PMIs will be reported next week. Of note, the Caixin readings have been coming in stronger than the official ones and are likely overstating strength in the mainland economy.

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