Dollar Rangebound Despite More Hawkishness From Powell

June 29, 2023

Win Thin

Fed Chair Powell underscored his hawkish stance; between Powell and continued strong U.S. data, the market is finally starting to believe the Fed; housing data will remain in focus; we get another revision to Q1 GDP data; weekly jobless claims will be reported
Eurozone June CPI data continue to roll out; BOE Governor Bailey also spoke at Sintra; Riksbank hiked rates 25 bp to 3.75%, as expected
Japan reported firm May retail sales; BOJ Governor Ueda said the bank will start normalizing monetary policy when it becomes more confident that inflation will pick up in FY24; Australia reported firm May retail sales

The dollar remains rangebound. DXY traded as high as 103.233 earlier today but is now trading flat near 102.88. Key retracement objectives from the May-June drop come in near 103.31 and 103.638. The euro is trading flat near $1.0920 while sterling is trading higher near $1.2655. USD/JPY traded at a new high for this move near 144.70 before falling back to trade near 144.25 currently. AUD is outperforming after stronger than expected retail sales helped offset the sting of yesterday’s soft CPI data (see below). SEK is underperforming on a dovish Riksbank message after hiking the expected 25 bp (see below). The FX market remains choppy as markets try to get a handle on Fed policy. With markets now starting to price in that second Fed hike this year (see below), the dollar should get further traction. PCE data tomorrow and jobs data next Friday will be key to this repricing.

AMERICAS

Fed Chair Powell underscored his hawkish stance. Speaking at the ECB’s annual central bank symposium in Sintra, Portugal, Powell said Fed policy was restrictive but not restrictive enough and hasn’t been restrictive very long. He stressed that most Fed policymakers expect two more hikes this year and added that the Fed won’t take hiking at consecutive meetings off the table. Lastly, he noted that the Fed does not need to adjust the pace of QT, which is running at around $1 trln per annum. Powell added to his hawkishness today by saying today at a Bank of Spain event that most Fed policymakers expect “two or more” hikes. While this may seem like splitting hairs, highlighting the three policymakers that see 3-4 hikes this year (as seen in the June Dot Plots) is noteworthy.

Between Powell and continued strong U.S. data, the market is finally starting to believe the Fed. WIRP still suggests a 25 bp hike is largely priced in for July but the odds of another 25 bp hike after that have risen to 25% in November May PCE data tomorrow may help solidify those odds, with headline expected at 3.8% y/y vs. 4.4% in April and core expected to remain steady at 4.7% y/y. More importantly, market pricing for the start of an easing cycle has been pushed out until next June. That sounds about right but with risks tilted to later rather than sooner. As far as the pace of easing goes, the market is pricing in 100-125 bp of easing by end-2024. That is slightly less than what the June Dot Plots suggest but a lot can happen between now and H2 2024.

Housing data will remain in focus. May pending home sales will be reported and are expected at -0.5% m/m vs. flat in April. New home sales surged in May and so we see upside risks to today’s data. The rebound in housing is all the more remarkable given elevated mortgage rates, with the 30-year fixed rate national average of 7.11% just below the peak near 7.20% from late May.

We get another revision to Q1 GDP data. Growth is expected to be revised up a tick to 1.4% SAAR but this is old news. Markets are focused on Q2, where the Atlanta Fed’s GDPNow model is tracking 1.8% SAAR. Next model update comes tomorrow. Of note, Bloomberg consensus sees 1.2% SAAR for Q2, 0.0% SAAR for Q3, and -0.5% SAAR for Q4.

Weekly jobless claims will be reported. Continuing claims will be for the BLS survey week containing the 12th of the month and are expected at 1.765 mln vs. 1. 759 mln last week. Initial claims are expected at 265k vs. 264k last week. Of note, consensus for June NFP next Friday stands at 213k vs. 339k in May, though the unemployment rate is seen falling a tick to 3.6%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone June CPI data continue to roll out. Spain reported today and its EU Harmonised inflation came in at 1.6% y/y vs. 1.5% expected and 2.9% in May and its core measure came in at 5.9% y/y vs. 5.5% expected and 6.1% in May. Germany reports later today and its EU Harmonised inflation is expected at 6.8% vs. 6.3% in May. German state data reported so far today suggest modest downside risks to the national reading. France reports tomorrow and its EU Harmonised y/y rate is expected at 5.4% vs. 6.0% in May. Eurozone also reports tomorrow, with headline expected at 5.6% y/y vs. 6.1% in May and core expected at 5.5% y/y vs. 5.3% in May. Though headline inflation has been falling steadily, ECB policymakers remain very concerned about elevated core readings. Still, ECB tightening expectations remain steady. WIRP suggests odds of a 25 bp hike are near 90% July 27. Odds of another 25 bp hike stand near 50% September 14 and top out near 90% December 14.

Bank of England Governor Bailey also spoke at Sintra. He pushed back against a quick pivot, saying “I’ve always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation.” WIRP suggests another 50 bp hike is largely priced in for August, followed by 25 bp hikes in September, November, and December that would see the bank rate peak near 6.25%. This would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude and yet the benefits to sterling are starting to wane. That’s because a recession is now back on the table after some earlier optimism.

The Riksbank hiked rates 25 bp to 3.75%, as expected. The bank said rates would be hiked at least one more time this year and noted that the weak krona is contributing to high inflation. It also announced that it would accelerate QT to SEK5 bln per month vs. SEK3.5 bln previously and noted “This may contribute to a stronger krona and improve the Riksbank’s capacity to reduce inflation. It is still uncertain how much monetary policy tightening will be required for inflation to fall back and stabilize close to the target of 2%. But the Riksbank will do what is needed.” Forward guidance shifted slightly more hawkish as the policy rate is seen peaking at 4.05% in Q2 2024 vs. 3.65% in the April forecasts and staying there through Q2 2025 before falling to 3.75% by Q2 2026 vs. 3.35% in April. However, that path suggests only one more 25 bp hike and that has been taken by the markets as too dovish, with EUR/SEK trading at a record high near 11.8280 right after the decision before falling back modestly. The swaps market sees around 65% odds of a 25 bp hike at the next meeting September 21 but fully price in for November 23. Looking ahead, the market sees around 50% odds of another 25 bp hike in H1 2024 and we expect those odds to rise if inflation remains stubbornly high.

ASIA

Japan reported firm May retail sales. Sales rose 1.3% m/m vs. 0.8% expected and a revised 1.1% (was -1.2%) in April. As a result, the y/y rate came in at 5.7% vs. 5.2% expected and a revised 5.1% (was 5.0%) in April. It’s hard to get excited about this reading when most other indicators suggest the economy is slowing in Q2. Bloomberg consensus sees growth slowing to 1.1% SAAR vs. 2.7% in Q1, but we see downside risks. Recent signals from the BOJ suggest it too is worried about downside risks. May labor market data and IP will be reported tomorrow and will help round out the picture of the Japanese economy.

Bank of Japan Governor Ueda said the bank will start normalizing monetary policy when it becomes more confident that inflation will pick up in FY24. He noted that for now, its forecast for core inflation remains below 2% and the bank still believes it will slow by the end of the current FY23. Ueda added “From there on, we are forecasting some increase in the rate of inflation into FY24, but we are less confident about the second part. If we become reasonably sure that the second part is going to happen, that could be a good reason for a policy change.” Ueda noted that the BOJ’s April forecasts saw 2% core inflation for FY24 and added “That’s why we are keeping policy unchanged at the moment.” Updated forecasts will come at the July 27-28 meeting and it’s clear that the April inflation forecasts are way too low and will need to be raised significantly. Even then, Ueda has said in the past that higher inflation forecasts won’t necessarily trigger tighter policy.

Australia reported firm May retail sales. Sales rose 0.7% m/m vs. 0.1% expected and flat in April. However, the y/y rate still slowed a tick to 4.2% y/y, part of a weakening trend and the weakest since September 2021. Private sector credit will be reported tomorrow. WIRP suggests nearly 30% odds of a hike July 4 and rises to nearly 90% August 1 and fully priced in September 5. Odds of another 25 bp hike top out near 60% in December. All of these odds have risen from yesterday, when soft May CPI was reported.

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