Dollar Recovers Ahead of Jobs Report

December 08, 2023

Win Thin

The highlight will be the November jobs report; Fed easing expectations remain elevated ahead of next week’s FOMC meeting; December University of Michigan consumer sentiment will be closely watched
ECB officials have gone into quiet mode ahead of next week’s meeting; BOE/Ipsos November inflation expectations eased
Japan reported October cash earnings, household spending, and current account and revised Q3 GDP data; New Zealand Q3 manufacturing activity weakened; China’s Politburo promised to boost fiscal stimulus; India kept rates steady at 6.5%, as expected

The dollar has recovered ahead of the jobs report. DXY is trading higher near 103.752. USD/JPY is trading higher near 144.55 after trading as low as 141.70 yesterday. We remain skeptical of BOJ liftoff anytime soon and so this pair should recover some more ground in the coming days. The euro remains under pressure as ECB easing expectations pick up (see below) and is trading lower near $1.0780 while sterling is trading lower near $1.2585. At this point, it will likely take a string of firm U.S. data to truly challenge the current dovish Fed narrative. We continue to stress that the U.S. economy continues to grow at or above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. The dollar should see another leg higher when market expectations for the Fed finally shift, though that may be a 2024 story.

AMERICAS

The highlight will be the November jobs report. Bloomberg consensus for NFP stands at 183k vs. 150k in October, while its whisper number stands at 175k vs. 151k at the start of this week. The unemployment rate is expected to remain steady at 3.9% while average hourly earnings are expected to fall a tick to 4.0% y/y. There should be some payback for the strike-depressed October reading but it’s not clear how much. While there have been some signs of softness in the labor market, it remains remarkably robust.

The U.S. economy remains relatively robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 1.2% SAAR vs. 1.3% previously. Next update will be next Thursday. This stands in stark contrast to the NY Fed Nowcast model that is now tracking 2.3% SAAR. This model will be updated today. Readings early in the quarter are typically volatile as more and more data are incorporated into the models. Lastly, we’d note that the current early reads are based largely on strike-depressed October data. If November data bounce back as we expect, the Q4 estimates should rise accordingly.

Fed easing expectations remain elevated ahead of next week’s FOMC meeting. WIRP suggests no change next Wednesday but after that, it’s all about the cuts. There are 10% odds of a cut January 31, rising to 66% March 20 and fully priced in for May 1 vs. June 12 at the start of last week. Five cuts are fully priced in by end-2024. While we disagree with this market pricing, it will take a string of stronger data to shift the narrative.

December University of Michigan consumer sentiment will be closely watched. Headline is expected at 62.0 vs. 61.3 in November, with both expectations and current situation expected to rise modestly. 1-year inflation expectations are expected to fall two ticks to 4.3% y/y while 5- to 10-year expectations are expected to fall one tick to 3.1% y/y.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank officials have gone into quiet mode ahead of next week’s meeting. Despite efforts to push back against the market, easing expectations have picked up. WIRP suggests 5% odds of a cut next Thursday, rising to 10% January 25, 75% for March 7 and fully priced in for April 11 vs. June 6 at the start of last week. A fifth cut by the end of next year is fully priced in.

Bank of England November inflation expectations eased. In its poll conducted with Ipsos, 1-year expectations fell to 3.3% vs. 3.6%, the lowest since November 2021. However, this stands in contrast to the bank’s Decision Maker Panel, where 1-year expectations are 4.4%. Both remain well above the 2% target and yet BOE easing expectations continue to pick up ahead of next week’s meeting. WIRP suggests no odds of a hike next Thursday, rising modestly to top out near 5% February 1. After that, rate cuts are priced in with the first one fully priced in for June 20 vs. fully priced in for September 19 at the start of last week.

ASIA

Japan reported October cash earnings and household spending data. Nominal earnings came in at 1.5%y/y vs. 1.0% expected and 0.6% in September, while real earnings came in at -2.3% y/y vs. -3.0% expected and -2.9% in September. The modest tightening in the labor market didn’t have much impact on wage growth, which remains weak overall. Policymakers have stressed that next spring’s round of wage negotiations will be very important in terms of normalizing policy. Elsewhere, household spending came in at -2.5% y/y vs. -2.9% expected and -2.8% in September. Bank of Japan liftoff expectations have shifted back to April vs. June at the start of this week after official comments. However, WIRP now suggests only 15% odds of a move this month vs. 35% yesterday, as the soft data provide a bit of a reality check for the markets.

Japan final GDP data were revised down. GDP came in at -0.7% q/q vs. -0.5% preliminary, while the SAAR came in at -2.9% vs. -2.1% preliminary. The revisions came as private demand subtracted -0.1 percentage points from growth vs. flat preliminary and inventories subtracted -0.5 percentage points vs. -0.3 preliminary. Data so far in Q4 suggest the soft patch is continuing into Q4, which makes us question why the BOJ would be contemplating liftoff now.

Japan October current account data are worth discussing. The adjusted surplus came in at JPY2.62 trln vs. JPY1.86 trln expected and JPY2.01 trln in September. However, the investment flows will be of more interest. The October data showed that Japan investors remained net buyers of U.S. bonds (JPY2.0 trln) for the third straight month and five of the past six months. Japan investors turned net buyers (JPY101 bln) of Australian bonds again and for seven of the past eight months and remained net sellers of Canadian bonds (-JPY14 bln) for the fourth straight month and for nine of the past ten months. Investors turned net buyers of Italian bonds (JPY288 bln) after two straight months of net selling. Japan investors remained total net buyers of foreign bonds (JPY1.15 trln) for the third straight month and for five of the past six months. With Japan yields moving higher, it’s possible that Japan investors will stop chasing higher yields abroad but it’s still too early to say.

New Zealand Q3 manufacturing activity weakened. Activity fell -2.7% q/q vs. a revised 2.6% (was 2.9%) in Q2. Q3 GDP data will be reported next Thursday. Consensus sees 0.2% q/q vs. 0.9% in Q2 but we see clear downside risks after the manufacturing and retail sales data. With the economy softening, there seems to be little need for the RBNZ to hike again. WIRP suggests only 10% odds of a hike February 28. After that, it’s all about the cuts with the first one fully priced in for August 14.

China’s Politburo promised to boost fiscal stimulus. The meeting was chaired by President Xi and was focused on the 2024 economic outlook. The Politburo said fiscal policy will be stepped up “appropriately” and stressed that monetary policy should be flexible, appropriate, targeted, and effective. Of note, the previous wording of “forceful” was dropped from the statement. We remain skeptical that any stimulus measures will do much to boost the economy when the nation is plagued by a huge debt overhang.

Reserve Bank of India kept rates steady at 6.5%, as expected. All six members of the MPC supported the decision and all but one voted to keep its stance at “withdrawal of accommodation.” Governor Das stressed that “It would be wrong to think or assume that a change of approach or any loosening is round the corner. It’s not on the table.” The bank raised its growth forecast for FY23 ending in March to 7.0% vs. 6.5% previously, which Deputy Governor Patra called “conservative.” The swaps market is pricing in some odds of a rate cut over the next three months, while 25 bp of easing is nearly priced in over the subsequent three months. This seems unlikely given the bank’s hawkish tone today. Indeed, November CPI will be reported next Tuesday and is expected to accelerate to 5.78% y/y, which would be nearing the top of the 2-6% target band.

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