Dollar Remains Firm Ahead of Jobs Data

June 04, 2021
  • May jobs data will be the highlight; ISM services PMI surprised to the upside; weekly jobless claims data are worth discussing; Chair Powell is the only Fed speaker today; Canada also reports May jobs data; Chilean assets were hit yesterday by a potential bill allowing investors to fully withdraw their pension savings
  • Eurozone reported weak April retail sales; the Czech government survived a no-confidence vote; Israeli politics have entered a new era
  • Japan reported firm April houshold spending; Japan will try to revive its once-mighty chip industry; tensions between the U.S. and China continue to gradually rise; India left rates on hold whilst boosting its QE program

The dollar is firm ahead of the jobs data. The bounce in DXY yesterday was the biggest since April 30, and it is building on those gains today to trade at the highest level since May 14. To keep things in perspective, however, DXY has only retraced about a quarter of the March-May drop. Key retracement objectives from that move come in near 91.026 (38%), 91.486 (50%), and 91.946 (62%). Next targets for DXY are the May 13 high near 90.907 and a break above that would set up a test of the May 5 high near 91.436. The euro is trading back near $1.21 while sterling is trading just above $1.41. USD/JPY is trading just above 110 and is likely to eventually test the March 31 high near 111. While we believe the fundamental story favors the dollar, there is a lot of ground recover in the coming days. Until we see a bigger move higher U.S. rates (both real and nominal), the greenback is likely to remain vulnerable to further bouts of selling. The 10-year yield is trading around 1.62% currently, while the breakeven inflation rate has edged lower to around 2.43%, pulling the real rate higher to around -0.81%, the highest since late April.

AMERICAS

May jobs data will be the highlight. Consensus currently sees 674k jobs added vs. 266k in April, with the unemployment expected to fall two ticks to 5.9%, a new cycle low. Both initial and continuing claims fell in the BLS survey week containing the 12th of the month, which suggests a solid May NFP number. ADP reported private sector jobs data yesterday at 978k vs. 650k expected and a revised 654k (was 742k in April). As one can see from last month, the ADP and NFP don’t always line up. However, most are looking for a snapback in NFP from the April miss. April factory orders will also be reported and are expected to fall -0.3% m/m, driven largely by a drop in aircraft orders that was picked up in the -1.3% m/m drop in durable goods orders already reported.

ISM services PMI surprised to the upside. Headline rose to 64.0 vs. 63.2 expected and 62.7 in April. Prices paid rose to 80.6 vs. 76.8 in April, while employment fell to 55.3 vs. 58.8 in April. Overall, this was a very strong report. The slight fall in employment is disappointing but this means it's still expanding but at a slightly slower pace. We suspect this is similar to what we saw for softer manufacturing employment reading, which ISM said was due to labor supply, not demand. All things considered, we think a good NFP number tomorrow is pretty much baked in the cake for markets.

Weekly jobless claims data are worth discussing. Initial claims fell to 385k vs. 387k expected and a revised 405k (406k) the previous week last, while continuing claims rose to 3.771 mln vs. 3.614 mln expected and a revised 3.602 mln (was 3.642 mln) the previous week. Of note, emergency continuing claims are reported with a 2-week lag and so this most recent data was for the BLS survey week containing the 12th of the month. These fell about 50k to 11.66 mln unadjusted. Together with regular continuing claims, the total fell to 15.1 mln unadjusted and is the lowest since late 2020. This too points to a solid NFP today.

Chair Powell is the only Fed speaker today. Of note, he has remained silent on tapering even as several regional Fed presidents and his two Vice Chairs have begun advocating for it. We see risks that Powell makes comments today that puts him in the tapering camp. The timing is key since at midnight tonight, the media embargo goes into effect and there will be no Fed speakers until Powell’s post-decision press conference the afternoon of June 16. Yesterday, NY Fed President Williams noted that “The economy has improved, and I think it’s on a good trajectory, but to my mind, we’re still quite a ways off from reaching the ‘substantial further progress’ that we’re really looking for, in terms of adjustments to our purchases. That said, we have to be thinking ahead, planning ahead, and so I do think it makes sense for us to be thinking through the various options that we may have in the future -- talking about talking about how the economy is doing, where we see it going, and understanding how that may play out over the coming months.” This sounds like Williams is moving closer to the tapering camp as well.

Canada also reports May jobs data. A -25k drop is expected vs. -207.1k in April. This is expected to push the unemployment rate up a tick to 8.2%. May Ivey PMI will also be reported today and stood at 60.6 in April. Overall, the outlook for the Canadian economy remains strong. The Bank of Canada is on hold for now, with fiscal policy taking over this year in terms of stimulus. Next policy meeting is June 9 and no change is expected then.
Chilean assets were hit yesterday by a potential bill allowing investors to fully withdraw their pension savings. This would be the fourth move in this direction, but markets weren’t expecting it to go this far since the previous ones limited withdrawals to 10%. If the measure goes through, it puts a substantial amount of the nearly $200 bln (as of May) AUM of the pension funds at risk of leaving the financial markets. To put things in perspective, previous withdrawals amounted to just under $50 bln. Local equity indices were down nearly 4% yesterday and the peso depreciated 0.5%. Despite the new headwinds and the upcoming election risks, the peso has been holding up relatively well, but the IPSA equity index has underperformed the region by a wide margin.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported weak April retail sales. Sales were expected to fall -1.5% m/m but instead plunged -3.1% and basically reverses the revised 3.3% (was 2.7%) gain in March. Survey data have been firming in Q2 even as the hard data has suffered from the lockdowns. As those lockdowns ease, the hard data should start catching up with the survey data. That said, the ECB is expected to extend its accelerated asset purchases into Q3 at next week’s meeting. Growth and inflation forecasts will likely be adjusted higher, making the expected dovish outcome a bit trickier to justify. However, it seems clear from recent ECB communications that the doves have the upper hand at this juncture.

The Czech government survived a no-confidence vote. The motion stemmed from the center-right parties accusing Prime Minister Andrej Babis of mismanaging the pandemic response, including accusations of conflict of interests from EU subsidies. This comes on top of the looming case of financial fraud against him. In the end, the government was saved by a tactical decision by Communist Party not to vote, thereby preventing the opposition from taking power. There was no market reaction. However, we suspect political tensions will remain high ahead of general elections planned for this October.

 Israeli politics have entered a new era. Prime Minister Netanyahu appears to be on the way out after leading the nation straight 12 years and 15 of the past 25, as opposition leader Yair Lapid notified President Rivlin that he has put together a working coalition. Under the coalition agreement, Lapid will share power with Naftali Bennett on a rotating basis. Of note, an Arab party will be part of an Israeli government for the first time ever. The coalition has the slimmest of majorities with just 61 of 120 seats, and reports suggest Netanyahu will continue his efforts to peel away right-wing lawmakers from this unlikely grouping. The opposition also formally petitioned for the replacement of the parliamentary speaker, who is an ally of Netanyahu and is expected to try and delay the vote.

ASIA

Japan reported firm April household spending. Spending rose 13.0% y/y vs. 8.7% expected and 6.2% in March. Despite some firm data in April, there are still risks that GDP contracts in Q2 as lockdowns will be maintained through most of June. The BOJ is on hold for now but we still expect another fiscal package over the summer as the economy slumps and Suga’s popularity wanes ahead of October elections.

Japan will try to revive its once-mighty chip industry. The Ministry of Economy, Trade, and Industry said it would treat semiconductors as a “national project” that would be as important as securing food and energy. The initiative comes during a global chip shortage that has impacted manufacturing across a wide range of countries and industries. China, Korea, and the U.S. are all seeking to boost their domestic chip industries. Of note, Japan’s share of global chip sales fell to just 10% in 2019, down from 50% in 1988. Japan still has 84 chip factories, the most in the world. However, they have become outdated and Japan now has to import nearly two thirds of its semiconductors. METI said it will seek a “drastic revamp” of these existing factories and will also try to encourage development of chips required for post-5G systems. No further details were given with regards to costs and funding.

Diplomatic tensions between the U.S. and China continue to gradually rise. The latest salvo came from the Biden administration’s decision to ban any U.S. investment in 59 Chinese firms linked to military or the surveillance industry. The ban takes effect August 2. China’s leadership was quick to condemn the move but has taken no retaliatory action so far. The yuan has weakened over the last few sessions, but it’s just following the broader dollar trend reversal also seen in major currencies.

The Reserve Bank of India left rates on hold whilst boosting its QE program. The repo rate was kept at 4.00%, while the bond purchase program was increased by another INR 1.2 trln in Q3. It also announced additional liquidity provisions to some lockdown-impacted sectors. The bank trimmed its GDP forecast by 1 ppt to 9.5% and highlighted the impact of supply constraints on inflation. The bank said it would maintain its accommodative policy for as long as necessary to achieve growth on a durable basis. Consensus sees steady rates through 2021, with odds of a hike rising around mid-2022 and beyond. We are not convinced the easing cycle is over, especially after the ongoing reliance on QE. There was little reaction to the event as it was fully priced in. INR is down modestly, but in line with moves across EM.

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