Dollar Remains Firm as Key U.S. Risks Addressed

October 26, 2023

Win Thin

UAW reached a tentative labor agreement with Ford; the House of Representatives finally has a new Speaker; we get our first official reading for Q3 GDP; Chile is expected to cut rates 75 bp to 8.75%
ECB is expected to keep rates steady; Lagarde is likely to emphasize growing downside risks; October U.K. CBI distributive trades survey was very weak; Turkey is expected to hike rates 500 bp to 35.0%.
RBA Governor Bullock said the bank was not that surprised by the CPI data yesterday; still, RBA tightening expectations remain elevated

The dollar remains firm as key risks to the U.S. have been addressed. DXY is trading higher for the third straight day near 106.724 after three straight down days. Clean break above 106.589 sets up a test of the October 3 high near 107.348. The euro is trading lower near $1.0540 and clean break below that level sets up a test of the October 3 low near$1.0450. Sterling is leading this move, trading lower near $1.2085 and nearing a test of the October 4 low near $1.2035. USD/JPY traded at a new cycle high near 150.80 before reversing lower to trade near 150.25 currently. Recent price action supports our belief that the recent dollar weakness was corrective in nature. Looking beyond the recent noise related to dovish Fed comments and some well-publicized investor calls in USTs, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended. Simply put, the U.S. economy continues to grow above trend even as the rest of the world slips into recession. Recent data confirm that the U.S. economy is still running hot and needs further tightening.

AMERICAS

The United Auto Workers reached a tentative labor agreement with Ford. Ford agreed to a 25% hourly wage hike over the life of the contract, but this rises to 33% when cost of living allowances are included. The UAW instructed its workers to go back to work while the deal is ratified. UAW leadership will vote on the deal October 29 and it must then be ratified by Ford’s 57,000 hourly workers in the U.S. This deal puts pressure on General Motors and Stellantis to quickly agree to the same terms. Both companies are scheduled to meet with UAW representatives today.

The House of Representatives finally has a new Speaker. Mike Johnson won by a 220-209 vote as all Republicans present voted for him. He will have no time to waste as the House needs to quickly pass the necessary budget bills to avoid a government shutdown when the Continuing Resolution (CR) expires November 17. Johnson has suggested that the House will quickly hold votes on eight spending bills before the deadline, but would consider another CR that runs through either January 15 or April 15 if needed to avoid a shutdown.

These developments have helped boost the dollar. With lower government shutdown risks as well as the lower likelihood that the auto strikes will significantly harm the U.S. economic outlook, markets are breathing a sigh of relief. Those were the two biggest near-term risks to the U.S. outlook and so the favorable outcomes are seen as being positive for the dollar.

Financial conditions continue to loosen. Chicago Fed’s financial conditions through Friday October 20 are the loosest since late February 2022, well before the Fed started hiking rates. So far, higher bond yields do not appear to be having much impact on financial conditions. More needs to be done and yet Fed tightening expectations remain subdued. WIRP suggests no odds of a hike next Wednesday, rising to 25% December 13 and topping out near 40% January 31. These odds are way too low. A rate cut is not priced in until Q3 2024.

We get our first official reading for Q3 GDP. Consensus sees growth at 4.5% SAAR vs. 2.1% in Q2, while personal consumption is expected at 4.0% SAAR vs. 0.8% in Q2. Of note, the Atlanta Fed’s GDPNow model’s final estimate of Q3 growth came in at 5.4% SAAR yesterday. After today’s GDP data, the model will then begin tracking Q4 growth tomorrow. We expect momentum in the economy to carry over and yet Bloomberg consensus for Q4 currently stands at a mere 0.8% SAAR.

Weekly jobless claims will be of interest. That’s because continuing claims are for the BLS survey week containing the 12th of the month and are expected at 1.740 mln vs. 1.734 mln last week. Last week’s initial claims were for the BLS survey week and the 198k reading was the lowest since mid-January. The 4-week moving average of 206k was the lowest for a BLS survey week since January, when NFP came in at 517k vs. 189k expected. Initial claims are expected at 207k this week. Bloomberg consensus for October NFP stands at 173k, while its whisper number stands at 202k.

Regional Fed manufacturing surveys will continue to roll out. Kansas City Fed manufacturing index will be reported and stood at -8 in September. Its services index will be reported tomorrow and stood at 2 in September. So far, Empire manufacturing came in at -4.6 vs. -6.0 expected and 1.9 in September, Philly Fed manufacturing came in at -9.0 vs. -7.0 expected and -13.5 in September, and Richmond Fed manufacturing index came in as expected at 3 vs. 5 in September.

Other minor data will be reported. September wholesale and retail inventories, advanced goods trade (-$86.0 bln expected), durable goods orders (1.8% m/m expected), and pending home sales (-2.0% m/m expected) will all be reported.

Chile central bank is expected to cut rates 75 bp to 8.75%. However, nearly a quarter of the 21 analysts polled by Bloomberg look for a smaller 50 bp move while 1 looks for a larger 100 bp move. Last week, the bank said that it would consider recent peso weakness in its decision. Since then, USD/CLP went from 950 to 925 and so a 75 bp cut seems the most likely move. At the last meeting September 5, the bank cut rates 75 bp and maintained its plan to cut rates to 7.75-8.0% by year-end.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank decision is due out shortly and is expected to keep rates steady. If so, it would be the first pause since it started hiking in July 2022. While there are still a handful of hawkish holdouts, most ECB policymakers have acknowledged that the tightening cycle is over. The bank is expected to discuss modifications to reserve requirements as well has how to shrink its PEPP holdings but no decisions are expected until next year. We may get some updated thinking here. Some are looking for a hike in the Minimum Reserve Requirement from the current 1% today but this seems too soon.

President Lagarde is likely to emphasize growing downside risks. She was quite downbeat at her September 14 press conference. Since then, the data have only gotten weaker and so we expect her to remain downbeat. That said, she will leave the door open to another hike even though this is seen as highly unlikely. WIRP suggests no odds of a hike today, rising to top out at only 10% December 14. A rate cut is nearly priced in for June 6. Updated macro forecasts won’t come until the December 14 meeting.

October U.K. CBI distributive trades survey was very weak. Total reported sales came in at -21 vs. -14 in September, while retailing reported sales came in at -36 vs. -14 in September. October retail sales data won’t be reported until November 17 but the CBI survey suggests another weak reading. This comes after the CBI reported a very weak industrial trends survey earlier this week, which suggests another weak IP reading November 10.

Bank of England tightening expectations remain subdued. WIRP suggests only 5% odds of a hike next Thursday, rising to 25% December 14 and topping out near 35% February 1. A rate cut is not priced in until Q4 2024. Cunliffe speaks later today.

Turkey central bank is expected to hike rates 500 bp to 35.0%. However, the market is all over the place. Of the 24 analysts polled by Bloomberg, 5 see a 250 bp hike, 2 see a 300 bp hike, 1 sees a 350 bp hike, and 16 see a 500 bp hike. At the last policy meeting September 21, the bank hiked rates 500 bp to 30.0%, as expected. Since then, September CPI data came in hot and the lira continued to weaken. The swaps market sees a peak policy rate near 39.50% over the next six months, which would not be enough to get inflation back to target and stabilize the lira.

ASIA

RBA Governor Bullock said the bank was not that surprised by the CPI data yesterday. Testifying before the Senate, she said the inflation report came in “pretty much where we thought.” Bullock said the data yesterday were higher than the RBA’s August forecasts but given developments since then, “we thought it was going to be about where it came out.” When asked if the latest inflation report data represented a “material change” to the bank’s economic outlook, Bullock said “We’re still thinking about that. I wouldn’t say one way or another.”

Still, RBA tightening expectations remain elevated. WIRP suggests 50% odds of a hike November 7 vs. 20% at the start of this week, rising to 75% December 5 vs. 40% at the start of this week. A hike is fully priced in for February 6, while odds of a second hike have appeared and top out around 40% in Q2. A rate cut is not priced in until 2025. Despite these elevated odds, AUD traded at a new cycle low near 0.6270 before recovering back above .6300. It remain on track to test the October 2022 low near .6170.

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