Dollar Remains Soft Ahead of Jobs Report

December 02, 2022

Win Thin

November jobs data will be the highlight; ISM manufacturing PMI confirmed recent weakness in other surveys; the Chicago Fed appointed Austan Goolsbee to replace the retiring Charles Evans in January; Canada highlight is also November jobs data
ECB Governor Lagarde said it’s crucial to anchor inflation expectations; eurozone country data continue to come in weak; U.K. Labour party handily won a by-election
New BOJ board member Naoki Tamura called for a review of the bank’s policies; PBOC Governor Yi Gang said it is focused on growth

The dollar remains soft ahead of the jobs report. DXY is down for the third straight day and is trading near 104.50 after breaking below the August 10 low near 104.636. The mid-June low near 103.418 is the next target and if that breaks, it sets up a test of the May 30 low near 101.30. The euro is trading near $1.0530 and is on track to test the June 27 high near $1.0615, while sterling is on track to rest its June 16 high near $1.2405. USD/JPY traded at a new cycle low today near 133.65 and is on track to test the August 2 low near 130.40. While we still believe the fundamental outlook favors the dollar, we acknowledge that near-term dollar weakness is likely to continue after Powell’s unexpected dovish turn. If the U.S. data continue to weaken, that dovish Fed narrative will only get stronger.

AMERICAS

November jobs data will be the highlight. Consensus stands at 200k vs. 261k in October, while the unemployment rate is expected to remain steady at 3.7% and average hourly earnings are expected to fall a tick to 4.6% y/y. The market is set up for a softer number after ADP reported only 127k private sector jobs were added last month. If the data continue to soften, it will fit in with the more dovish Fed narrative that has been building in recent weeks. WIRP suggests a 50 bp hike December 14 remain fully priced in, but the swaps market is now pricing in a peak policy rate between 4.75-5.0% vs. 5.0-5.25% at the start of this week.

ISM manufacturing PMI confirmed recent weakness in other surveys. Headline came in at 49.0 vs. 49.7 expected and 50.2 in October. The details were not good, as employment fell to 48.4 vs. 50.0 in October and new orders fell to 47.2 vs. 49.2 in October. Of note, supplier deliveries rose slightly to 47.2 vs. 46.8 in October, which was the lowest since March 2009, while the backlog of orders fell to 40.0 vs. 45.3 in October, the lowest since May 2020. The lower these numbers are, the lower the strains in the supply chains. These are a good sign for inflation going forward, as is the prices paid component falling to 43.0 vs. 46.6 in October, the lowest since May 2020. The softer ISM readings fit in with the recent dovish shift in the market's Fed narrative but ISM services PMI Monday are more important for the broad economy.

The Chicago Fed appointed Austan Goolsbee as the new president to replace the retiring Charles Evans in January. Goolsbee is currently a professor of economics at the University of Chicago Booth School of Business and formerly served as a member and then the Chairman of the Council of Economic Advisers under President Obama. Evans is viewed as one of the more dovish members of the Fed. Goolsbee may have an impact right off the bat as Chicago becomes a voter on the FOMC in 2023. Coincidentally, Evans speaks today, as does Barkin. At midnight tonight, the media embargo goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference December 14.

Canada highlight is also November jobs data. Consensus sees 10.0k jobs created vs. 108.3k in October, with the unemployment rate seen up a tick to 5.3%. At the last meeting October 26, the Bank of Canada delivered a dovish surprise and hiked rates 50 bp to 3.75% vs. 75 bp expected. Next meeting is December 7 and WIRP suggests a 25 bp hike is fully priced in, with only 33% odds of a larger 50 bp move vs. nearly 60% at the start of this week. Looking ahead, he swaps market is pricing in a peak policy rate near 4.25% vs. 4.25-4.5% at the start of this week.

EUROPE/MIDDLE EAST/AFRICA

ECB Governor Lagarde said it’s crucial to anchor inflation expectations. At a central bank conference hosted by the Bank of International Settlements and the Bank of Thailand, she noted that the global economy may be in for a period of volatile inflation, adding that “Given this exceptional uncertainty, what we central bankers have to do is actually deliver monetary policy that anchors expectations so those expectations remain moored to target.” Lagarde added that “Conventional wisdom will tell you that we do not target any exchange rate. Obviously we are monitoring and are very attentive to variation of exchange rates, in particular we are monitoring carefully what has been an appreciation of the dollar.”

ECB tightening expectations have fallen. WIRP suggests a 75 bp hike December 15 is only around 15% priced in, down from nearly 50% at the start of this week and fully priced in right after the October decision. Elsewhere, the swaps market now pricing in a peak policy rate near 2.75% vs. 3.0% at the start of this week and 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Of noted, October eurozone PPI came in at 30.8% y/y vs. 41.9% in September, the second straight month of deceleration from the 43.4% y/y peak in August and the lowest since January.

Eurozone country data continue to come in weak. Germany reported October trade data. Exports fell -0.6% m/m vs. -0.2% expected and a revised -0.7% (was -0.5%) in September, while imports fell -3.7% m/m vs. -0.5% expected and a revised -2.2% (was -2.3%) in September. France reported October IP at -2.6% m/m vs. a revised -0.9% (was -0.8%) in September, which dragged the y/y down to -2.7% vs. a revised 1.6% (was 1.8%) in September. Eurozone-wide IP will be reported December 14.

The U.K. Labour party handily won a by-election. Samantha Dixon defeated Tory candidate Liz Wardlaw and held her seat in the City of Chester with 61% of the vote, which represented a 13.8 percentage point swing from the Tories to Labour. The results were broadly in line with national polling, which if sustained would spell trouble for the ruling Tories. The writing is on the wall, it seems, as former Chancellor Sajid Javid said he will not run again for his seat in Parliament at the next general election that’s due by January 2025. The weak economy and high inflation have clearly taken a toll on the ruling Tories. WIRP suggests a 50 bp hike December 15 is priced in, with only 20% odds of a larger 75 bp hike vs. 30% at the start of this week. The swaps market is now pricing in a peak policy rate near 4.5%, down from 4.5-4.75% at the start of this week and down sharply from 6.25% right after the mini-budget in late September.

ASIA

New Bank of Japan board member Naoki Tamura called for a review of the bank’s policies. Specifically, he said it’s appropriate for the bank to conduct a review and that the timing could be soon or later, depending on the development of prices, wages, and the economy. It seems silly to undertake a review in the few months remaining in Governor Kuroda’s term, but we suspect a consensus may be building for a policy review early in the new term of his successor that’s yet to be named. This would set the table for an eventual exit from its ultra-loose policies, probably some time in H2 of next year. Next policy meeting is December 19-20 and no change is expected then.

People’s Bank of China Governor Yi Gang said it is focused on growth. He said “Our focus is growth right now. We have a pretty accommodative monetary policy in place to help with economic recovery and maximize employment.” He noted that inflation has been relatively subdued and that it is likely to remain in a “moderate range” in 2023. Of note, November CPI and PPI data will be reported next Friday. CPI is expected at 1.6% y/y vs. 2.1% in October, while PPI is expected at -1.4% y/y vs. -1.3% in October. With price pressures under control, it’s really no surprise that policymakers will continue focusing on boosting growth. The PBOC cut reserve requirements by 25 bp November 25 and further easing seems likely in the coming months.

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