Dollar Remains Under Modest Pressure

December 05, 2024

Win Thin

Fed Chair Powell maintained a cautious tone; other Fed speakers are taking the same approach; Fed Beige Book report was roughly balanced; ADP reported a solid gain in November; ISM services PMI was disappointing; Canada reported firm November PMIs
The French government collapsed; key eurozone data were reported; BOE November DMP inflation expectations rose; Sweden reported November CPI
BOJ officials are keeping the markets guessing

The dollar remains under modest pressure. DXY is trading lower for the third straight day near 106.187 as markets await fresh drivers. USD/JPY is down slightly after BOJ board member Nakamura kept a December hike alive (see below) but the pair continues to find support near 150. Elsewhere, the euro is trading higher near $1.0535 after the French no confidence vote (see below), while sterling is trading higher near $1.2730. We look for the dollar rally to continue after this period of consolidation. While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Key data still to come over the next two weeks should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

Fed Chair Powell maintained a cautious tone. In his last appearance before the FOMC meeting, Powell said that “We can afford to be a little more cautious as we try to find neutral.” With regards to the September cut, Powell stressed that "We wanted to send a strong signal that we were going to support the labor market if it continued to weaken." However, he added that "The economy is strong, and it's stronger than we thought it was going to be in September." He doesn’t sound like he’s in a hurry to cut rates but as always, it will really come down to the key data that will be reported over the next two weeks. Stay tuned.

Other Fed speakers are taking the same approach. Musalem said that “It seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook.” With regards to a potential pause, Musalem said “It might be December, it might be January. Could be later.” Daly said “We do not need to be urgent. There’s no sense of urgency, but we do need to continue to carefully calibrate our policy and make sure it’s in line with the economy we have today and the one we expect to have going forward.” Barkin speaks today.

The Fed Beige Book report was roughly balanced. On overall economic activity: Economic activity rose slightly in most Districts. Three regions exhibited modest or moderate growth that offset flat or slightly declining activity in two others. On labor markets: Employment levels were flat or up only slightly across Districts. Wage growth softened to a modest pace across most Districts, as did expectations for wage growth in coming months. On prices: Prices rose only at a modest pace across Federal Reserve Districts. Contacts indicated they expect the current pace of price growth to persist, but businesses in several Districts indicated tariffs pose a significant upside risk to inflation. Bottom line: this report does not sound like an urgent call to cut rates. Odds of a December cut are around 75%, which we think overstates the case ahead of upcoming key data.

ADP reported a solid gain in November. Its private sector jobs estimate came in at 146k vs. 150k expected and a revised 184k (was 233k) in October. Bloomberg consensus for NFP is 215k whilst its whisper number is 204k. The unemployment rate is expected to remain steady at 4.1% while annual average hourly earnings growth is expected to ease a tick to 3.9% y/y.

Other labor market data will be reported today. November Challenger job cuts and weekly jobless claims will be reported. Initial claims are expected at 215k vs. 213k previously, while continuing claims are expected at 1.904 mln vs. 1.907 mln previously. So far, there have been very few signs of labor market stresses. While hiring has slowed, layoffs remain relatively low.

ISM services PMI was disappointing. Headline came in at 52.1 vs. 55.7 expected and 56.0 in October. Details were also weak, as employment fell to 51.5 vs. 53.0 in October and activity fell to 53.7 vs. 57.2 in October. What’s worse, price paid edged up to 58.2 vs. 58.1 in October. This was the first really weak U.S. data print in quite some time but we don't think it moves the needle much on Fed policy. Jobs data tomorrow, inflation data next week, and retail sales data the week after next are all much more important. Still, worth it’s keeping an eye on this ISM weakness.

Growth remains solid. The Atlanta Fed GDPNow model is currently tracking Q4 growth at 3.2% SAAR and will be updated today after the data. Elsewhere, the New York Fed Nowcast model is tracking Q4 growth at 1.8% SAAR and will be updated tomorrow. Its initial estimate for Q1 growth should also be published tomorrow.

Canada reported firm November PMIs. S&P Global services PMI came in at 51.2 vs. 50.4 in October, which helped push the composite PMI higher to 51.5 vs. 50.7 in October the highest since May 2022. Ivey PMI will be reported today and there are upside risks after the firm S&P Global readings.

EUROPE/MIDDLE EAST/AFRICA

The French government collapsed. We don't think anyone was surprised by this, as both the left and the right were clearly united in their opposition to Barnier. What now? We don't think there's any way to put a positive spin on this. President Macron will choose another Prime Minister but most likely, France is facing political paralysis until July 2025, when new legislative elections can be held. Macron's gamble in calling snap elections last summer was clearly a mistake and it appears he will be a lame duck for much of his second term, which ends in May 2027. However, a recent poll shows nearly 55% of the French populace want Macron to resign, something that he was ruled out. Despite the gloomy political outlook, French bond spreads have come in a bit while the euro has gained modestly. We believe these gains are unlikely to be lasting.

Key eurozone data were reported. German October factory orders came in at -1.5% m/m vs. -2.0% expected and a revised 7.2% (was 4.2%) in September. Germany reports IP and trade data tomorrow. Elsewhere, French and Spanish IP came in at -0.1% m/m and 0.5% m/m, respectively. Lastly, eurozone retail sales for October came in at -0.5% m/m vs. -0.3% expected and 0.5% in September.

BOE November DMP inflation expectations rose. 1-year expectations rose three ticks to 2.8% and 3-year expectations rose two ticks to 2.7%. Both rose from their series lows of 2.5% in October. These readings should keep the Bank of England on a very cautious easing path, which is reflected by the fact that the odds of a December cut have fallen below 10%. Greene speaks later today.

Sweden reported November CPI data. Headline remained steady at 1.6% y/y, CPIF came in at 1.9% y/y vs. 1.5% in October, and CPIF ex-energy came in at 2.4% y/y vs. 2.1% in October. All readings were at consensus. However, CPIF ex-energy was the highest since May and above the Riksbank’s forecast of 2.0% y/y. While the bank has said it plans to cut the policy rate again at the next monetary policy meeting December 19, the market sees only 25% odds of a cut. Looking ahead, the swaps market is still pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.

ASIA

Bank of Japan officials are keeping the markets guessing. Board member Nakamura said “I’ve said this before, but I’m not against rate hikes themselves. It’s important to make decisions based on data.” However, he stressed that “We are at a state where it’s important to adjust the degree of monetary easing carefully in accordance with the economic recovery by assessing a broad array of data.” His remarks come a day after a newswire report that the bank could stand pat at the December 18-19 meeting. Markets currently see 40% odds of a hike for December, up from 30% yesterday but well below 65% seen last week. We look for steady rates this month, which would help USD/JPY recover some of its recent losses.

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