Dollar Remains Under Pressure Ahead of Jobs Report

May 03, 2024

Win Thin

Fed easing expectations have come in a bit; all eyes will be the jobs report; April ISM services PMI will also be important; Canada also reports April PMI readings
The ECB rate path remains open to debate; Norges Bank delivered a hawkish hold; CNB cut rates 50 bp to 5.25% and signaled caution ahead
Australia reported firm home loans data; final April PMIs were revised down

The dollar remains under pressure ahead of the jobs report. DXY is trading lower for the third straight day near 105.178 after trading as high as 106.490 ahead of the FOMC decision. Near-term direction will be dictated by the jobs data but a break below 104.887 would set up a test of the April low near 103.880. The euro is trading higher near $1.0740 while sterling is trading higher near $1.2555. USD/JPY is trading lower near 153 and is on track to test the April low near 150.80. NOK is the top performing major today after the Norges Bank delivered a hawkish hold (see below). Powell delivered a dovish message this week but when all is said and done, it will all come down to the data. The ongoing backdrop of persistent inflation and robust growth in the U.S. should keep the Fed on hold and put upward pressure on U.S. yields, which in turn should be supportive of the dollar. We believe that while market easing expectations have adjusted violently this past month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further. Today’s jobs report will be key.

AMERICAS

Fed easing expectations have come in a bit. Odds of a June cut have risen to 15% vs. 10% at the start of this week, while July odds have risen to 40% vs. 33% at the start of this week and September odds have risen to 80% vs. 75% at the start of this week. A November cut is now fully priced in vs. 95% at the start of this week. What is clear is that despite Powell’s dovish performance this week, markets recognize that when all is said and done, data will dictate Fed policy. Powell clearly wants to cut rates as soon as possible, but the data just won’t let him yet. That is why today’s data is so important for the markets.

All eyes will be the jobs report. Bloomberg consensus sees 240k jobs added vs. 303k in March, while its whisper number stands at 247k. The unemployment rate is expected to remain steady at 3.8%. The pace of wage growth, a key driver of core services CPI inflation, will also draw plenty of attention. Average hourly earnings are expected to slow a tick to 4.0% y/y. Recall that ADP reported its private sector job estimate at 192k vs. 183k expected and a revised 208k (was 184k) in March. NFP has outperformed ADP for eight straight months.

April ISM services PMI will also be important. Headline is expected at 52.0 vs. 51.4 in March. Employment is expected at 49.0 vs. 48.5 in March, while prices paid is expected at 55.0 vs. 53.4 in March. Market will be especially attuned to this component after manufacturing prices paid jumped to 60.9 in April, the highest since June 2022. Of note, the preliminary April S&P Global services PMI fell to a five-month low of 50.9 vs. 51.7 in March and so there are downside risks to the ISM reading.

The U.S. growth outlook remains solid. The Atlanta Fed GDPNow model estimates Q2 growth at 3.3% SAAR and will be updated next Wednesday after the data. These early reads are often revised significantly in both directions, but estimates suggest momentum remains fairly strong. The New York Fed GDP nowcast model sees Q2 growth at 2.7% SAAR and will be updated later today. Its initial estimate for Q3 will come in early June.

Canada also reports April PMI readings. S&P Global reports its services and composite PMIs. Earlier this week, its manufacturing PMI came in at 49.4 vs. 49.8 in March. Ivey PMI will be reported next Tuesday.

EUROPE/MIDDLE EAST/AFRICA

The ECB rate path remains open to debate. Chief Economist Lane said, “We are not pre-committing to a particular rate path” and added that “The next phase of the disinflation process is likely to be more gradual, with bumps in the road ahead.” Other hawks have also been unwilling to commit to any moves after the widely expected June cut. On the other hand, GC member Stournaras said, “we now consider three rate cuts in 2024 as the more likely scenario.” This is basically what the market is pricing in currently.

Norges Bank delivered a hawkish hold. It kept rates steady at 4.5%, as expected, but reiterated that the policy rate will continue to lie at the current level “for some time ahead.” Norges Bank also noted that “the data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged.” At the March meeting, the Norges Bank signaled it would gradually start easing from Q3, but today’s new guidance indicates it is in no rush to loosen policy. The market sees around 30% odds of a 25 bp cut in September, down slightly from 35% at the start of this week. There are no updated macroeconomic projections at this meeting.

Czech National Bank cut rates 50 bp to 5.25%, as expected. However, the tone was a bit more hawkish as Governor Michl said “The fight against inflation isn’t over. The bank board considers it necessary to maintain tight monetary policy and have a very cautious approach to further rate cuts.” More importantly, the bank also lifted its year-end PRIBOR forecast upward by a full percentage point to 5%, suggesting less easing this year than the 75 bp that’s priced in currently. CZK and PLN are likely to continue benefitting from hawkish central banks, while HUF will suffer from the dovish NBH.

ASIA

Australia reported firm home loans data. The value of new housing loans commitments came in at 3.1% m/m in March vs. 1.0% expected and a revised 1.9% (was 1.5%) in February. However, this increase may be more a reflection of rising house prices (which has raised the average loan size) rather than rising demand for dwellings. Indeed, the “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey points to sluggish buying sentiment. The market sees a small 10% probability of a rate hike by year-end. In our view, there is scope for a downward adjustment to RBA interest rate expectations because household spending is weak. Retail turnover unexpectedly fell 0.4% m/m in March following rises of 0.2% in February and 1.0% in January.

Final April PMIs were revised down. Services came in at 53.6 vs. 54.2 preliminary, which dragged the composite down to 53.0 vs. 53.6 preliminary. Earlier this week, manufacturing was revised down to 49.6 vs. 49.9 preliminary.

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