Dollar Remains Under Pressure Ahead of Jobs Report

July 05, 2024

Win Thin

Soft data and less hawkish FOMC minutes are weighing on the dollar; New York Fed President Williams gave a balanced view; June jobs data Friday will be the highlight; Canada also reports June jobs data and Ivey PMI
Labour’s Starmer will become U.K. Prime Minister; French bonds spreads have drifted lower ahead of this Sunday’s second round election; ECB President Lagarde remains cautious; May eurozone IP and retail sales came in soft; Sweden reported soft May GDP data
Japan Finance Minister Suzuki spoke; Philippines June CPI came in soft

The dollar remains under pressure ahead of the jobs report. DXY is trading lower for the fourth straight day just below 105 as weak data and less hawkish FOMC minutes take a toll (see below). The euro is trading higher near $1.0825 despite weak data (see below), while sterling is trading higher near $1.2790 after Labour’s landslide win (see below). USD/JPY is trading lower near 160.80 after the 162 level held earlier this week. Recent soft data are challenging our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place (see below), which has also led Fed officials to voice more concern about the economy. Still, we note that weaker data in many of the major economies underscore the economic and monetary policy divergences that should continue to support the dollar. Today’s jobs report will be key for global markets.

AMERICAS

Soft data and less hawkish FOMC minutes are weighing on the dollar. After weak ISM PMIs were reported, the minutes piled on. While the Fed delivered a hawkish hold, the minutes show a much more nuanced outlook as “The vast majority of participants assessed that growth in economic activity appeared to be gradually cooling” and “A number of participants remarked that monetary policy should stand ready to respond to unexpected economic weakness.” Also, “Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings.”

New York Fed President Williams gave a balanced view. He said “Inflation is now around 2.5%, so we have seen significant progress in bringing it down. But we still have a way to go to reach our 2% target on a sustained basis. We are committed to getting the job done.” With data softening in recent weeks, we believe the Fed will deliver a more dovish message at the July 30-31 FOMC meeting and set the table for the start of the easing cycle at the September 17-18 meeting. The market sees around 80% odds of a September cut, but it will of course depend on the data.

June jobs data Friday will be the highlight. Bloomberg consensus is 190k vs. 272k in May, while its whisper number stands at 185k currently. For reference, the average gain over the past 12 months has been 232k. ADP private sector jobs came in at 150k vs. 165k expected and a revised 157k (was 152k) in May. Of note, NFP has outperformed ADP in nine of the past ten months. The unemployment rate is expected to remain steady at 4.0% even as the participation rate is expected to rise a tick to 62.6%. With the labor market in better alignment, the pace of wage growth will be a bigger driver of Fed expectations. Average hourly earnings are forecast to rise 0.3% m/m, with the y/y rate expected to fall two ticks to 3.9%.

Q2 growth remains solid. The New York Fed Nowcast model is tracking Q2 at 1.9% SAAR and Q3 at 2.2% SAAR. Both were steady from the previous week's estimates and will be updated today. Elsewhere, the Atlanta Fed GDPNow model is now tracking Q2 growth at 1.5% SAAR vs. 1.7% previously and will be updated next Wednesday after the data.

Canada highlight will also be June jobs data. Consensus sees a 25.0k rise in jobs vs. 26.7k in May, while the unemployment rate is expected to rise a tick to 6.3%. Overall, labor market pressures are easing and evolving largely as the Bank of Canada expected at the time of the April Monetary Policy Report. We doubt the BOC will deliver a follow-up policy rate cut in July as the odds are below 50%, but a September rate cut is fully priced in by the market.

Canada also reports June Ivey PMI. Earlier this week, S&P Global PMIs came in soft as the composite fell to 47.5 vs. 50.6 in May. This was the lowest since March and suggests downside risks to the Ivey PMI today.

EUROPE/MIDDLE EAST/AFRICA

Labour leader Sir Keir Starmer will formally become U.K. Prime Minister later today. The latest BBC forecast of 412 total seats would give Labour a majority of about 170 seats in the House of Commons and the scale of Labour’s majority is largely in line with pre-election polls. The Tories had their worst ever showing but the Scottish National Party were also big losers, winning only a projected 10 out of 57 seats in Scotland. A Labour government is supportive of GBP and UK financial markets. The likely next Chancellor Rachel Reeves emphasized throughout the election campaign her party’s pro-growth/pro-business agenda is aimed at unleashing private business investment.

The 10-year spread of France over Germany has drifted lower ahead of this Sunday’s second and final round of voting in France’s legislative elections. Polls show Le Pen’s far-right National Rally is set to fall short of an absolute majority. The hard-right National Rally would get 200-230 seats out of 577 in the National Assembly, the leftist New Popular Front would get 165-190, and Macron’s centrist Ensemble group would get 120-140. A hung parliament will generate more political instability and lead to policy gridlock which can further weigh on French bonds.

ECB President Lagarde remains cautious. Lagarde reiterated the ECB needs a lot more data “to be confident that inflation is continuously down.” Bottom line: A July ECB policy rate cut is highly unlikely, but the market sees around 75% odds of a 25 bp cut at the September 12 meeting. Of note, the account of the June meeting suggested that the decision to ease in June lacked broad conviction among ECB officials, as “some members felt that the data available since the last meeting had not increased their confidence that inflation would converge to the 2% target by 2025. These members also viewed risks to the inflation outlook as being tilted to the upside. Nevertheless, a willingness to support Mr. Lane’s proposal [a rate cut] was expressed, notwithstanding the reservations put forward.” Lagarde speaks again later today.

Key May eurozone industrial data came in soft. Germany IP came in at -6.7% y/y vs. -4.3% expected and a revised -3.7% (was -3.9%) in April. Yesterday, German factory orders came in at -8.6% y/y vs. -6.1% expected and a revised -1.8% (was -1.6%) in April and so weakness in IP is likely to persist. France and Spain also reported weaker than expected IP of -3.1% y/y and 0.4% y/y, respectively. Eurozone IP will be reported July 15 and there are clear downside risks.

Eurozone reported May retail sales. Sales came in a tick higher than expected at 0.3% y/y vs. a revised 0.6% (was flat) in April. Italy also reported sales and came in at 0.4% y/y vs. a revised -1.7% (was -1.9%) in April.

Sweden reported soft May GDP data. GDP came in at 0.1% m/m vs. 0.4% expected and -0.7% m/m in April. The y/y rate came in at -0.2% and was the first contraction since November. The details were disappointing, as household consumption expenditure was a drag to growth while lower imports were a modest growth tailwind. The data underscore the Riksbank’s dovish guidance that “the policy rate can be cut two or three times during the second half of the year.” Bottom line: monetary policy divergences between Riksbank and Norges Bank suggests NOK/SEK can edge higher. The Norges Bank is in no rush to start easing.

ASIA

Japan Finance Minister Suzuki spoke. He warned that inflation remains a concern as the weak yen pushes up import costs. Suzuki added that he expects the BOJ to manage monetary policy appropriately. Nonetheless, the BOJ is unlikely to tighten more than is currently priced-in which will limit JPY relief rallies. First, Japan underlying inflation is in a firm downtrend and near the 2% target. Second, consumption spending in Japan remains weak. Real household spending unexpectedly fell -1.8% y/y in May vs. 0.3% expected and 0.5% y/y and driven by sharp declines in utilities and household durable goods. The swaps market is pricing in 50% odds of a 10 bp rate hike at the next meeting July 31, and a total of 35 bp of tightening over the next 12 months.

Philippines June CPI came in soft. Headline came in at 3.7% y/y vs. 3.9% expected and actual in May. This was the lowest since March and moves further within the 2-4% target range. The central bank just delivered a dovish hold last week, as Governor Remolona said, “The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of lower import tariffs on rice.” He added that this makes a rate cut at the next meeting August 15 somewhat more likely than before and that a total 50 bp of easing this year was possible. Of note, the market is pricing in 100 bp of easing in H2. This seems too aggressive when the peso is trading near all-time lows.

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