Dollar Soft Ahead of ADP Data

January 05, 2022
  • Yields at the long end of the U.S. continue to rise; the highlight will be ADP private sector jobs data; FOMC minutes will be important 
  • Eurozone reported final services and composite PMI readings; December eurozone inflation readings continue to roll out; ECB won’t meet until February 3, giving it some time to better assess the economic outlook as more data come out; Turkish authorities are hardening their vigilance in FX markets
  • Reports suggest some BOJ officials are shifting their views on inflation risks; the sharp drop in U.S. tech stocks yesterday took its toll on Asian indices today, with the Hang Seng falling to the lowest level since mid-2020; inflation readings out of emerging Asia were lower than expected

The dollar is softer ahead of ADP data. DXY is down for the first day this week but continues to trade above 96. This week’s rally ran out of steam near 96.40, a key technical level where a break above would set up a test of the December cycle high near 96.91. The euro remains heavy and so far has been unable to get much traction above $1.13. GBP is seeing little follow-through buying above $1.35. Lastly, USD/JPY has reversed lower after trading yesterday at the highest level since January 2017 near 116.35. Despite today’s drop back below 116, we continue to target the December 2016 high near 118.65.


Yields at the long end of the U.S. curve continue to rise. The 10-year yield traded as high as 1.68% yesterday and is nearing a test of the October higher near 1.70%. Of note, 10-year inflation breakeven rates have lagged and so the real 10-year yield of -0.95% is the highest since late October. The U.S. 2-year yield continues to flirt with 0.80% but so far has not been able to break above that level. Markets continue to price in three Fed hikes this year, with liftoff seen in either March or May. This seems ab out right to us. Where we think the market is wrong is its pricing of the terminal Fed Funds rate. Swaps market sees that at 1.5% in 2022, which seems too low in historical context. That said, markets are starting to price in odds of further hikes in 2023. Keep an eye on this as further repricing here could be the trigger for the dollar’s next leg higher.

The highlight will be ADP private sector jobs data. Consensus at 410k vs. 534k in November. Yesterday, ISM manufacturing PMI came in at 58.7 vs. 60.0 expected and 61.1 in November. It’s worth noting that sustained readings above 60 are rare and yet this series was above 60 for 8 of the 12 months in 2021. The details were very solid, with employment coming in at 54.2 vs. 53.3 in November, prices paid at 68.2 vs. 82.4 in November, and new orders at 60.4 vs. 61.5 in November. Overall , we don't think this report takes anything away from the strong US economic outlook. Elsewhere, November JOLTS job opening fell to 10.56 mln vs. 11.09 mln in October. This modest drop suggests the labor market may be starting to normalize. Yet what is the new normal? A record 4.527 mln workers quit that month and so the job market continues to churn, making it even harder to get a handle on the true underlying trends. NFP consensus is currently 424k vs. 210k in November.

FOMC minutes will be important. Since the Fed accelerated tapering at that December meeting, markets will be looking for clues for when the conditions for liftoff will likely be met. WIRP suggests nearly 2 in 3 odds of liftoff March 16, while May 4 is fully priced in. Some are looking for clues to balance sheet reduction, but we think it is way too early for that. That seems like a 2023 story and so Fed officials are unlikely to be discussing it just yet. Yesterday, Kashkari said he sees two hikes in 2022 whilst warning that high prices could raise inflation expectations. This is what it sounds like when doves cry.


Eurozone reported final services and composite PMI readings. Headline services and composite came in at 53.1 and 53.3, respectively, down a tick or two from the preliminary readings. German composite fell a tick to 49.9, while French composite rose two ticks to 55.8. Italy and Spain reported for the first time and their composite PMIs came in at 54.7 and 55.4, both down nearly three full points from November. With Germany tipping into recession and the other major eurozone economies losing momentum, it’s clear that the ECB took a gamble in tapering QE this year.

December eurozone inflation readings continue to roll out. Italy reported today, with headline EU Harmonized inflation coming in as expected at 4.2% y/y vs. 3.9% in November. Germany reports tomorrow, with headline EU Harmonized inflation expected at 5.6% y/y vs. 6.0% in November. The eurozone reports Friday, with headline inflation expected at 4.8% y/y vs. 4.9% in November and core expected at 2.5% y/y vs. 2.6% in November. Yesterday, France reported headline EU Harmonized inflation steady from November at 3.4% y/y, while Spain last week reported headline EU Harmonized inflation at 6.7% y/y vs. 5.5% in November.

The ECB won’t meet until February 3, giving it some time to better assess the economic outlook as more data come out. That said, that meeting is likely to be a non-event as the bank has already tipped PEPP will end as scheduled in March. As we’ve pointed out numerous times, the temporary increase to its existing AP will not be large enough to prevent a significant tightening of financial conditions this year in the eurozone. Besides the impact on the growth outlook, this tapering will have unwanted side effects, with peripheral spreads likely to widen further. As it is, the 10-year Italy-Germany differential hit a cycle high of 137 bp last month and is hovering around 132 bp currently. In a likely sign of things to come, Italy’s new 30-year bond offer today saw EUR43 bln of orders, less than half that for a similar sale in October 2020. Yields here have risen 35 bp over the past month, with a similar rise seen in its 10-year paper too over the same period.

Turkish authorities are hardening their vigilance in FX markets, gradually moving down the continuum towards potential capital controls. Bloomberg reports that regulators are keeping tabs on investors transacting large amounts of foreign currency and went as far as requesting information from commercial banks. They are also nudging corporates away from using the spot market in favor of the futures market or NDFs on offer by the central bank for their FX hedging needs. The central bank’s net FX reserves stood at $8.6 bln last month, down sharply from $26.4 bln in November. We still think that there is no amount of tinkering that will reverse the situation: either they take determined action or the country’s external accounts will deteriorate further, possibly to a crisis point. The lira has depreciated in 7 of the past 8 days, trading now at USD/TRY 13.44.


Reports suggest some BOJ officials are shifting their views on inflation risks. Some will reportedly discuss ending the bank’s long-held view that inflation risks are “skewed to the downside,” a phrase that has been used since October 2014. The officials stressed that any shift in the risk assessments aren’t meant to signal any move by the BOJ towards removing accommodation. Some are also considering an adjustment to the bank’s growth outlook, with FY21 likely to be downgraded but offset by upgraded FY22 forecast. New macro forecasts will be released with the Outlook Report for the January 17-18 meeting. However, the April report will be much more important as FY24 will be added to the forecast horizon. That said, it’s hard to imagine that the BOJ’s core CPI forecast will rise much from the 1.0% currently forecast for FY23 which would suggest steady rates until FY25. This is the biggest reason why we remain so negative on the yen.

The sharp drop in U.S. tech stocks yesterday took its toll on Asian indices today, with the Hang Seng falling to the lowest level since mid-2020. Concerns about higher (nominal and real) rates in the U.S. seem to be the main driver here, but news of continued supply chain disruptions from chip shortages also weighed on sentiment for the region. However, virus concerns also played a part as Hong Kong announced a halt to flights from eight countries, closure of bars and gyms, and limits to indoor dining. India’s Sensex was the only major EM Asian index to manage gains (+0.7%), against declines of -1% for the Shanghai Composite and Korea’s Kospi, and a -1.6% loss for Hong Kong’s Hang Seng index.

Inflation readings out of emerging Asia were lower than expected. Philippines headline CPI rose 3.6% y/y vs. 4.1% expected and 4.2% in November. This was the lowest since December 2020 and moved back within the 2-4% target range. Elsewhere, Thai headline CPI rose 2.17% y/y vs. 2.51% expected and 2.71% in November. This was the lowest since September and moved closer to the center of the 1-3% target range. Neither central bank is in a hurry to hike rates, though Bloomberg consensus sees liftoff for the Philippines in H2. With the Thai economy amongst the hardest hit by the pandemic, the BOT will be one of the most dovish in the region and liftoff is seen in H1 23. Of note, THB was the worst performing currency in emerging Asia last year at -10.3%, while PGP was the third worst at -5.8%. KRW was tucked in between at -8.6%. Even though the BOK started its modest tightening last year, its policy rate started from a very low base of 0.5% and stands at 1.0% currently vs. 2.0% for the Philippines and 0.5% for Thailand.

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