Dollar Soft Ahead of ADP and ISM

July 03, 2024

Win Thin

Fed officials are getting more concerned about the labor market; FOMC minutes will be released; ADP private sector jobs will be the highlight; June ISM services PMI will also be very important
ECB President Lagarde downplayed sticky services inflation; eurozone and U.K. reported final June services and composite PMIs; Riksbank released its minutes; Sweden reported firm June services and composite PMIs; Turkey reported June CPI; Poland is expected to keep rates steady at 5.75%
Japan reported final services and composite PMIs; Australia reported solid May retail sales and final June services and composite PMIs; Caixin reported weak June services and composite PMIs

The dollar is soft ahead of ADP and ISM services PMI. DXY is trading lower for the second straight day near 105.636 but remains on track to test the April-May highs near 106.50. The euro is trading higher near $1.0760, while sterling is trading higher near $1.2705. USD/JPY traded at a marginal new high for this move near 161.95 today as the market continues to test the BOJ, but we see no imminent intervention risks. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed remains in hawkish mode. At the same time, weaker data in many of the major economies underscore the widening economic and monetary policy divergences that should continue to support the dollar.

AMERICAS

Fed officials are getting more concerned about the labor market. Chair Powell said recent data “suggest that we’re getting back on a disinflationary path. What we’d like to see is more data like what we’ve been seeing recently.” He added that unexpected labor market weakening could prompt a policy reaction. Elsewhere, Goolsbee said “If employment starts falling apart or if the economy begins to weaken, which you’ve seen some warning signs, you’ve got to balance that off with how progress you’re making on the price front. The unemployment rate is still quite low, but it has been rising.” More and more Fed officials are expressing concern about the state of the labor market. We started to see this last week, when both Goolsbee and Daly hinted that Fed policy might pivot soon. Again, it will all come down to the data, but the Fed is certainly more concerned about the labor market than it's been in the past. If the data cooperate, we believe a September cut remains very much in play.

FOMC minutes will be released. The minutes will offer more details behind the Fed’s hawkish hold. Recall that the Dot Plots shifted to show only one 25 bp cut was expected this year versus three previously, while updated macro forecasts saw higher headline and core PCE inflation projections for 2024 and 2025. The market sees 75% odds of a September cut, but it will of course depend on the data. Williams speaks today.

ADP private sector jobs will be the highlight. It is expected at 165k vs. 152k in May and comes ahead of June jobs data Friday. There, Bloomberg consensus is 190k vs. 272k in May, while its whisper number stands at 190k as well. Of note, NFP has outperformed ADP in nine of the past ten months. For reference, the average gain over the past 12 months is 232k. June Challenger job cuts and weekly jobless claims will also be reported today.

May JOLTS data suggest the labor market tightened up a bit. Job openings came in at 8.140 mln vs. 7.946 mln expected and a revised 7.919 mln (was 8.059 mln) in April. Hires rose, layoffs rose, and quits were pretty much steady. Of note, the openings rate rose to 4.9% from 4.8% in April and moves away from the 4.5% that typically signals a much higher unemployment rate. As mentioned earlier, the Fed is clearly sensitive to a weaker labor market but right now, the data are holding up relatively well. We'll know more this Friday, obviously.

June ISM services PMI will also be very important. Headline is expected at 52.6 vs. 53.8 in May. Prices paid is expected at 56.7 vs. 58.1 in May, while employment is expected at 49.0 vs. 47.1 in May. The regional Fed non-manufacturing business surveys suggest risks are balanced. Of note, S&P Global services PMI rose to a 26-month high of 55.1 in June versus 54.8 in May. May trade and factory orders will be reported.

Growth remains solid. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 1.7% SAAR, down from 2.2% previously. Next update comes today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 1.9% SAAR for Q2 and 2.2% SAAR for Q3. Next update is Friday.

EUROPE/MIDDLE EAST/AFRICA

ECB President Lagarde downplayed sticky services inflation. After coming in at steady at 4.1% y/y in June, Lagarde remarked “Obviously, we don’t need to have services at 2% because manufacturing goods are below 2% and at the end of the day it’s going to be a balance between goods and services.” This is noteworthy, as the hawks remain concerned about sticky services inflation. Overall, the eurozone disinflationary process is still on track and supports the case for the ECB to cut rates again in September. The market continues to see roughly 70% odds of a 25 bp cut September 12. Guindos, Cipollone, Lane, Knot, and Lagarde speak today.

Eurozone reported final June services and composite PMIs. Headline services came in at 52.8 vs. 52.6 preliminary, while the composite came in a tick higher at 50.9. This was the first drop in the composite since October and is the lowest since March. Looking at the country breakdown, the German composite fell two ticks from the preliminary to 50.4 while the French composite rose six ticks to 48.8. Italy and Spain reported for the first time and their composites came in at 51.3 and 55.8, respectively. Both were weaker than expected and down from May.

U.K. reported final June services and composite PMIs. Services came in at 52.1 vs. 51.2 preliminary, while the composite PMI came in at 52.3 vs. 51.7 preliminary. Even with the revision, this was still the second straight drop in the composite to the lowest since December.

Riksbank released its minutes. At last week’s meeting, the bank delivered a dovish hold as it warned “the policy rate can be cut two or three times during the second half of the year” vs. previous guidance that “the policy rate is expected to be cut two more times during the second half of the year.” Minutes showed that the decision to keep rates steady at 3.75% and downwardly revise the expected rate path was unanimous. There are four more policy meetings in H2, and the market is pricing in nearly 75 bp of easing over this period. The June CPI print on July 12 will either strengthen or weaken the case for this easing path. Bottom line: monetary policy divergence between the Riksbank and Norges Bank suggests NOK/SEK can edge higher. The Norges Bank is in no rush to start easing.

Sweden reported firm June services and composite PMIs. Services came in at 51.8 vs. 50.5 expected and a revised 49.8 (was 49.5) in May, while the composite came in at 52.3 vs. a revised 51.0 (was 50.8) in May. This was the second straight improvement in the composite to the highest since February. However, the hard data remain soft and so the Riksbank will continue cutting rates.

Turkey reported June CPI. Headline came in at 71.60% y/y vs. 72.60% expected and 75.45% in May, while core came in at 71.41% y/y vs. 73.17% expected and 74.98% in May. This was the first deceleration in headline since October. That said, much of the improvement was due to high base effects. The risk is that the market is underestimating how sticky inflation may be in the coming months. Indeed, a central bank survey of households saw inflation expected at 71.5% a year from now vs. 31.8% seen in a survey of market participants. The central bank itself sees 38% inflation by the end of this year and 14% by the end of next year. The market is pricing in nearly 400 bp of easing over the next three months followed by another 425 bp of easing over the subsequent three months. This seems too aggressive.

National Bank of Poland is expected to keep rates steady at 5.75%. The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Following the June meeting, Governor Glapinski said the likelihood of rate cuts by the end of this year is “nil”, adding “my comments today are hawkish.” There is no reason to expect the message to change this week. The market is pricing in 25 bp of easing over the next six months, followed by steady rates over the subsequent six months. Governor Glapinski holds a press conference Thursday. Minutes to the June 5 meeting will be released Friday.

ASIA

Japan reported soft final June services and composite PMIs. Services came in at 49.4 vs. 49.8 preliminary and the composite came in at 49.7 vs. 50.0 preliminary. This was the first drop in the composite PMI since February and is the lowest since November. After the downward revisions to Q1 GDP data, it’s clear that softness in the economy is carrying over into Q2 and possibly Q3. This will force the BOJ to maintain its dovish stance, which in turn will continue to weigh on the yen.

Australia reported solid May retail sales. Sales came in at 0.6% m/m vs. 0.3% expected and 0.1% in April. Sales were boosted by early end-of-financial year promotions and sales events. The swaps market continues to price in 25% odds of a rate hike at the next August 6 meeting, rising to around 50% over the next several meetings. Overall, the RBA is in no rush to loosen policy as it expects it will be some time before inflation is sustainably in the 2-3% target range. The monetary policy divergence between the RBA and BOC suggests AUD/CAD can edge higher.

Australia also reported final June services and composite PMIs. Services came in at 51.2 vs. 51.0 preliminary and the composite PMI came in at 50.7 vs. 50.6 preliminary. The composite PMI has fallen three straight months to the lowest since January. While this would suggest that ongoing tightness in monetary policy is having some impact on the economy, the hard data remain relatively firm.

Caixin reported weak June services and composite PMIs. Services came in at 51.2 vs. 53.4 expected and 54.0 in May, which was the lowest since October. This dragged the composite down to 52.8 vs. 54.1 in May. Over this past weekend, soft official PMIs were reported. Manufacturing remained steady at 49.5 but non-manufacturing fell to 50.5 vs. 51.1 in May. As a result, the composite PMI fell half a point to 50.5, the lowest since December and nearing the 50 boom/bust level. We believe the Caixin PMIs have been overstating growth in China and that the official readings are closer to the mark.

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