Dollar Soft Ahead of ADP and Powell

November 30, 2022
  • November ADP private sector job estimate will be the highlight; November Chicago PMI will be closely watched; the Fed releases its Beige Book report for the December 13-14 FOMC meeting; Chair Powell’s policy speech today will be key; Banco de Mexico releases its quarterly inflation report
  • Eurozone November CPI data cooled; ECB tightening expectations have eased; key eurozone country data were weak; BOE said that Brexit is partly to blame for the current high inflation in the U.K.
  • BOJ did not intervene in FX markets in November; Japan reported soft October IP; Australia October CPI data came in soft; China reported weak official November PMI readings; China warned it will crack down on hostile forces; Thailand hiked rates 25 bp to 1.25%, as expected

The dollar is softer today ahead of ADP and Powell. The situation in China remains fluid but we continue to downplay any hopes of quicker reopening after hawkish comments from mainland officials (see below). DXY has given up some of its gains from yesterday and is trading near 106.62. The 200-day moving average provided support this week and come s in near 105.489 today. A clean break below would set up a test of the August 10 low near 104.636. The euro continues to test its 200-day moving average near $1.0375 today, while sterling continues to struggle to get much above $1.20. USD/JPY remain heavy just below 139 and seems likely to eventually test the recent cycle low near 137.50. A break below would set up a test of the August 23 low near 135.80. While we still like the dollar higher due to our constructive fundamental outlook, we acknowledge that near-term dollar weakness is likely until the Fed narrative shifts once again in our favor. Perhaps today’s speech by Powell will provide a catalyst, as we expect a very hawkish tone.

AMERICAS

November ADP private sector job estimate will be the highlight. Consensus sees 200k jobs added vs. 239k in October. This will be one of the final clues to November jobs data Friday. Consensus sees 200k jobs added vs. 261k in October, while the unemployment rate is expected to remain steady at 3.7% and average hourly earnings are expected to fall a tick to 4.6% y/y. October JOLTS job openings will also be reported today and is expected at 10.25 mln vs. 10.717 mln in September.

November Chicago PMI will be closely watched. Headline is expected at 47.0 vs. 45.2 in October. ISM manufacturing PMI will be reported tomorrow. Headline is expected at 49.8 vs. 50.2 in October. Keep an eye on the sub-components. In October, employment stood at 50.0, prices paid stood at 46.6, and new orders stood at 49.2. Last week, S&P Global preliminary November PMI readings came in weaker than expected. However, it appears that ISM better reflects the ongoing resilience of the U.S. economy than S&P Global.

The Fed releases its Beige Book report for the December 13-14 FOMC meeting. Since the last Beige Book was released October 19, parts of the economy have continued to soften even as most measures of inflation have fallen. The labor market has remained resilient but hiring continues to slow. We expect the Beige Book to set the table for a downshift to a 50 bp hike next month. WIRP suggests that is fully priced in, with around 15% odds of a larger 75 bp move. The swaps market is still pricing in a peak policy rate of 5.0%, with around 25% odds of a 5.25% peak.

Chair Powell’s policy speech today will be key. It is his first since the post-decision press conference November 2. Since then, it has been up to other Fed officials to frame the bank’s message to the markets. Some (Brainard) have played up the move to smaller hikes, while others (Bullard) have played up the need for even higher rates. Markets reacted positively to the November 2 FOMC statement that seemed to hint at a pivot, but Chair Powell absolutely shredded any notions of a pivot during his press conference. We believe he will take the same tone today; that is, the Fed may move to smaller hikes but the terminal rate is likely to be much higher than previously expected. Bowman and Cook also speak today.

Other minor data will also be reported. October advance goods trade balance, wholesale and retail inventories, and pending home sales will all be reported. We also get another Q3 GDP revision and is expected at 2.8% SAAR vs. 2.6% previously. However, this is old news. Looking ahead to Q4, the Atlanta Fed’s GDPNow model is currently tracking 4.3% SAAR vs. 4.2% previously. The next model update will be tomorrow.

Banco de Mexico releases its quarterly inflation report. The forecasts will be key. While headline appears to have peaked, core is still rising. At the last policy meeting November 10, the bank hiked rates 75 bp to 10.0% and said “In its next meetings, the Board will assess the magnitude of the upward adjustments to the reference rate based on the prevailing conditions.” This suggests a potential downshift to 50 bp at the next meeting December 15. Indeed, there was one dissent in favor of a smaller 50 bp move this month and others may follow if inflation pressures ease. Of note, November CPI will be reported December 8. The swaps market is pricing in a peak policy rate near 11.0%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone November CPI data cooled. Headline came in at 10.0% y/y vs. 10.4% expected and 10.6% in October, while core remained steady as expected at 5.0% y/y. This was the first deceleration in headline since June 2021. Of note, France’s EU Harmonized CPI came in at 7.1% y/y vs. 7.0% expected and 7.1% in October, while Italy’s came in at 12.5% y/y vs. 12.1% expected and 12.6% in October. Yesterday, Spain’s EU Harmonized CPI came in at 6.6% y/y vs. 7.1% expected and 7.3% in October, while Germany’s came in as expected at 11.3% y/y vs. 11.6% in October.

ECB tightening expectations have eased. WIRP suggests a 75 bp hike December 15 is less than 25% priced in, down from 45% at the start of this week and being fully priced in right after the October decision. Elsewhere, the swaps market is still pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Makhlouf speaks today.

Key eurozone country data were weak. Germany reported November unemployment at 5.6% when it was expected to remain steady at 5.5%. France reported October consumer spending at -2.8% m/m vs. -1.0% expected and a revised 1.3% (was 1.2%) in September. As a result, the y/y rate came in at -5.9% vs. -5.5% expected and a revised -2.9% (was -3.0%) in September. Spain reported October retail sales at 1.0% y/y vs. a revised 0.4% (was 0.1%) in September. Germany reports October retail sales tomorrow and is expected at -0.5% m/m vs. 1.0% in September, while eurozone sales will be reported December 5.

The Bank of England said that Brexit is partly to blame for the current high inflation in the U.K. Chief Economist Pill said this was due largely to job shortages created by the lack of labor mobility that once existed with the EU. He added that the bank estimates that Brexit will cost the U.K. 3% in permanently lost GDP within 15 years. Recent polls show that if the Brexit vote were to be held today, it would fail. Prime Minister Sunak has been largely silent on Brexit as he and Chancellor Hunt grapple with the budget but at some point, it will come back to haunt the Tories again.

Bank of England tightening expectations have steadied. WIRP suggests a 50 bp hike December 15 is priced in, with around 35% odds of a larger 75 bp hike and unchanged from the start of last week. The swaps market is still pricing in a peak policy rate between 4.5-4.75%, down sharply from 6.25% right after the mini-budget in late September.

ASIA

The Bank of Japan did not intervene in FX markets in November. The Finance Ministry reported no action during the period October 28-November 28 and compares to JPY6.3 trln spent intervening in October and JPY2.8 trln in September. For now, the intervention coupled with broad-based dollar weakness has negated the need to support the yen.

Japan reported soft October IP. It came in at -2.6% m/m v. -1.8% expected and -1.7% in September. As a result, the y/y rate came in at 3.7% vs. 5.1% expected and 9.6% in September. This follows weaker than expected retail sales data reported yesterday. Looking ahead, the weak November PMI readings reported last week suggest activity will continue to weaken this month and for Q4 as a whole. Despite the firm labor market, wage growth remains low. All in all, the recent data should lead the BOJ to deliver another dovish hold at the December 19-20 meeting.

Australia October CPI data came in soft. Headline came in at 6.9% y/y vs. 7.6% expected and 7.3% in September, while trimmed mean came in at 5.3% y/y vs. 5.7% expected and 6.1% in September. Of note, this monthly CPI data is brand new but does suggest that price pressures may be peaking. Of note, the latest macro forecasts from the RBA show inflation at 8.0% at year-end and falling to 4.75% at end-2023 and 3.25% at end-2024. RBA tightening expectations have fallen as a result. WIRP suggests 60% odds of a 25 bp hike December 6 vs. 70% at the start of this week. Elsewhere, the swaps market is pricing in a peak policy rate near 3.80%, down from 4.10% at the start of this week.

China reported weak official November PMI readings. Manufacturing came in at 48.0 vs.49.0 expected and 49.2 in October, while non-manufacturing came in at 46.7 vs. 48.0 expected and 48.7 in October. As a result, the composite PMI dropped to 47.1 vs. 49.0 in October and is the lowest since the April low of 42.7. Caixin reports its November manufacturing PMI tomorrow and is expected at 48.9 vs. 49.2 in October, but there are clear downside risks as the economy continues to suffer from Xi’s Covid Zero policy.

In a clear message to protestors, China warned it will crack down on hostile forces. The Central Political and Legal Affairs Commission said that authorities will act forcefully against “infiltration and sabotage activities by hostile forces as well as on illegal or criminal acts that disrupt social order.” This is in stark contrast to the softer tone taken by health officials yesterday and is more in line with the sort of response we’d expect. Despite this stern warning, violent protests took place overnight in Guangzhou as unrest continues to simmer.

Bank of Thailand hiked rates 25 bp to 1.25%, as expected. The bank said that “Economic recovery will be on track, albeit with risks to inflation. Given the heightened uncertainties surrounding the global economy, the Committee is ready to adjust the size and timing of policy normalization should the growth and inflation outlook shift from the current assessment.” The bank revised its inflation forecast for 2023 to 3% vs. 2.6% previously and pushed out its expected return to target to Q3 23 vs. Q2 23 previously. Of note, inflation has decelerated for two straight months to 5.98% y/y in October, the lowest since April but still well above the 1-3% target range. The swaps market is pricing in a policy rate near 2.0% over the next 12 months, rising gradually to 2.5% over the subsequent 24 months.

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