- The debt ceiling deal easily passed in the House yesterday; some at the Fed seem to be coalescing around the notion of a skip but not a pause; Fed Beige Book report for the June FOMC meeting is worth discussing; ADP private sector jobs estimate will be the data highlight; May ISM manufacturing PMI will also be important; Banco de Mexico releases its minutes
- Eurozone reported soft May CPI data; the ECB releases its account of the May 3-4 meeting
- Japan reported solid Q1 capital spending and company profits; Caixin reported solid May manufacturing PMI; Korea reported soft May trade data
The dollar is trading soft ahead of ADP. House passage of the debt ceiling deal (see below) has given risk assets a bit of a boost today, with global equities and bond yields higher. DXY is trading lower near 104.151 after making a new high for this move yesterday near 104.699. We believe it remains on track to test the mid-March high near 105.103. The euro is trading higher just above $1.07 despite soft May CPI data (see below) after making a new low for this move yesterday near $1.0635. We believe it remains on track to test the mid-March low near $1.0515. Sterling is trading higher near $1.2455 while the EUR/GBP cross continues to trade near the lows for this move near 0.85840. USD/JPY is trading higher near 139.75 after trading briefly below 139 earlier today. We believe the pair remains on track to test the November 21 high near 142.25. Banking sector concerns and dovish market pricing for Fed policy had been major negative headwinds on the dollar in recent months, but those have finally begun to clear. Now, likely passage of the debt ceiling deal (see below) would remove the final headwind for the dollar and so we see this rally continuing.
The debt ceiling deal easily passed in the House last night. The vote was a resounding 314-117, revealing how little sway that the extremes have in both parties. The bill now goes to the Senate, where Senator Thune said a vote could take place by Friday night. Even though the Senate is also evenly divided, it’s clear that a bipartisan majority can and will pass it. For those keeping score at home, the House vote passed with a nearly 75% super-majority.
We believe passage of the deal will leave the door open for a 25 bp hike at the June 13-14 FOMC meeting. With banking sector stresses fading, a potential default was really the only thing that could have prevented a hike this month. That said, the decision will ultimately depend on the data between now and that meeting, starting with the jobs report this Friday. WIRP suggests odds of a hike then are nearly 65% and is pretty much priced in for the July 25-26 meeting. More importantly, multiple rates cuts by year-end are priced out, with some odds still seen of a cut in December. Fed repricing has finally gone our way but more needs to be seen. Between now and the June 14 decision, we will not only jobs data tomorrow but also one more reading each of CPI and PPI data. All these readings will likely be the final determinant for the Fed decision.
Some at the Fed seem to be coalescing around the notion of a skip but not a pause. Yesterday, Jefferson said “A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.” Harker said "I think we can take a bit of a skip for a meeting and frankly, if we're going to go into a period where we need to do more tightening, we can do that every other meeting.” Elsewhere , Bowman said “While we expect lower rents will eventually be reflected in inflation data as new leases make their way into the calculations, the residential real estate market appears to be rebounding, with home prices leveling out recently, which has implications for our fight to lower inflation.” Collins said the Fed is “intent on reducing inflation that’s just simply too high.” Harker speaks again today. At midnight tomorrow, the media blackout period begins and there will be no Fed speakers until Chair Powell’s press conference June 14.
Fed Beige Book report for the June FOMC meeting is worth discussing. On overall economic activity: Economic activity was little changed overall in April and early May. Four Districts reported small increases in activity, six no change, and two slight to moderate declines. Expectations for future growth deteriorated a little, though contacts still largely expected a further expansion in activity. On labor markets: Employment increased in most Districts, though at a slower pace than in previous reports. Overall, the labor market continued to be strong, with contacts reporting difficulty finding workers across a wide range of skill levels and industries. That said, contacts across Districts also noted that the labor market had cooled some, highlighting easier hiring in construction, transportation, and finance. On prices: Prices rose moderately over the reporting period, though the rate of increase slowed in many Districts. Contacts in most Districts expected a similar pace of price increases in the coming months. Consumer prices continued to move up due to solid demand and rising costs, though several Districts noted greater price sensitivity by consumers than in the prior report. As we expected, the Beige Book leaves the door open for further tightening but it will all come down to the data.
ADP private sector jobs estimate will be the data highlight. It is expected at 170k vs. 296k in April. This will be an important clue for the May jobs report, where consensus for NFP stands at 195k vs. 253k in April. The unemployment rate is expected to rise a tick to 3.5% and average hourly earnings are seen steady at 4.4% y/y.
Other labor market data suggest ongoing strength. Yesterday, April JOLTS job openings came in at 10.103 mln vs. 9.4 mln expected and a revised 9.745 mln (was 9.590 mln) in March. This was the first rise since December and is the highest since January. May Challenger job cuts and weekly jobless claims will be reported today. Initial claims are expected at 235k vs. 229k last week, while continuing claims are expected at 1.800 mln vs. 1.794 mln last week.
May ISM manufacturing PMI will also be important. Headline is expected to fall a tick to 47.0. Keep an eye on employment and prices paid, which stood at 50.2 and 53.2 in April, respectively. Yesterday, Chicago PMI came in at 40.4 vs. 47.3 expected and 48.6 in April. Of note, ISM services PMI will be reported Monday and is expected at 52.5 vs. 51.9 in April. Last week, S&P Global reported mixed May PMI readings as manufacturing fell to 48.5 vs. 50.2 while services rose to 55.1 vs. 53.6 in April. This led to the composite PMI to rise to 54.5 vs. 53.4 in April and was the highest since April 2022.
Other minor data will round out the picture. April construction spending (0.2% m/m expected) and May vehicle sales (15.3 mln annual rate expected) will be reported. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth at 1.9% SAAR, down from 2.9% previously. Next model update comes today after the data.
Banco de Mexico releases its minutes. At the May 18 meeting, the bank paused for the first time since it began the tightening cycle in 2021 but said that “In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period.” It warned that “The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks.” The bank released its quarterly inflation report yesterday and Governor Rodriguez said the bank will hold rates for at least two meetings, adding that a U.S. recession would play a role in Banxico’s decision-making. The next meetings are June 22, August 10, and September 28. While Rodriquez seemed to rule out June and August for any policy changes, Deputy Governor Espinosa added that a rate cut was unlikely in September. That leaves November 9 and December 14. The swaps market sees steady rates for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us in light of this latest forward guidance.
Eurozone reported soft May CPI data. Headline came in at 6.1% y/y vs. 6.3% expected and 7.0% in April, while core came in at 5.5% y/y vs. 5.5% expected and 5.6% in April. Headline is the lowest since February 2022 while core is the lowest since January. While inflation remains well above the 2% target, the direction is clear and so the doves remain in control of the narrative. WIRP suggests a 25 bp hike is priced in then, followed by another 25 bp hike in either July or September that would see the deposit peak near 3.75%. Elsewhere, Germany reported April retail sales at 0.8% m/m vs. 1.0% expected and a revised -1.3% (was -2.4%) in March. April eurozone retail sales will be reported June 6.
The ECB releases its account of the May 3-4 meeting. At that meeting, the bank hiked rates 25 bp in a decision that was described as “almost unanimous” as some favored a larger 50 bp move. The bank said that the pace of QT would be maintained at EUR15 bln through June but said it expects to stop all APP reinvestments as of July. President Lagarde later estimated that the halt of APP reinvestments would average EUR25 bln per month and so it’s almost double the current pace. Lagarde reiterated that while future decisions are data dependent, it’s very clear that the ECB isn’t pausing. Updated macro forecasts will come at the June 14-15 meeting. Lagarde said today that “There is no clear evidence that underlying inflation has peaked. We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.” Elsewhere, Knot said “Financial markets are already pricing in interest-rate cuts for next year. If they have to adjust this expectation, which is not unlikely, this could lead to new corrections.” Villeroy also speaks today.
Japan reported solid Q1 capital spending and company profits. Capital spending came in at 11.0% y/y vs. 6.0% expected and 7.7% in Q4, while capital spending ex-software came in at 10.0% y/y vs. 3.7% expected and 6.3% in Q4. The data will likely lead to upward revisions in Q1 GDP data out next week. Elsewhere, company profits came in at 4.3% y/y vs. 0.9% expected and -2.8% in Q4, while company sales came in at 5.0% y/y vs. 5.3% expected and 6.1% in Q4. Japan Inc. appears to be doing quite well as the end of deflation has led to a brighter outlook that requires more investment. It has also brought back some pricing power. However we have seen signs of slowing in recent months and so corporations are likely to turn a bit more cautious in the coming months. Final manufacturing PMI fell two ticks from the preliminary to 50.6.
Caixin reported solid May manufacturing PMI. It was expected to remain steady at 49.5 but instead rose to 50.9. This is a much better reading than the official one, which came in at 48.8 vs. 49.2 in April. The Caixin PMI is widely considered to contain smaller and more export-oriented respondents. With exports remaining weak across the region, it’s hard for us to believe that China is somehow escaping the carnage and so we look for the Caixin manufacturing PMI to drop back below 50 in the next month or two. Of note, Caixin services and composite PMI readings will be reported Monday. With the economy clearly softening, we believe the PBOC will ease again in the coming months and this should translate into further yuan weakness.
Korea reported soft May trade data. Exports came in at -15.2% y/y vs. -16.3% expected and -14.3% in April, while imports came in at -14.0% y/y vs. -14.4% expected and -13.3% in April. Adjusting for the number of working days, average exports fell only -9.3% y/y. There were some bright spots, as exports to China fell -21%, the smallest drop since October. That said, global growth is likely to continue slowing in H2 and so there will be little relief on the horizon for the regional exporters.