Dollar Soft Ahead of CPI

April 10, 2024

Win Thin

March inflation data take center stage; we detect a subtle change in tone from Fed officials; FOMC minutes will be released; BOC is expected to keep rates steady at 5.0%; Brazil reports March IPCA inflation
The two-day ECB meeting begins today; Norway reported soft March CPI
BOJ Governor Ueda delivered his semi-annual report to parliament; RBNZ kept rates steady at 5.5%, as expected; Thailand kept rates steady at 2.5%, as expected

The dollar is soft ahead of CPI data. DXY is trading lower near 104.044 as U.S. yields have come down from Monday’s highs. The euro is trading higher near $1.0865 while sterling is trading higher near $1.27. USD/JPY is trading flat near 151.85 and so far remains unable to break above the 152 area on continued intervention concerns. NZD is the top performing major after a hawkish hold from the RBNZ (see below). The dollar rally should continue on signs of persistent inflation and robust growth in the U.S. The U.S. data continue to come in mostly firmer and should keep upward pressure on U.S. yields. We believe that while market easing expectations have adjusted somewhat already, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further. Hopefully, today’s CPI data will provide a spark.

AMERICAS

March inflation data take center stage. CPI will be reported today. Headline is expected at 3.4% y/y vs. 3.2% in February, while core is expected at 3.7% y/y vs. 3.8% in February. The Cleveland Fed’s Nowcast model forecasts headline and core CPI at 3.4% and 3.7%, respectively. Looking ahead to April, the model forecasts headline and core CPI at 3.4% and 3.6%, respectively. PPI will be reported tomorrow. Headline is expected at 2.2% y/y vs. 1.6% in February and core is expected at 2.3% y/y vs. 2.0% in February. With energy prices on the rise, we see upside risks to the inflation readings.

We detect a subtle change in tone from Fed officials. Bostic was typically hawkish when he said yesterday that “I do think the risks are balanced and given that the US economy has been so robust and so strong and so resilient - I can’t take off the possibility that the rate cuts may even have to move further out.” However, he then added that “If I started to get different signals to suggest that there’s a lot of coming pain in the labor market side, then I’d be open to changing our policy stance and perhaps cutting sooner.” On Monday, both Goolsbee and Kashkari acknowledged risks of weakness in the labor market. Bowman, Goolsbee, and Barkin speak today. Last Friday, Bowman said it was “much too soon” to think about cutting rates, and that she is increasingly concerned that inflation will stall out. If Bowman softens her tone, then we would have to acknowledge a clear shift in the Fed’s hawkish stance. Odds of a June cut are around 60% while odds of a July cut have fallen below 100%.

FOMC minutes will be released. In light of subsequent developments, the March 19-20 meeting no longer seems very relevant to current economic or market conditions. Recall that Chair Powell delivered a dovish message in his press conference. However, as we have said time and time again, markets should listen to the data, not Powell. The data say steady rates for now. If the Dots were redone now, we are quite confident that the median Dots would rise across the forecast horizon and that 2024 median would come in at 4.875% vs. 4.625% seen in March.

Growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.5% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.25% SAAR and Q2 growth at 2.6% SAAR. This model is updated every Friday. Financial conditions remain loose and so there is very little holding the economy back right now. The Fed will simply not be in any hurry to cut rates.

Bank of Canada is expected to keep rates steady at 5.0%. The market sees about 20% of a 25 bp cut and we acknowledge risks of a dovish surprise. Updated macro forecasts will be released and 2026 will be added to the forecast horizon. We expect downward revisions to the growth and inflation forecasts. Canada’s labor market is rapidly losing steam, progress on inflation is faster than the BOC projected in January, and the business outlook survey remains weak. As such, the BOC could remove current guidance that “it’s too early to loosen the restrictive policy” and is likely to slash its growth and inflation projections. Looking ahead, the market sees 80% odds of a cut in June.

Brazil reports March IPCA inflation. Headline inflation is expected at 4.01% y/y vs. 4.50% in February. If so, this would be the lowest since July 2023 and further within the 1.5-4.5% target range. At the last COPOM meeting March 20, the central bank cut rates 50 bp to 10.75% and committed to a cut of a “similar magnitude” at the next meeting May 8 only, implying smaller cuts after that. Due to the more hawkish tone, the swaps market is pricing in 75 bp of total easing over the next three months that would see the policy rate bottom at 10% vs. 9.25% seen in mid-March.

EUROPE/MIDDLE EAST/AFRICA

The two-day European Central Bank meeting begins today. A dovish hold tomorrow is widely expected. The bank should also reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. The probability of a 25 bp cut is rather low, near 5%. Most key ECB officials have telegraphed preference of a first rate cut in June, as they would have more information on wage dynamics as well as updated macro forecasts. President Lagarde’s post-meeting press conference will be key. Her comments will again be scrutinized for any hints about the timing and scope of future interest rate cuts.

Norway reported soft March CPI. Headline came in three ticks lower than expected at 3.9% y/y vs. 4.5% in February, while underlying came in two ticks lower than expected at 4.5% y/y vs. 4.9% in February. Headline is the lowest since September but still well above the 2% target. At the last meeting March 21, Norges Bank kept rates steady at 4.50% and reiterated that “the policy rate needs to be maintained at the current level for some time ahead.” The Norges Bank projected that then the policy rate will stay at 4.50% through Q3 before gradually moving down, which remains consistent with market pricing. However, we believe rising disinflationary pressures raises the risk that the Norges Bank starts easing sooner than Q3.

ASIA

Bank of Japan Governor Ueda delivered his semi-annual report to parliament. Ueda highlighted the reasons the BOJ exited ultra-loose policy in March and reiterated the need for maintaining accommodative monetary conditions as trend inflation has yet to reach 2%. Ueda also emphasized that the BOJ “won't change monetary policy just to deal directly with FX moves” but cautioned that “we might need to change monetary policy if FX moves lead not just to rising import prices, but risk pushing up trend inflation more than expected.” The muted rise in goods prices so far suggests the weaker yen is not inflationary. In March, PPI rose 0.2% m/m and 0.8% y/y while import prices fell -0.4% m/m but rose 1.4% y/y. Bottom line: the BOJ tightening process will be very gradual and a headwind for JPY.

Reserve Bank of New Zealand kept rates steady at 5.5%, as expected. There were neither a press conference nor updated macro projections at this meeting. However, it was a hawkish hold as the bank reiterated that “The Committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1-3% target range this calendar year.” The RBNZ also pointed out that while “economic growth in New Zealand remains weak…some near-term price pressures remain” and added that “most major central banks are cautious about easing monetary policy given the ongoing risk of persistent inflation.” The market is still pricing in the first cut in August.

Bank of Thailand kept rates steady at 2.5%, as expected. The vote was 5-2, with the dissents in favor of a 25 bp cut, same as the February 7 meeting. The bank expressed concerns about the impact of loose fiscal policy stemming from the government’s cash handout program. Assistant Governor Piti said that the policy rate may not be adjusted if the economic recovery persists. He views the current rate as close to neutral and stressed that “Our monetary policy is not an obstacle to economic growth.” While outright deflation makes a strong case for easing, ongoing interference by the government is troubling. After the hawkish hold, the swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.

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