Dollar Soft Ahead of Jobs Data

February 03, 2023
  • Markets are still digesting this week’s spate of central bank actions; January jobs report will be the highlight; January ISM services PMI will also be important; Colombia reports January CPI Saturday
  • The ECB hiked all rates by 50 bp, as expected; just like the FOMC Wednesday, the fireworks came during the press conference; final eurozone services and composite PMIs were reported; BOE Chief Economist Pill speaks today; BOE tightening expectations have fallen sharply; U.K. reported final services and composite PMIs
  • Japan reported final services and composite PMIs; Australia reported final services and composite PMIs

The dollar is soft ahead of the jobs report. DXY is trading lower near 101.618 after recovering from yesterday’s new cycle low near 100.82, the weakest since last April. The late April low near 99.818 remains in play but much will depend on today’s data. The euro traded as high as $1.1035 yesterday but is back near $1.09 after the equivocal ECB decision (see below). Sterling remains soft after the dovish BOE decision (see below) and traded at the lowest since January 17 near $1.2185 earlier before bouncing. It is likely to continue underperforming due to the negative fundamental backdrop and the break below $1.2225 sets up a test of the January 12 low near $1.2090. USD/JPY remains heavy and is trading lower near 128.35. While the dollar outlook was hurt by Powell’s uninspiring performance, the greenback has been granted a reprieve by Lagarde and Bailey. It really seems to be a race to the bottom for the major central banks and we think markets have not yet decided who the winner (loser?) will be. Today’s U.S. data may help set the near-term market direction.


Markets are still digesting this week’s spate of central bank actions. All four have delivered dovish policy decisions or pronouncements this week, which we find shocking when inflation is still running well above target all around the world. We just can't shake the sense that despite all this central bank talk about not declaring victory too soon, that is exactly what they are doing. The markets were all over the central banks for being so very wrong on inflation in 2022 and now all of a sudden, they believe that these banks are suddenly getting it right and simultaneously engineering soft landings? We think there’s a lot of wishful thinking going on and stand by our call that it's just not going to be this easy getting inflation back to target. "Mission Accomplished?" Not by a long shot. That said, the price action speaks for itself and everyone seems to be totally buying into this very optimistic narrative. To be continued.......

The January jobs report will be the highlight. Consensus sees 189k jobs added vs. 223k in December, with the unemployment rate seen up a tick to 3.6% and average hourly earnings at 4.3% y/y vs. 4.6% in December. Of note, annual benchmark revisions and updated seasonal adjustment factors to the establishment survey could lead to some outsized changes to NFP, hours worked, and average hourly earnings. Other data this week point to continued firmness in the labor market. The JOLTs data showed over 11 mln job openings in December, the highest since July. Elsewhere, initial jobless claims came in at 183k vs. 195k expected and 186k the previous week and was the lowest since April, bringing the 4-week moving average to 192k, the lowest since early May. Simply put, the labor market remains tight, which suggests to us that wage pressures aren't going to fall significantly in the coming months.

January ISM services PMI will also be important. Headline is expected at 50.5 vs. 49.2 in December. If so, the current dip below 50 would only have lasted one month. Keep an eye on the components; employment stood at 49.4 in December, while prices paid stood at 68.1. Ahead of ISM, S&P Global will report its final January services and composite PMIs. The preliminary readings both came in at 46.6.

Colombia reports January CPI Saturday. Headline is expected at 13.30% y/y vs. 13.12% in December. If so, it would be the highest since March 1999 and further above the 2-4% target range. Last Friday, the bank delivered a dovish surprise and hike rates 75 bp to 12.75% vs. 100 bp expected. The vote was 5-2 with the two dissents in favor of a smaller 25 bp move. Governor Villar signaled that the tightening cycle is nearing an end by noting “With today’s decision, monetary policy is nearing the stance required to cause inflation to slow to its 3% over the medium term.” The swaps market is pricing a peak policy rate between 13.5-13.75% in H1 followed by the start of an easing cycle in H2.


The European Central Bank hiked all rates by 50 bp, as expected. The statement was suitably hawkish as the bank said rates still have to rise significantly and at a steady pace. Indeed, it said it expects to raise rates further and intends to hike 50 bp at the March meeting and then “evaluate the subsequent path of its monetary policy.” The ECB also affirmed that Quantitative Tightening would begin as planned in March with the previously stated monthly cap of EUR15 bln between March and June.

Just like the FOMC Wednesday, the fireworks came during the press conference. President Lagarde said the risks to the inflation outlook have become more balanced, and that the risk assessment was “rather consensual.” She added that this current decision wasn’t a decision for March, which is definitely hedging her bets and goes in direct contrast to the statement. Lagarde added that “intend” with regards to the March hike is not irrevocable and that intention isn’t 100% commitment. WIRP suggests a 50 bp hike March 16 is fully priced in but that may be it for the super-sized hikes. Looking further ahead, a 25 bp hike May 4 is priced in followed by another one either June 15 or July 27 that would take the deposit rate up to 3.5%. This is likely to drift lower if continued disinflation gives the doves the upper hand. Of note, eurozone PPI came in today at 24.6% y/y vs. 2.4% expected and a revised 27.0% (was 27.1%) in November.

Final eurozone services and composite PMIs were reported. Both were revised up a tick from the preliminary to 50.8 and 50.3, respectively. Germany’s composite was revised up two ticks to 49.9 and France’s was revised up one tick to 49.1. Italy and Spain reported for the first time and their composite PMIs both rose back above 50 to 51.2 and 51.6, respectively. Elsewhere, France reported December IP at 1.1% m/m vs. 0.3% expected and 2.0% in November. While recent eurozone survey readings have been coming in firmer than expected, we remain skeptical that it can avoid recession.

Bank of England Chief Economist Pill speaks today. He will have a lot of explaining to do with regards to yesterday’s updated macro forecasts as well as the dovish tone in the bank’s decision to hike rates 50 bp. U.K. inflation is currently at 10.5%. Does the BOE really believe it will fall to 4.0% this year with unemployment rising only to 4.25% from 3.7% currently? And with only another 25 bp of tightening in the pipeline? It’s very hard for us to square the circle. Pill has already channeled Fed Chair Powell in an earlier interview by stressing that “It’s important that as I’ve said we do enough to attain our objective — return inflation to within target — but of course it’s also important that we enguard against the possibility of doing too much.”

Bank of England tightening expectations have fallen sharply. WIRP suggests odds of a 25 bp hike March 23 are only around 75%. After that, the odds of a final 25 bp hike in June or August top out near 30% and so the expected terminal rate is now near 4.25%, down from 4.5% at the start of this week and 6.25% after the disastrous mini-budget back in September. Higher U.K. rates are probably the only thing supporting sterling right now; it certainly isn’t the weak growth outlook, ongoing strikes, and political paralysis.

The U.K. reported final services and composite PMIs. Both where revised up seven ticks from the preliminary to 48.7 and 48.5, respectively. Yet the composite reading has come in below 50 for six straight months and remains near the cycle low of 48.2 from October and November. As such, we cannot get very excited about this revision, though optimists will say that it reflects the BOE’s more upbeat outlook. We believe the data are likely to resume worsening as the full weight of monetary and fiscal tightening has yet to be felt.


Japan reported final services and composite PMIs. Both were revised down a tick from the preliminary to 52.3 and 50.7, respectively. The composite is barely above 50 despite economic reopening both domestically and in China. Other real sector data have come in soft and so it’s no surprise that policymakers remain reluctant to remove accommodation even though core inflation is running at double the 2% target. Yet it’s becoming painfully clear that policy settings will have to be adjusted this year. Our original call was liftoff in H2 but we moved that forward to H1 after the December tweak to Yield Curve Control. Governor Kuroda’s successor will be named this month, after which we will know more about the likely timetable for ending YCC and hiking rates.

Australia reported final services and composite PMIs. Both were revised up three ticks from the preliminary to 48.6 and 48.5, respectively. The composite PMI has been sub-50 for four straight months, due largely to the chill from China. Although the mainland reopened in December, it appears that Australia has yet to benefit significantly. Meanwhile, the Reserve Bank of Australia meets next week and WIRP suggests nearly 80% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.60%, down from 3.90% at the start of this week. Given that inflation is still rising despite the 300 bp of tightening seen so far, we believe there are upside risks to the expected terminal rate. Updated macro forecasts will come at the February 7 meeting.

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