Dollar Soft Ahead of NFP as Banking Sector Concerns Dominate

February 02, 2024
  • The dollar came under pressure yesterday on growing banking sector concerns; data highlight will be the January jobs report; growth remains strong in Q1
  • The EU finally agreed to a EUR50 bln aid package for Ukraine; BOE delivered a dovish hold
  • Japan debt servicing costs are set to rise sharply in the coming years; Australia housing demand remains subdued; Korea reported soft January CPI data

The dollar remains under pressure ahead of the jobs report. DXY is trading lower for the fourth straight day near 102.963 as banking sector concerns take a toll on the dollar (see below). The euro is trading lower near $1.0880, while sterling is trading higher near $1.2760 despite the dovish hold from the BOE yesterday (see below). USD/JPY is trading lower near 146.50. The Fed remains cautious as all indications are that the U.S. economy continues to grow above trend as Q1 gets under way. Recent data have mostly come in on the firm side and so we continue to believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold this week. Perhaps the jobs report will add to the adjustment process.


The dollar came under pressure yesterday on growing banking sector concerns. As we wrote earlier this week, the Fed is unlikely to respond with monetary policy if the banking sector remains under stress. After the SVB debacle last March, the Fed introduced an emergency bank lending program but still hiked rates that month and again in May and July. We believe the same response will hold true now and so the dollar has scope to recover despite these concerns about U.S. regional bank commercial real estate loan portfolios. Indeed, we note that other commercial bank (not 100 largest banks) delinquency rates for non-farm non-residential commercial real estate (CRE) loans ticked up to only 0.7% in but remains near historic lows. Moreover, the decline in core commercial real estate prices has stabilized.

Data highlight will be the January jobs report. Bloomberg consensus sees 185k jobs added vs. 216k in December, while its whisper number stands at 207k. We see upside risks. Given the recent history of revisions, there is a good chance the previous two months increases will be revised down. However, that would not take away from the underlying message that the labor market remains robust. Unemployment is expected to rise a tick to 3.8%, while average hourly earnings are expected to remain steady at 4.1% y/y. December factory orders will also be reported and are expected at 0.2% m/m vs. 2.6% in November.

Beyond the short-term, improving productivity bodes well for the U.S. Q4 non-farm business sector labor productivity rose 3.2% q/q SA and 2.7% y/y. Annual US productivity growth has improved significantly in the last year and is above its post-war average of 2.1%. Rising productivity (GDP/hours worked) leads to low inflation economic growth, which should translate into a higher real interest rate and an appreciation of the currency over the longer term. Of note, unit labor costs picked up slightly ed to 0.5% q/q SA but remains very low overall.

Weekly jobless claims rose. Initial claims came in at 224k vs. 212k expected and a revised 215k (was 214k) the previous week. Continuing claims came in at 1.898 mln vs. 1.839 mln expected and a revised 1.828 mln (was 1.833 mln) the previous week. Both readings were the highest since mid-November and so bears watching for further signs of labor market weakness.

January ISM manufacturing was solid. Headline came in at 49.1 vs. 47.2 expected and a revised 47.1 (was 47.4) in December. This was the highest since October 2022. The details were mostly stronger, with production rising to 50.4 vs. 49.9 in December and new orders rising to 52.5 vs. 47.0 in December. The only weak spot was employment, which fell to 47.1 vs. 47.5 in December. Of note, prices rose to 52.9 vs. 45.2 in December, back above 50 and the highest since April 2023. This supports our view that inflation may not go down as much as markets are hoping.

Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first update came in at 4.2% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes next Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model’s Q1 estimate stands at 2.8% SAAR vs. 2.4% previously and will be updated today. Its estimates for Q2 will begin about one month before the start of the quarter. Of note, actual Q4 growth came in at 3.3% SAAR and was the sixth straight quarter of above trend growth. If momentum carries over into Q1 as we expect, we are likely to see a seventh straight quarter.

Final January University of Michigan consumer sentiment will be reported. Headline is expected to rise a tick from the preliminary to 78.9, driven by a two tick increase in current conditions to 83.5 and a one tick increase in expectations to 76.0. 1- and 5 to 10-year inflation expectations are expected to remain steady at 2.9% and 2.8%, respectively. Of note, Conference Board consumer confidence was reported earlier this week at 114.8 vs. 108.0 in December.


The European Union finally agreed to a EUR50 bln aid package for Ukraine. A veto from Hungary had held up the deal, which requires unanimity. As part of the deal, the EU agreed to debate implementation of the package every year. Hungary Prime Minister Orban said, “We negotiated a review mechanism that guarantees that the money will be used rationally.” Eyes now turn to the U.S., where a $60 bln aid package for Ukraine is stuck in Congressional limbo. German Prime Minister Scholz said “The American president is a truly good friend and ally who’s trying to get approval in Congress. I hope that today’s message will help him to have it a bit easier at home for his agenda.”

Bank of England delivered a dovish hold. It left the policy rate steady at 5.25% but laid the groundwork for looser policy settings ahead. First, only two MPC members favored a 25 bp hike vs. three at the previous two meetings. Surprisingly, Dhingra preferred a 25 bp cut. Second, the statement no longer read that “further tightening in monetary policy would be required.” Instead, the BOE noted that the restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labor market and that “the Committee will keep under review for how long Bank Rate should be maintained at its current level”. Third, the BOE’s inflation projections were revised lower. Headline inflation is now projected to fall to around the 2% target in Q2 before increasing to around 2.25% and 2.75% in Q3 and Q4 respectively.

BOE easing expectations remain intact. The market sees 100-125 bp of rate cuts this year, starting in Q2. In our view, the risk is that the BOE does not deliver this much easing, partly because the projected UK fiscal drag in 2024 will likely be softer as Chancellor Hun is expected to announce pre-election tax cuts at the March 6 Spring Budget. Chief Economist Pill speaks today to regional agents about the latest Monetary Policy Report.


Japan debt servicing costs are set to rise sharply in the coming years. The Finance Ministry estimates that debt servicing costs will rise to JPY33.4 trln ($228 bln) in FY27, up almost 25% from JPY27.0 trln estimated for the upcoming FY24. The government assumes a steady rise in interest rates over the next several years, acknowledging that the BOJ will eventually normalize policy. Japan’s debt/GDP ratio stands around 250%, but most of that is in domestic hands, including the Bank of Japan.

Australia housing demand remains subdued. New housing loan commitments unexpectedly dropped in December by -4.1% m/m vs. 1.0% expected and a revised 0.7% (was 1.0%) in November. This was largely due to both lower owner-occupier loan commitments (-5.6% m/m) and investor loan commitments (-1.3% m/m). Forward-looking indicators like the “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey suggests buying sentiment will stay weak for the time being. The first RBA rate cut is priced in for June 18.

Korea reported soft January CPI data. Headline came in a tick lower than expected at 2.8% y/y vs. 3.2% in December, while core came in two ticks lower than expected at 2.5% y/y vs. 2.8% in December. Headline was the lowest since July but still above the 2% target. While the bank removed language about the potential need for further tightening at the last meeting in January, Governor Rhee stressed that a rate cut would not be easy for at least the next six months or more. The next Bank of Korea meeting is February 22, and no change is expected then. The swaps market is pricing in steady rates over the next six months, followed by the start of an easing cycle over the subsequent six months with 50 bp of easing that would take the policy rate down to 3.0%.  

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