Dollar Soft Ahead of NFP

June 02, 2023
  • The Senate passed the debt ceiling bill last night; May jobs report will be the highlight; May ISM manufacturing PMI was mixed
  • The ECB released its account of the May 3-4 meeting; the ECB is nearing the end of the tightening cycle as the doves have the upper hand; Turkey President Erdogan named market veteran Simsek as his new Finance Minister
  • Australia raised its minimum wage by 5.75% starting July 1; reports suggest China is preparing a new package of measures designed to support the property market; Korea reported soft Q1 GDP and May CPI data

The dollar is trading soft ahead of the jobs report. Senate passage of the debt ceiling deal (see below) has given risk assets another boost, with global equities and bond yields higher. DXY is trading lower for the second straight day near 103.410 after making a new high for this move Wednesday near 104.699. We believe it remains on track to test the mid-March high near 105.103. The euro is trading higher $1.0770 after making a new low for this move Wednesday near $1.0635. We believe it remains on track to test the mid-March low near $1.0515. Sterling is trading higher near $1.2530 while USD/JPY is trading flat near 138.35. AUD is outperforming as a hike in the minimum wage boosts RBA tightening bets. 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, we believe passage of the debt ceiling deal (see below) removes the final headwind for the dollar and so we see this recent rally continuing.


The Senate passed the debt ceiling bill last night. As it did in the House, the bill passed by a resounding 63-36 margin. There was some minimal drama ahead of the vote, as Republican Senators Lee and Graham threatened to tie up the bill on the Senate floor before relenting. Eleven proposed amendments were all rejected quickly and so the final bill is pretty much unchanged from the deal that was struck and now goes to President Biden to be signed into law. It will suspend the debt ceiling until January 1, 2025 and so unfortunately, we will most likely have to go through this drama again in the not to distant future.

We believe passage of this 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 next month. However, it will depend largely on how the data come in between now and the decision day. Harker continued to push for a skip this month as “I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target in a timely manner.” Recent talk of a skip has seen odds of a hike this month fall to around 30% vs. nearly 60% at the start of this week. Those odds rise to around 70% for July 26 vs. fully priced in at the start of this week. A rate cut by year-end is back to being priced in after being largely priced out at the start of this week. Fed repricing has finally moved our way but more needs to be seen. At midnight tonight, the media blackout period begins and there will be no Fed speakers until Chair Powell’s press conference June 14.

May jobs report will be the highlight. Consensus for NFP stands at 195k vs. 253k in April, with the unemployment rate expected to rise a tick to 3.5% and average hourly earnings seen steady at 4.4% y/y. However, Bloomberg’s whisper number has risen to around 230k vs. 222k previously after ADP reported its private sector jobs estimate yesterday at 278k vs. 170k expected and a revised 291k (was 296k) in April. For those keeping score at home, ADP undershot NFP from January-May 2022, then again from July-November 2022 and then again in January and March of this year. With JOLTS data suggesting the labor market remains tight, we see upside risks to today’s jobs data.

May ISM manufacturing PMI was mixed. Headline fell a tick to 46.9, but the details were very much mixed. Production rose to 51.1 vs. 48.9 in April, while employment rose to 51.4 vs. 50.2 in April. On the other hand, prices paid fell to 44.2 vs. 53.2 in April, while new orders fell to 42.6 vs. 45.7 in April. All in all, not a terrible report given that manufacturing is weak globally, not just in the U.S. Supplier deliveries fell to 43.5 vs. 44.6 in April, while backlog of orders fell to 37.5 vs. 43.1 in April. Both are the lowest since March 2009. The lower these numbers are, the lower the strains in the supply chains. If these measures continue to fall, this is obviously a good sign for inflation going forward. Of note, the Atlanta Fed’s GDPNow model is now tracking Q2 growth at 2.0% SAAR, up from 1.9% previously. Next model update comes next Wednesday.


The ECB released its account of the May 3-4 meeting. On interest rates: “A number of members initially expressed a preference for increasing the key ECB interest rates by 50 bp in view of the risks to the inflation outlook posed by continued upside inflation surprises and inflation projected to be above target over at least four years, as well as by the elevated risk of an unanchoring of inflation expectations.” It added that “At the same time, most of these members indicated that they could accept the proposed rate increase of 25 bp. The ECB’s communication should, however, convey a clear “directional bias” to underline that, on the basis of the present outlook, further interest rate increases would be warranted in order to return inflation to target and to avoid a smaller rate increase being misinterpreted as signaling the prospect of a pause in the current hiking cycle.” On inflation: “A large number of members assessed the risks to price stability as being clearly tilted to the upside over the policy-relevant horizon, while other members judged that the risks were more symmetric, especially beyond the near term.” It added that “Overall, it was felt that the conditions were not in place to ‘declare victory’ or to be complacent about the inflation outlook. Instead, members concurred that further tightening was needed to bring inflation back to target over the medium term.” On the balance sheet: “Overall, financial markets were seen as having largely priced in a full run-off by the summer, implying that the impact on long-term yields was likely to be limited.” It added that “Caution was also expressed against too fast a contraction in the Eurosystem balance sheet” and that “The remark was made that the optimal size of the balance sheet in the long run was uncertain.”

The ECB is nearing the end of the tightening cycle as the doves have the upper hand. Villeroy said “The interest-rate hikes we still have to do are relatively marginal, most of the path is complete, and now what is key is the transmission of what has already been decided.” Kazaks said “Current market pricing also expects there will be further rate increases, where they are pricing it is possibly not widely off the mark.” Of note, WIRP suggests another hike is priced in for June 15, followed by another 25 bp hike for September 14 that would see the deposit rate peak near 3.75%..

Turkey President Erdogan named market veteran Simsek as his new Finance Minister. He served as Erdogan’s Finance Minister and Deputy Prime Minister in prior cabinets but stepped down in 2018. Reports suggest Simsek has rebuffed earlier requests to rejoin the cabinet, but did so this time after Erdogan pledged autonomy for economic policies. At first blush, this is a positive development, but we remain skeptical that we will see a significant shift back towards orthodox economic policies after years and years of unorthodoxy. Indeed, we believe Erdogan will still ultimately control all the levers of the economy. Inflation is falling in large part from base effects but is forecast to remain elevated near 40%. This would require a massive hike in the nominal policy rate to something close to 50% in order to lower inflation back to the 3-7% target. Will Erdogan allow that? We’d also note that the key institutions have lost talent and experience at the sub-cabinet level, making implementation of orthodoxy that much more difficult. For now, we’d fade this bounce in Turkish assets.


Australia raised its minimum wage by 5.75% starting July 1. The new minimum wage will be AUD882.80 ($580.53) per week, or AUD23.23 per hour. Of note, the annual review sets the minimum wage every fiscal year based on recommendations from employer groups, unions, and government officials. Head of the nation’s Fair Work Commission Hatcher said the hike will impact up to 2.37 mln workers, or around 20.5% of the labor force. Hatcher added that the hike will “not have discernible macroeconomic effects,” which seems very unlikely to us with the labor market still so tight. Indeed, RBA tightening expectations quickly rose, as WIRP now suggest 335 odds of a hike next week vs. none at the start of this week. Looking ahead, a hike is now priced in for either August or September, with 30% odds of a second hike in the fall.

Reports suggest China is preparing a new package of measures designed to support the property market. The new measures are seen as necessary after existing policies failed to sustain a rebound in the property sector. Regulators are reportedly considering reducing the down payment in some neighborhoods of major cities, lowering agent commissions on real estate transactions, and relaxing restrictions for residential purchases. With the impact of the reopening quickly fading, it’s not surprising that policymakers would seek to stimulus the economy. It also would be in keeping with the renewed focus on boosting domestic activity, and yet pumping more air back into a deflating property bubble hardly seems like optimal policy. indeed, reports have emerged recently of rising default risks for debt issued by property developers. We’d fade this bounce in China assets. Stay tuned.

Korea reported soft Q1 GDP and May CPI data. Headline inflation came in a tick lower than expected at 3.3% y/y vs. 3.7% in April, the lowest since October 2021 but still above the 2% target. Core fell to 4.3% y/y vs. 4.6% in April, the lowest since May 2022. Next BOK meeting is July 13 and with inflation still falling, rates are likely to be kept steady at 3.5%. The market no longer sees any odds of one last 25 bp hike and we also believe the tightening cycle has ended. Elsewhere, GDP growth also came in as expected at 0.3% q/q vs. 0.3% in Q4, while the y/y rate picked up a tick to 0.9%. So far, China reopening has had very little impact on the regional exporters such as Korea.

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