Dollar Soft Despite Hawkish FOMC Minutes

February 22, 2024
  • FOMC minutes tilted hawkish; Fed officials remain cautious; highlight will be S&P Global preliminary February PMIs; January Chicago Fed NAI will get some attention; weekly jobless claims will be closely watched; Canada reports December retail sales; Mexico reports mid-February CPI
  • ECB publishes the account of its January meeting; eurozone reported solid preliminary February PMIs; U.K. reported firm preliminary February PMIs; BOE MPC member Greene remains cautious about easing; Turkey kept rates steady at 45.0%, as expected
  • BOJ Governor Ueda reinforced market expectations for a June rate hike; Japan reported soft preliminary February PMIs; Australia reported firm preliminary February PMIs; New Zealand reported mixed January trade data; Korea kept rates steady at 3.5%, as expected

The dollar remains soft despite the hawkish FOMC minutes. DXY is trading lower for the third straight day near 103.713. The euro is trading higher near $1.0850, while sterling is trading higher near $1.2670. Both currencies were helped by firm PMI readings (see below). USD/JPY is trading flat near 150.20 as weak PMIs and somewhat hawkish BOJ comments offset each other (see below). When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon and the markets are finally coming around to our view. The data continue to come in mostly firmer while Fed officials remain cautious about easing. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.


FOMC minutes tilted hawkish. Most Fed officials noted risks of cutting rates too quickly, while some saw risks that inflation progress could stall. Officials said demand may be strong than assessed, and several noted potential risks from easier financial conditions. With regards to Quantitative Tightening, officials said talks would help guide an “eventual decision” on balance sheet runoff, while some said that slowing the balance sheet runoff could smooth the transition. Bottom line: the Fed is no hurry to cut rates and in no hurry to slow QT. However, this hawkish tilt was to be expected given the hawkish hold delivered last month.

The Chicago Fed’s weekly measures of financial conditions will be reported today. Conditions have loosened sixteen straight weeks to the loosest since January 2022, two months before the Fed started hiking. No wonder the U.S. economy continues to chug along.

Fed officials remain cautious. When asked about the timing for rate cuts, Governor Bowman said “Certainly not now.” She added that the housing market isn’t influencing the Fed’s decision-making. This was a strange thing to say about the housing market but it's certainly true. The Fed has two mandates: full employment and 2% inflation. The housing market will be collateral damage from higher interest rates but that's what's supposed to happen. Elsewhere, Barkin said he expects firms to raise prices until consumers push back, adding that he is worried that once goods deflation ends, services inflation will remain too high. This was the same cautious tone as other Fed officials. Jefferson, Harker, Cook, Kashkari, and Waller all speak today.

Highlight will be S&P Global preliminary February PMIs. Manufacturing is expected to remain steady at 50.7, services is expected at 52.3 vs. 52.5 in January, and the composite is expected at 51.8 vs. 52.0 in January. ISM manufacturing PMI will be reported next week, and its services PMI will be reported the week after that.

January Chicago Fed National Activity Index will get some attention. Headline is expected at -0.21 vs. -0.15 in December. If so, the 3-month moving average would improve to -0.12 vs. -0.27 in December. This would be the highest since September and further away from the -0.7 threshold that signals recession. January existing home sales will also be reported and are expected at 4.9% m/m vs. -1.0% in December.

Weekly jobless claims will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month. These are expected at 216k vs. 212k previously. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. This week, they are expected at 1.884 mln vs. 1.895 mln previously. Bloomberg consensus for February NFP stands at 150k vs. 353k in January, while its whisper number stands at 222k.

Canada highlight will be December retail sales. Consensus sees headline at 0.8% m/m vs. -0.2% in November and ex-autos at 0.7% m/m vs. -0.5% in November. Of note, Statistics Canada’s advance estimate of nominal retail sales comes in right at consensus of 0.8%. Soft CPI data earlier this week has impacted BOC easing expectations, with the market now pricing in nearly 80% odds of the first cut in June vs. 55% at the end of last week.

Mexico reports mid-February CPI. Headline is expected at 4.70% y/y vs. 4.87% previously, while core is expected at 4.67% y/y vs. 4.75% previously. If so, headline would be the lowest since mid-December but still above the 2-4% target range. Banco de Mexico also releases its minutes. At the February 8 meeting, the bank kept rates steady at 11.25% and removed the phrase about holding rates “for some time.” Instead, the bank said it would make its decisions at the next meetings “depending on available information.” We don’t expect a cut at the next meeting March 21, and believe May 9 is more likely in light of stubbornly high inflation. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 50 bp over the subsequent three months.


The ECB publishes the account of its January meeting. It will be scrutinized for any hints, if any, about the timing and scope of future interest rate cuts. During her post-meeting press conference, President Lagarde emphasized that the debate over rate cuts was premature but noted that borrowing costs could be lowered from the summer. Since then, many officials have continued to push back against the notion of a cut this spring. Of note, the market sees less than 5% odds of a cut March 7, rising to 33% April 11 and fully priced in June 6.

Eurozone reported solid preliminary February PMIs. Headline manufacturing came in at 46.1 vs. 47.0 expected and 46.6 in January, services came in at 50.0 vs. 48.8 expected and 48.4 in January, and the composite came in at 48.9 vs. 48.4 expected and 47.9 in January. This was the highest composite reading since June 2023. Looking at the country breakdown, the German composite came in at 46.1 vs. 47.5 expected and 47.0 in January and the French composite came in at 47.7 vs. 45.0 expected and 44.6 in January. This was the lowest German composite reading since October and with China still struggling, we expect the German economy to continue underperforming within the eurozone. Italy and Spain will be reported with the final February readings in early March.

U.K. reported firm preliminary February PMIs. Manufacturing came in at 47.1 vs. 47.5 expected and 47.0 in January, services came in at 54.3 vs. 54.1 expected and 54.3 in January, and the composite came in at 53.3 vs. 52.9 expected and actual in January. This was the highest composite reading since May 2023. Bottom line: the diverging growth outlook between the eurozone and U.K. favors a lower EUR/GBP.

Bank of England MPC member Greene remains cautious about easing. She said that “I would need to wait to see more evidence that inflation isn’t as entrenched as we had feared before I would be willing to vote [for a rate cut].” However, Greene acknowledged that factors behind elevated services inflation “are starting to come down so things are trending in the right direction.” Of note, Greene shifted to a hold at the February 1 meeting after voting for a 25 bp hike previously and so markets may have been looking for a more dovish tilt from her. Greene speaks again tomorrow. The market sees basically no chance of a cut March 21, rising to 20% May 9 and 50% June 20. A cut isn’t fully priced in until August 1.

Turkey central bank kept rates steady at 45.0%, as expected. This was the first meeting under new Governor Karahan. The bank kept its forward guidance unchanged from the last meeting January 25, noting that “The Committee assesses that the current level of the policy rate will be maintained until there is a significant and sustained decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range.” However, the bank stressed that it could tighten policy “in case a significant and persistent deterioration in inflation outlook is anticipated.” Turkey’s OIS curve implies nearly 12 percentage points of easing over the next 12 months, which will be hard to do given punishingly high (and rising) inflation. This would mean real rates will remain deeply negative and be a huge drag on TRY.


BOJ Governor Ueda reinforced market expectations of a June rate hike. Ueda noted Japan was experiencing inflation and that “I expect that a virtuous economic cycle in which inflation rises gradually with an increase in wages and employment will strengthen. Signs have been observed that businesses are becoming more active when deciding wages as labor demand tightens.”

Japan reported soft preliminary February PMIs. Manufacturing came in at 47.2 vs. 48.0 in January, services came in at 52.5 vs. 53.1 in January, and the composite came in at 50.3 vs. 51.5 in January. This virtually reverses the January gain in the composite and puts it back perilously close to the 50 boom/bust level. This isn’t much of a surprise given the downside misses for most Japan data recently, and certainly complicates the Bank of Japan’s decision when to hike rates.

Australia reported firm preliminary February PMIs. Manufacturing came in at 47.7 vs. 50.1 in January, services came in at 52.8 vs. 49.1 in January, and the composite came in at 51.8 vs. 49.0 in January. This is the highest composite reading since April 2023 and supports the RBA’s hawkish stance. However, the improvement may not be sustainable if mainland China continues to slow.

New Zealand reported mixed January trade data. Export growth improved to -7.1% y/y vs. -10.0% in December, while import growth worsened to -20.2% y/y vs. -13.1% in December. This was the weakest reading for imports since May 2020 and suggests that domestic demand is slowing sharply. With inflation falling, we very much doubt the RBNZ will hike rates next week, as a major bank is predicting.

Bank of Korea kept rates steady at 3.5%, as expected. While one board member was open to a rate cut, Governor Rhee stressed that “The direction of rate policy will become clear only when we become confident inflation is going to trend as we projected. If inflation slows as expected, our policy room will grow. But if it doesn’t, we should think of other methods, too.” He added that a rate cut in H1 was unlikely. The swaps market is pricing in steady rates over the next six months followed by 25-50 bp of easing over the subsequent six months.

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