Dollar Steadies Ahead of BLS Revisions and FOMC Minutes

August 21, 2024

Win Thin

FOMC minutes will be released; Fed officials remain cautious going into Jackson Hole; we expect Powell to take a similar tone Friday; BLS releases its preliminary annual payrolls benchmark revisions; Canada July CPI data came in soft
The U.K. fiscal outlook continues to deteriorate; South Africa reported soft July CPI data
Japan reported July trade data; Indonesia kept rates steady at 6.25%, as expected; Thailand kept rates steady at 2.5%, as expected

The dollar has finally steadied ahead of BLS revisions and FOMC minutes. DXY is trading flat near 101.472 after three straight down days. USD/JPY is trading higher near 146.20, sterling is trading flat near $1.3040, and the euro is trading lower near $1.1125. While Powell is widely expected to signal a September cut in his Jackson Hole speech, we continue to believe that markets are once again getting carried away with its pricing for aggressive easing. Dollar bears could get caught flat-footed by a less dovish message from Powell this Friday. We continue to believe that the divergence story remains in place and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. Last week’s data provided a good start but more needs to be seen. Tomorrow’s global PMIs are very important.

AMERICAS

FOMC minutes will be released. The statement from the July 30-31 meeting reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” The Fed noted that inflation made some progress but remains “somewhat” elevated. On the other hand, it became very clear that the Fed is increasingly concerned about the labor market, as the statement emphasized it “is attentive to the risks to both sides of its dual mandate.” The June FOMC statement noted it was “highly attentive to inflation risks.” Chair Powell’s press conference provided the dovish goods when he said that “a reduction in our policy rate could be on the table as soon as the next meeting in September.” For emphasis, he added that “there was a real discussion back and forth of what the case would be for moving at this meeting.”

Fed officials remain cautious going into Jackson Hole. Last night, Governor Bowman said “Should the incoming data continue to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive.” However, she stressed that "I continue to view inflation as somewhat elevated. And with some upside risks to inflation, I still see the need to pay close attention to the price-stability side of our mandate while watching for risks of a material weakening in the labor market."

We expect Powell to take a similar tone at Jackson Hole this Friday. That is, he should set the table for a cut next month whilst pushing back at market pricing for an aggressive easing cycle due to still-elevated inflation. We believe the balance of risks currently calls for a 25 bp cut, not 50 bp. Powell should stress a data-dependent approach to easing and not pre-commit to any rate path going forward. We continue to believe that markets are once again getting carried away with Fed easing prospects and could be caught flat-footed by a less dovish message from Powell. Please see our Jackson Hole Preview here.

BLS releases its preliminary annual payrolls benchmark revisions. This is typically not a market-mover. However, given the current intense focus on the labor market, this year’s revisions could have a greater than usual impact. Estimates are all over the place, ranging from -360k to -600k, with one institution warning of a potential -1 mln. Recall that last year’s -306k revision was largely ignored by the markets. As background, the annual benchmark revisions over the last 10 years have averaged +/- 0.1% of total nonfarm employment. Over that past 5 years, the biggest revision was +/- 0.3% of total nonfarm employment. Nonfarm employment totaled 158.1 mln in March 2024. As such, we can expect a downward adjustment to total nonfarm employment between -158k and -475k. A larger downward adjustment would confirm fears that the labor market has not been as strong as the payroll data have been indicating. Note that the revisions will only impact NFP and not the unemployment rate, which is derived from the household survey.

Canada July CPI data came in soft. Headline came in as expected at 2.5% y/y vs. 2.7% in June and was the lowest since March 2021. Elsewhere, core-median came in a tick lower than expected at 2.4% y/y vs. 2.6% in June while core-trim came in a tick lower than expected at 2.7% y/y vs. 2.8% in June. Both were the lowest since April 2021. Overall, core (average of trim and median CPI) and headline inflation are tracking the BOC’s Q3 projection of 2.5% and 2.3%, respectively, and should cement market pricing for an additional 75 bp of easing by year-end.

EUROPE/MIDDLE EAST/AFRICA

The U.K. fiscal outlook continues to deteriorate. The April-July deficit came in at GBP51.4 bln, nearly GBP5 bln more than what the Office for Budget Responsibility forecast back in March. For July alone, the deficit came in at -GBP3.1 bln vs. GBP1.5 bln expected. Chief Secretary to the Treasury Jones said that “Today’s figures are yet more proof of the dire inheritance left to us by the previous government.” Last month, Chancellor Reeves identified a GBP16.4 bln fiscal hole and has warned of “difficult” decisions to be made for the October 30 budget presentation. If stronger growth is not helping to limit the deficit, it appears that some tax hikes and spending cuts will become necessary. Stay tuned.

South Africa reported soft July CPI data. Headline came in at 4.6% y/y vs. 4.8% expected and 5.1% in June, while core came in at 4.3% y/y vs. 4.5% expected and actual in June. Headline was the lowest since July 2021 and basically at the midpoint of the 3-6% target range. At the last meeting July 18, the South African Reserve Bank kept rates steady at 8.25%. It was a 4-2 vote, with the dissents in favor of a 25 bp cut. This was the first split vote since September 2023, and means that the bar to a cut has fallen significantly. Next meeting is September 19. August CPI data will be reported the day before and if disinflation continues, we believe the SARB will cut rates then. Of note, the market is pricing in 25 bp of easing over the next three months and 125 bp of total easing over the next 12 months. Given the disinflation trend in place, we believe SARB could ease more than what’s priced in.

ASIA

Japan reported July trade data. Export growth came in at 10.3% y/y vs. 11.5% expected and 5.4% in June, while import growth came in at 16.6% y/y vs. 14.6% expected and 3.2% in June. Much of the improvement was due to low base effects, as well as valuation effects from the weak yen. In dollar terms, exports rose 4.6% y/y vs. -5.5% in June, while imports rose 10.6% y/y vs. -7.4% in June.

Bank Indonesia kept rates steady at 6.25%, as expected. Governor Warjiyo said that “In the third quarter, our focus is to further strengthen the stability of the rupiah” and added that room for easing will likely open up towards the end of the year. Bloomberg consensus sees the first cut coming in Q4. With the rupiah trading at the strongest level since January, this seems very likely. Of note, the next meeting is September 18, same as the FOMC decision. We suspect BI will not want to cut that day ahead of the Fed but cannot rule it out if the rupiah continues to strengthen.

Bank of Thailand kept rates steady at 2.5%, as expected. The vote stayed 6-1, with the one dissent again in favor of a 25 bp cut. The bank noted that “The Committee deems that it is crucial to closely monitor the impacts of deterioration in credit quality on borrowing costs and overall credit growth, which could disturb economic activities.” Assistant Governor Piti added that “We will need to assess in the next meeting whether there’s something that will affect the economic outlook and warrant any policy action. If it’s still in line with our forecast, our stance will remain neutral.” The bank is likely waiting on the fate of the cash handout program. Despite early reports suggesting it will be halted, the press is now saying that the handouts will continue. The swaps market is pricing in some odds of a rate cut over the next three months, with 50 bp of total easing seen over the next 12 months.

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