Dollar Steady Ahead of ADP and ISM

September 01, 2021
  • August ADP jobs data will be the highlight; August ISM manufacturing PMI will also be key; Canada Q2 GDP data could have significant repercussions; Chile delivered a vigorous start to the tightening cycle by hiking 75 bp instead of the 50 bp expected
  • ECB officials continue to sound hawkish; data out of Europe were mostly on the lower side of expectations
  • Australia reported Q2 GDP growth at 0.7% q/q vs. 0.4% expected; PMIs across Asia today show the impact of the delta variant, especially on the service sector

The dollar is holding steady ahead of key data later today. DXY is flat on the day near 92.64 after three consecutive sessions of declines. The euro is holding above $1.18 as hawkish ECB comments continue to be heard (see below). Sterling remains stuck below $1.38, while USD/JPY continues to drift higher to trade at the highest since August 13. U.S. equities futures are up 0.3% and the EuroStoxx 50 is up nearly 1%. It also was a positive session for APAC equities. The Nikkei closed +1.3%, Hang Seng +0.7% and Shanghai comp +0.8% as Chinese tech stocks continue to rebound after Beijing’s regulatory clampdown. Oil was unchanged ahead of today’s OPEC meeting.

AMERICAS

August ADP jobs data will be the highlight. Consensus sees 638k vs. 330k in July. This will be one of the final clues for jobs data Friday, where consensus currently sees 748k jobs added vs. 943k in July. The unemployment rate is expected to fall two ticks to 5.2%, while average hourly earnings are seen steady at 4.0% y/y. July construction spending (0.2% m/m expected) and August auto sales (14.5 annualized expected) will also be reported.

August ISM manufacturing PMI will also be key. It is expected at 58.5 vs. 59.5 in July but keep an eye on the jobs component, which stood at 52.9 in July. ISM services PMI will be reported Friday after the jobs data and so markets will only have a read on manufacturing employment. Of note, Markit preliminary manufacturing PMI came in at 61.2 vs. 63.4 in July and final reading will be today. August Chicago PMI came in yesterday at 66.8, lower than the expected 68.0 and 73.4 in July but still very high by historical standards.

After last week’s Jackson Hole Symposium, Fed officials have been very quiet. Indeed, Bostic speaks today and is the first to do so since Powell’s keynote speech. We originally had Bostic in the dovish camp but his comments Friday suggest he has moved into the hawkish camp.

Canada Q2 GDP data could have significant repercussions. GDP contracted unexpectedly, coming in at -1.1% annualized vs. an expected gain of 2.5% and a revised 5.5% (was 5.6%) in Q1. It's not getting better in Q3, as Statistics Canada estimated that GDP fell -0.4% m/m in July. One Canadian bank was very critical of the revisions for coming with little explanation ahead of general elections. However, we tend to have sympathy with Statistics Canada, as tracking the economy has been made more difficult and unpredictable due to the pandemic. This should also keep the Bank of Canada in cautious mode. For now, the BOC is on hold but will likely taper again before year-end. Next policy meeting is September 8 and no change is expected then. August Markit manufacturing PMI will be reported.

While the economy is recovering, this is bad optics for Trudeau ahead of the September 20 elections. Consumer confidence has been falling recently and a negative GDP print won't help matters. Of course, opposition Conservative leader O’Toole said the data showed that Trudeau’s Liberal Party was putting Canada “further down the road of recession, not the road to recovery.” Reports suggest Trudeau will release a campaign platform today pledging CAD50 bln of new spending over the next five years. It will be fully financed by tax revenues generated by the growing economy.

Chile’s central bank delivered a vigorous start to the tightening cycle by hiking 75 bp instead of the 50 bp expected. The communique mentioned the “extraordinary dynamism” of private consumption and concerns about “macroeconomic imbalances” to justify lifting the overnight rate to 1.50%. We also assume that the move is at least in part a pre-emptive measure ahead of a period of great political uncertainty. The peso outperformed all major Latam currencies yesterday with a 1% appreciation against the dollar, but we don’t think carry alone will be enough to offset the political risk premium and prefer to fade the move.

EUROPE / MIDDLE EAST / AFRICA

ECB officials continue to sound hawkish. First it was De Guindos, then it was Villeroy and Lane. Yesterday, it was Knot’s turn when he said that the outlook may allow slower ECB stimulus and an end to PEPP in March. Knot added that the pace of PEPP can be reduced because financing conditions remain favorable. Holzmann made similar remarks that “We are now in a situation where we can think about how to reduce the pandemic special programs.” We are surprised that they are being so vocal about this given soft real sector data recently, but it seems some policymakers are getting quite nervous about the rising inflation readings. Knot is Dutch and Holzmann is Austrian and so their hawkish views aren’t that surprising. However, de Guindos and Villeroy lean dovish and so their remarks are noteworthy.

Data out of Europe were mostly on the lower side of expectations. The eurozone reported its final manufacturing numbers for August at 61.5, a tick below the flash reading. Germany fell a tick from the preliminary to 62.6 while France rose two ticks to 57.5. Italy and Spain reported for the first time at 60.9 and 59.5, respectively, both up about half a point from July. Final eurozone August services and composite PMI readings will be reported Friday. Elsewhere, eurozone unemployment rate fell a couple of ticks to 7.6%, as expected. German July retail sales came in much weaker than expected at -5.1% m/m vs. -1.0% consensus but comes after solid readings in previous months which created base effects from the reopening. Indeed, June was revised up to 4.5% m/m from 4.2% previously.

ASIA

Australia reported Q2 GDP growth at 0.7% q/q vs. 0.4% expected. The y/y rate came in at 9.6% vs. 9.1% expected. The rebound captures a picture from before the delta variant restrictions and thus won’t help market or policymakers much. Still, the Reserve Bank of Australia should proceed with tapering at its next policy meeting September 7. Some are calling for the RBA to delay tapering, as GDP could contract in Q3 due to the extended lockdowns. However, the Q2 data suggests momentum was solid going into the lockdowns and so the damage may be limited.

In line with yesterday’s disappointing data from China, PMIs across Asia today also show the impact of the delta variant, especially on the service sector. China’s Caixin manufacturing PMI came in at 49.2 (vs. 50.1 expected). Korea, India and Taiwan’s manufacturing PMIs help above 50 but decelerated, while those in most other EM Asia countries remained well into contractionary territory. While disappointing, we expect the service sector to show even more signs of weakness to come. The only silver lining here is that this is all well priced in and expected by markets and shouldn’t impact asset prices unless we see another leg lower.

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