Dollar Steady Ahead of Jobs Report

June 03, 2022

Markets are marking time ahead of the U.S. jobs data; Fed Vice Chair Brainard remains hawkish; ISM services PMI will be reported after the jobs report; Colombia reports May CPI Saturday

Eurozone reported weak April retail sales; the ECB meets next week with an uncertain economic backdrop; Turkey reported May CPI and PPI data

Japan Prime Minister Kishida signaled steady policy ahead; incoming Australia Prime Minister Albanese is setting the table for higher wages; Korea reported May CPI

The dollar is holding steady ahead of the jobs data.  DXY is trading basically flat near 101.869 after yesterday’s disappointing sell-off took it back below 102.  The euro traded as high as $1.0765 today but so far has been unable to mount a true challenge to the $1.08 area.  The weakening trend in the yen has reasserted itself as USD/JPY continues to trade above 130.  We look for a test of the May cycle high near 131.35 and maintain our long-standing target of the January 2002 high near 135.15.  Sterling is having trouble break back above $1.26 and we look for continued underperformance ahead that pushes the EUR/GBP cross higher.  We still view this recent move lower in the dollar as a correction within the longer-term dollar rally but acknowledge that further gains will be slow until the market pessimism on the U.S. economic outlook improves.  We need to see some further strength in the data.


Markets are marking time ahead of the U.S. jobs data.  The U.S. 10-year yield is steady near 2.92%, while the 2-year yield is up a couple of ticks at 2.65%.  The dollar is up slightly but well within recent ranges.  Global equity markets are mostly higher, though U.S. futures are pointing to a lower open.  We try to refrain from putting too much emphasis on any one data point but we think a strong jobs report would help the dollar recover from its May swoon.  In particular, the U.S. rates market has gotten more negative about the U.S. outlook and that has taken a toll on the greenback.  We think this pessimism is overdone but the data will have to cooperate.

May jobs data is the main event.  Consensus sees 320k jobs created vs. 428k in April, while the unemployment rate is expected to fall a tick to 3.5%, a new cycle low that matches the pre-pandemic low.  Average hourly earnings are expected to ease to 5.2% y/y vs. 5.5% in April, while average weekly hours  are expected to remain steady at 34.6.  ADP private sector jobs data came in weaker than expected at 128k vs. a revised 202k (was 247k) in April.  However, most other signs point to continued strength in the labor market.   

Fed Vice Chair Brainard remains hawkish.  She said yesterday that “From where I sit today, market pricing for 50 basis points, potentially in June and July, from the data we have in hand today, seems like a reasonable path.”  She added that “Further out, getting to September, it’s a little harder to say. If we don’t see the kind of deceleration in monthly inflation prints, if we don’t see some of that really hot demand starting to cool a little bit, then it might well be appropriate to have another meeting where we proceed at the same pace.”  Regarding a potential pause, Brainard noted that “If we are seeing a deceleration in the monthly prints, it might make sense to be proceeding at a slightly slower pace. Right now it’s very hard to see the case for a pause.”  We concur.

ISM services PMI will be reported after the jobs report.   Headline is expected at 56.5 vs. 57.1 in April.  If so, it would match the February low and continue the modest slowing trend.  Keep an eye on employment and prices paid, which stood at 49.5 and 84.6 in April, respectively.  Of note, manufacturing prices paid fell a couple of points to 82.2 in May.  Next week’s May CPI readings will be closely watched, and current consensus sees both headline and core easing to 8.2% y/y and 5.9% y/y, respectively. 

Colombia reports May CPI Saturday.  Headline is expected at 9.08% y/y vs. 9.23% in April.  If so, it would be the first deceleration since March 2021 but still well above the 2-4% target range.  The bank hiked 100 bp for the third straight time to 6.0% at the last meeting April 29 by a 4-3 vote, with the dissents in favor of  a larger 150 bp move.  Next meeting is June 20 and another 100 bp hike to 7.0% seems likely, with some risks of a hawkish surprise if inflation continues to rise.  The swaps market sees 325 of tightening over the next 6 months that would see the policy rate peak near 9.25%.   


Eurozone reported weak April retail sales.  Sales plunged -1.3% m/m vs. an expected gain of 0.1% and a revised 0.3% (was -0.4%) in March.  Final May eurozone services and composite PMIs were also reported.  Headline services fell two ticks from the preliminary to 56.1 while the composite fell a tick from the preliminary to 54.8, the lowest since January.  The German composite fell to 53.7 vs. 54.6 preliminary, while the French composite fell a tick to 57.0.  Italy and Spain reported for the first time and their composite PMIs came in at 52.4 and 55.7, respectively.  Italy’s composite was down more than two points from April while Spain’s was steady.  While the eurozone economy has been more resilient than we expected, cracks are widening and downside risks remain. 

The ECB meets next week with an uncertain economic backdrop.  Yes, inflation is way above target and showing no signs of easing.  Much of this is due to high food and energy prices but the bank recognized the need to remove accommodation.  Yet the real economy is slowing at the same time.  This is why we think the gradualist wing of the ECB will win out.  The hawks will remain vocal but they do not represent consensus.  Holzmann speaks today and is likely to push for a 50 bp hike.  We think such a move is unlikely, at least in July.  However, ECB tightening expectations have picked up.  WIRP still suggests liftoff July 21 remains fully priced in.  So is a follow up 25 bp hike in September.  However, odds of a 50 bp move in October are rising, followed by a 25 bp hike in December.  Looking ahead, the swaps market is  pricing in 225 bp of tightening over the next 24 months that would see the deposit rate peak near 1.75%, up from 1.5% at the start of this week.

Turkey reported May CPI and PPI data.  Headline CPI came in at 73.50% y/y vs. 74.70% expected and 69.97% in April, core came in at 56.04% y/y vs. 55.72% expected and 52.37% in April, and PPI came in at 132.16% y/y vs. 126.86% expected and 121.82% in April.  We  cannot get excited about a small downside miss in headline when PPI continues to surge, suggesting further upside pressure on CPI.  The central bank just kept rates steady at 14% last Friday but hinted at new measures ahead.  Next meeting is June 23 but subsequent comments from President Erdogan suggest rate hikes are not imminent as he said “Those who try to impose on us a link between the benchmark rate and inflation are either illiterates or traitors.”  The country is nearing a breaking point as Erdogan’s grand experiment of keeping interest rates low to fight inflation is clearly failing.  At some point, the central bank will be forced to tighten but until then, the lira is likely to continue weakening and eventually test the all-time low near 18.3633 from December.   


Prime Minister Kishida signaled steady policy ahead.  Specifically, he said the government would adhere to its 2013 joint policy statement with the Bank of Japan and maintain current economic policies.  That statement was the basis for so-called Abenomics, which relied on the so-called “three arrows” of fiscal stimulus, monetary stimulus, and structural reforms.  BOJ Governor Kuroda was brought in and implemented QE and later YCC and Kishida’s comments support our view the current monetary policy settings will be maintained through the end of Kuroda’s term next spring.  Kishida’s choice of the next Governor will be key in moving the BOJ towards a tightening path.  Elsewhere, Japan reported firmer final services and composite PMIs.  Services came in at 52.6 vs. 51.7 preliminary, while the composite came in at 52.3 vs. 51.4 preliminary.  That is the highest composite reading since December and continues the gradual improvement in the economy. 

Incoming Australia Prime Minister Albanese is setting the table for higher wages.  He submitted a proposal to Australia’s labor watchdog  to raise the minimum wage by more than inflation in order to keep one of his major election promises.  Albanese said “High and rising inflation and weak wages growth are reducing real wages across the economy and creating cost-of-living pressures for Australia’s low-paid workers.  The government does not want to see Australian workers go backwards; in particular, those workers on low rates of pay who are experiencing the worst impacts of inflation and have the least capacity to draw on savings.”  Australia is by no means unique in terms of falling real wages.  While a hike in the minimum wage will help boost consumption, it comes at a time when the RBA is trying to slow the economy and cool demand-led inflation.  Elsewhere, Australia reported final May services and composite PMIs.  Services came in at 53.2 vs. 53.0 preliminary, while the composite came in at 52.9 vs. 52.5 preliminary, the lowest since January.  Recent weakness in the PMI readings is likely China-related and bears watching.  For now, the economy remains robust and so the RBA will continue tightening.  WIRP suggests a 25 bp hike June 7 is priced in.  Looking ahead, the swaps market is pricing in 325 bp of tightening over the next 12 months that would see the policy rate peak near 3.65%, up from 3.25% at the start of this week.   

Korea reported May CPI.  Headline came in 5.4% y/y vs. 5.1% expected and 4.8% in April, while core came in at 4.1% y/y vs. 3.7% expected and 3.6% in April.  Headline is the highest since August 2008 and further above the 2% target.  Bank of Korea just hiked rates 25 bp to 1.75% last week, as expected.  It was Governor Rhee’s first meeting and he signaled that the BOK was focused on fighting inflation.  He said it was “reasonable” that the market is pricing in a policy rate of 2.5% by year-end.  He also revealed that the bank was debating whether to make public its view on the neutral rate for policy.  Next meeting is July 13 and another 25 bp hike seems likely then.  Looking further out, the swaps market sees another 150 bp of tightening over the next 12 months that would see the policy rate peak near 3.25% vs. 3.0% at the start of this week.  

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