Dollar Steady Ahead of Powell and PPI

May 14, 2024

Win Thin

All eyes are on Powell; April PPI will be the data highlight; New York Fed April inflation expectations ran hot; NFIB small business optimism firmed in April
German ZEW survey was firm; U.K. reported mixed labor market data; data confirm our view that the BOE can afford to wait until August before easing
The yen continues to weaken despite rising JGB yields; Japan reported weak April machine tool orders; Australia Treasurer Chalmers handed down an expansionary budget

The dollar remains steady ahead of Powell and PPI. DXY is trading flat near 105.225 after giving up earlier gains. Whether the dollar rally can continue will depend solely on key U.S. data, starting with PPI today. GBP is trading flat near $1.2550 after an earlier dip to $1.2510 on mixed labor market data (see below), while the euro is trading flat near $1.0795. USD/JPY is trading higher near 156.40 despite higher JGB yields (see below). We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, which the data this week are expected to underscore. As such, we look for further dollar gains. Powell remains a wild card as he speaks today for the first time since his dovish post-decision press conference May 1.

AMERICAS

All eyes are on Powell. He speaks today at 10 AM ET for the first time since his dovish post-decision press conference May 1. Will he join most other Fed officials in signaling caution? Or will he stick to his dovish guidance? We expect the former. We believe it would rattle markets if he were to deviate what lately has been a united message from Fed officials. Yesterday, Governor Jefferson joined the cautious chorus when he said, “In light of the attenuation in progress, in terms of getting inflation down to our target, it is appropriate that we maintain the policy rate in restrictive territory, which it is right now.” He stressed that “We continue to look for additional evidence that inflation is going to return to our 2% target. And until we have that, I think it is appropriate to keep the policy rate in restrictive territory.” Cook also speaks today.

April PPI will be the data highlight. Headline is expected to pick up a tick to 2.2% y/y, while core is expected to fall a tick to 2.3% y/y. Keep an eye on PPI ex-trade, transportation, and warehousing. This feeds into PCE calculations and remains stuck above 4% y/y. April CPI will be reported tomorrow.

New York Fed April inflation expectations ran hot. 1-year expectations came in at 3.3% vs. 3.0% in March, 3-year expectations came in at 2.8% vs. 2.9% in March, and 5-year expectations came in at 2.8% vs. 2.6% in March. This rise was to be expected after University of Michigan last week reported 1-year expectations at 3.5% vs. 3.2% in April and 5- to 10-year expectations at 3.1% vs. 3.0% in April. All these measures remain well above the 2% target and so the Fed really has to remain cautious and not cut rates prematurely.

NFIB small business optimism firmed in April. Headline came in at 89.7 vs. 88.2 expected and 88.5 in March. This was the first rise since December and is the highest since January.

EUROPE/MIDDLE EAST/AFRICA

German ZEW survey was firm. Expectations component came in at 47.1 vs. 46.4 expected and 42.9 in April, while current situation came in at -72.3 vs. -75.9 expected and -79.2 in April. Eurozone expectations came in at 47.0 vs. 43.9 in April and was the highest since February 2022. Eurozone confidence measures have been rising in recent months and this continues the trend. The European Central Bank remains on track to cut rates starting in June. After that, cuts are largely priced in for September and December. Schnabel and Knot speak today.

U.K. reported mixed labor market data. Employment for the three months ending in March came in at -178k vs. -220k expected and -156k previously, while the unemployment rate rose a tick as expected to 4.3%. Average weekly earnings ex-bonuses came in a tick higher than expected at 6.0% y/y in March, but private sector regular weekly earnings growth was softer at 5.9% y/y, the lowest since May 2022 and a tick lower than the BOE penciled in for Q1.

The data confirm our view that the BOE can afford to wait until August before easing. Odds of a June cut are around 60% but becomes fully priced in for August. The labor market remains historically tight. The unemployment rate is around the BOE’s medium-term equilibrium level of around 4.5% and the claimant count rate has been steady at 4.1% since October 2023. Chief Economist Pill sounded dovish after the data, noting “It’s not unreasonable to believe that through the summer we will begin to see enough confidence in the decline in persistence that bank rate will come under consideration. It’s important to recognize we can cut bank rate, while still leaving some restriction in the system.”

ASIA

The yen continues to weaken despite rising JGB yields. USD/JPY finally broke above 156, but the move remains quite orderly as intervention risk remains in play. JGB yields across the curve made fresh highs dating back more than a decade on expectations the Bank of Japan further trims JGB purchases. Continued yen weakness despite higher JGB yields is noteworthy. USD/JPY has now retraced over half the intervention-induced drop. Break above 157 sets up a test of the April 29 high near 160.15.

Japan reported weak April machine tool orders. Total orders came in at -11.6% y/y vs. -3.8% in March and was the weakest since January. Both foreign and domestic orders weakened to -11.0% y/y and -12.9% y/y, respectively, and does not bode well for the economic outlook. April PPI was also reported at 0.9% y/y vs. 0.8% expected.

Australia Treasurer Chalmers handed down an expansionary budget. Despite earlier claims from Chalmers that it would be an inflation-fighting budget, the budget will instead inject fiscal stimulus at a time when the RBA is removing monetary accommodation. With an election due by May 2025, this was apparently not the time for austerity. The budget calls for a deficit of -AUD28.3 bln in FY24/25, or -1% of GDP, and which then widens to -AUD42.8 bln for FY25/26. The projections showed that the near-term deficits were largely driven by cost-of-living relief as well as unfunded healthcare provisions. Looking further out, deficits will be driven by plans for AUD330 bln of defense spending over the next decade. Looser fiscal policy could raise the likelihood the RBA raises rates again, though that is not our base case.

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