Dollar Trades Sideways Ahead of PCE Data

May 31, 2024
  • Former President Trump was convicted of 34 felony counts; Fed officials remain cautious; financial conditions continue to loosen; data highlight will be April PCE; personal income and spending will be reported at the same time; May Chicago PMI will also be closely watched; Canada highlight will be Q1 GDP data
  • Eurozone May CPI data ran hot; it will not prevent the ECB from cutting interest rates next week; minor U.K. data were encouraging
  • BOJ spent a record JPY9.8 trln on intervention last month; Japan reported May Tokyo CPI and April real sector data; China reported soft official May PMIs

The dollar is trading sideways ahead of PCE data. DXY is trading flat near 104.685 after being unable to decisively breach the 105 level. Former President Trump’s conviction on 34 felony counts had no market impact (see below). The euro is trading higher near $1.0850 after higher-than-expected CPI data (see below) while sterling is trading lower near $1.2720. USD/JPY is trading higher near 157.30. Reports that BOJ spent JPY9.8 trln intervening in May had little impact (see below). We believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have taken back the dovish Fed easing expectations and yields have been steadily rising. As such, we look for the dollar recovery to continue. Today’s data could be a big help.


Former President Trump was convicted of 34 felony counts. So far, we cannot discern any market impact. However, we note that the race has tightened up significantly in the betting markets. We will be putting out a U.S. election primer over the summer that discusses the likely policy implications under different scenarios, including the makeup of Congress.

Fed officials remain cautious. Williams said, “The behavior of the economy over the past year provides ample evidence that monetary policy is restrictive in a way that helps us achieve our goals.” That said, he added that “I don’t feel any urgency or need that we have to make a decision now.” Logan said “It also may be that policy is just not as restrictive as we think it might have been relative to the level of interest rates before the pandemic. It’s really important to keep all options on the table and that we continue to be flexible.” Bostic said he doesn’t think a rate hike will be required to hit the 2% inflation target. He added that he doesn’t see a cut in July but added that if September is right for a cut, the Fed will cut but stressed that this would not be a political decision. Bostic speaks again today. At midnight tonight, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference June 12. Of note, the market sees less than 80% odds of a November cut, which is near the pre-May 1 FOMC lows.

Financial conditions continue to loosen. The Chicago Fed’s measure has loosened six straight weeks through Friday May 24 and are the loosest since mid-November 2021. This simply does not square with ongoing Fed comments that policy is restrictive. If this week's rise in yields and drop in equities are sustained, we could see tighter conditions for the first time since mid-April.

Data highlight will be April PCE. Headline is expected to remain steady at 2.7% y/y, while core is expected to remain steady at 2.8% y/y. However, we see some upside risks as PPI ex-trade, transportation, and warehousing (used in PCE calculations) accelerated to 4.4% y/y in April. The Cleveland Fed’s inflation Nowcast model sees both headline and core at 2.7% y/y. Looking ahead to May, the model sees both measures remaining at 2.7% y/y.

Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.5% in March, while spending is expected at 0.3% m/m vs. 0.8% in March. Real personal spending is expected at 0.1% m/m vs. 0.5% in March. Of note, weak April retail sales warns of downside risks to the spending data, but this is offset by the recent bounce in consumer confidence measures.

May Chicago PMI will also be closely watched. Headline is expected at 41.5 vs. 37.9 in April. Recall that S&P Global preliminary May PMIs rose sharply last week. Manufacturing came in at 50.9 vs. 49.9 expected and 50.0 in April, services came in at 54.4 vs. 51.2 expected and 51.3 in April, and the composite came in at 54.4 vs. 51.2 expected and 51.3 in April. The composite was the highest since April 2022 and suggests the economy is picking up again. ISM PMIs will be reported next week.

We got revisions to Q1 GDP. Revised growth came in as expected at 1.3% SAAR vs. 1.6% previously. Personal consumption contributed 1.34 ppt vs. 1.68 ppt previously, fixed investment contributed 1.02 ppt vs. 0.91 ppt previously, and govt consumption contributed 0.23 ppt vs. 0.21 ppt previously. On the other hand, net exports subtracted -0.89 ppt vs. -0.86 previously and inventories subtracted -0.45 ppt vs. -0.35 ppt previously. Private domestic demand remained relatively firm at 2.8% SAAR vs. 3.1% previously. Of course, this is old news as markets are already looking ahead to Q2 and Q3.

We get some updates on Q2 growth. The Atlanta Fed’s GDPNow model estimates Q2 growth at 3.5% SAAR and the next update comes today after the data. Elsewhere, the New York Fed's Nowcast model estimates Q2 growth at 2.0% SAAR and the next update also comes today. Looking ahead, its first Q3 estimate comes out in early June.

Canada highlight will be Q1 GDP data. Growth is expected at 2.2% SAAR vs. 1.0% in Q4. If so, it would be the strongest since Q1 2023. The Bank of Canada has penciled in 2.8% growth, driven by exports and consumption spending. However, the decline in retail sales volumes in February and March points to downside risk to the BOC’s forecast. The market sees 65% odds of a cut in June while a July rate cut is fully priced in.

Mexico elections will be held this Sunday. Polls show Morena candidate Claudia Scheinbaum well ahead of opposition candidate Xochitl Galvez in the race to replace President Andres Manuel Lopez Obrador. All 500 seats in the lower house will be contested, as well as all 128 seats in the Senate. With polls consistently showing Scheinbaum with a huge lead, markets have largely priced in a continuation of the policies of her long-time mentor and ally AMLO.


Eurozone May CPI data ran hot. Headline came in a tick higher than expected at 2.6% y/y vs. 2.4% in April, while core came in two ticks higher than expected at 2.9% y/y vs. 2.7% in April. The scope for an upside surprise was there after German CPI came in higher than expected yesterday. France and Italy reported CPI data too and their EU Harmonised inflation readings both came in a tick higher than expected at 2.7% y/y and 0.8% y/y, respectively.

The eurozone disinflationary process hit a speed bump in May but will not prevent the ECB from cutting interest rates next week. However, sticky services inflation and the modest improvement in the eurozone growth outlook argue for a shallow ECB easing cycle, which offers EUR some support. Indeed, odds of a second cut have fallen to 65% in September and 85% in October. Panetta said “Even with several cuts in the key interest rates, the monetary policy stance will remain tight. When defining the path of policy rate cuts, it should be borne in mind that prompt and gradual action contains macroeconomic volatility better than a tardy and hasty approach.” However, most ECB officials have remained cautious about the pace of the easing cycle after it begins cutting in June. Today’s CPI data show that such caution is warranted.

Minor U.K. data were encouraging. Nationwide house prices rose 0.4% m/m in May vs. 0.2% expected and -0.4% in April. The y/y rate improved to 1.3% vs. 0.6% in April. Meanwhile, the Lloyds Business Barometer index surged to its highest level since November 2015 and suggests the BOE will not be in a rush to loosen policy. The market continues to price in the first rate cut in November.


Bank of Japan spent a record JPY9.8 trln on intervention last month. The period covered by the data was April 26 through May 29, during which the BOJ intervened twice (April 29 and May 2) in the FX markets to support the yen. This was a monthly record, surpassing the JPY9.1 trln spent in November 2011. The second intervention drove USD/JPY from 158 down to 153, but the pair has since rebounded to trade near 157.30 currently. Until the BOJ outlines a more hawkish tightening cycle, the yen is likely to remain weak. That said, the interventions have stabilized the yen in a 155-160 range, at least for now.

May Tokyo CPI was reported. Headline came in as expected at 2.2% y/y vs. 1.8% in April, core (ex-fresh food) came in as expected at 1.9% y/y vs. 1.6% in April, and core ex-energy came in a tick lower than expected at 1.7% y/y vs. 1.8% expected and actual in April. Overall, the bar for an aggressive BOJ tightening cycle is high as underlying inflation remains well under control. Indeed, the market is pricing in only 75 bp of tightening over the next three years.

April real sector data were firm. IP came in at -1.0% y/y vs. -1.1% expected and -6.2% in March, retail sales came in at 2.4% y/y vs. 1.7% expected and a revised 1.1% (was 1.2%) in March, and housing starts came in at 13.9% y/y vs. -0.1% expected and -12.8% in March. The economy hit a soft patch in Q1 but so far, it seems to be bouncing back in Q2.

Labor market data were also reported. The unemployment rate remained steady as expected at 2.6%, while the job-to-applicant ratio fell two ticks 1.26 vs. 1.28 expected and actual in March. The labor market is loosening a bit and wage pressures remain relatively low. This is another reason for the BOJ to remain cautious. April cash earnings data will be reported next week.

China reported soft official May PMIs. Manufacturing came in at 49.5 vs. 50.5 expected and 50.4 in April, non-manufacturing came in at 51.1 vs. 51.5 expected and 51.2 in April, and the composite came in at 51.0 vs. 51.7 in April. This was the second straight drop in the composite to the lowest since February. The modest cyclical recovery is already ebbing while structurally, the economy remains constrained by a huge debt overhang and a burst property bubble. With the PBOC still in easing mode and the Fed staying hawkish, downside pressure on CNY and CNH are intact. Caixin PMIs will be reported next week.

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