Dollar Treads Water Ahead of ADP & ISM

May 05, 2021
  • Comments by Treasury Secretary Yellen are worth discussing; ADP private sector jobs will be today’s highlight; ISM services PMI will also be reported; the U.S. growth outlook remains stronger than ever; Brazil is expected to hike rates 75 bp to 3.5%; Colombia central bank releases its quarterly inflation report
  • Final eurozone April services and composite PMI readings were reported; more details of the ECB’s weekly asset purchases were reported; Israeli Prime Minister Netanyahu was unable to form a government by the midnight deadline; Poland is expected to keep rates at 0.10%
  • RBI will provide additional liquidity to support the economy, including some new facilities; BOT kept rates at 0.50%, as expected

The dollar is little changed ahead of some key U.S. data. DXY made a marginal new high for this bounce today near 91.436 but has since fallen back. The next upside target is the 200-day moving average at just under 92. The euro is once again testing support near $1.20, while sterling continues to outperform and is trading just above $1.39. As a result, the EUR/GBP cross has edged lower to trade at the lowest level since April 21. USD/JPY remains stuck between 109 and 110. A clean break of 109.65 is needed to set up a test of the March 31 high near 111. We continue to look for continued dollar strength on the strong economic outlook (see below) but this will require a more significant turnaround in U.S. yields.



Comments by Treasury Secretary Yellen are worth discussing. Specifically, she said “It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat. It could cause some very modest increases in interest rates.” This fed into the souring market sentiment yesterday. In a subsequent interview, Yellen did some damage control and said she wasn’t forecasting rate hikes and stressed “It’s not something I’m predicting or recommending. If anyone appreciates the independence of the Federal Reserve, I think that person is me.”

Standard operating procedure is that the sitting Treasury Secretary should not be commenting on interest rates. Yellen should have known better but it seems there is a learning curve even for someone with her extensive experience. We all know that when all is said and done, it's in the hands of Powell and company to determine interest rates, at least the Fed Funds rate. The policy framework has changed significantly since Yellen left the Fed and so we don't think she has any special insight now. Fed officials have clearly said they will let the economy run hot before hiking rates. In the end, the moves in U.S. fixed income markets weren’t that expressive. The 10-year yield remains around the 1.60%. However, inflation breakeven rates continue to trend higher, especially for the 5- and 10-year maturities, driving the real yield lower. Fed officials Evans, Rosengren, and Mester speak today.

ADP private sector jobs will be today’s highlight. Consensus sees 850k. Weekly claims data for the BLS survey week suggest a strong NFP number, but the final clues will be revealed this week. April jobs data Friday is expected to show 995k jobs added vs. 917k in March, with the unemployment rate falling two ticks to 5.8%. The expected -0.4% y/y drop in average hourly earnings would be a statistical quirk, as the jobs being added will tend to be at lower wages.

ISM services PMI will also be reported. Headline PMI is expected at 64.1 vs. 63.7 in March. Keep an eye on the employment component, which was 57.2 in March. The ISM manufacturing PMI was somewhat disappointing, where the employment component fell to 55.1 from 59.6 in March. That said, the reopening of large swaths of the country are likely to feed into service sector outperformance for several months.

The U.S. growth outlook remains stronger than ever. The Atlanta Fed’s GDPNow model updated its forecast for Q2 to an eye-popping 13.6% SAAR, up from 13.2% previously as well as its initial 10.4% print. The New York Fed’s Nowcast model currently shows Q2 growth at a more modest 5.3% SAAR and won’t be updated until Friday. Of note, Bloomberg consensus sees 8.1% growth in Q2 and 7.0% in Q3 before easing to 4.6% in Q4, all in SAAR terms.
Today, trade (-$74.3 bln expected) and factory orders (1.3% m/m expected) will be reported. Canada reports March building permits and trade.

Brazil COPOM is expected to hike rates 75 bp to 3.5%. IPCA inflation came in at 6.1% y/y in April, the highest since December 2016 and further above the 2.25-5.25% target range. With inflation still rising, the market is looking ahead to another 75 bp hike at the June 16 COPOM meeting. Ahead of the decision, Brazil reports March IP, which is expected to rise 8.5% y/y vs. 0.4% in February. However, much of that is due to base effects as IP is expected to fall -3.0% m/m vs. -0.7% in February. The economy has been hobbled by its poor handling of the pandemic and an aggressive tightening cycle will only make things worse.

Colombia central bank releases its quarterly inflation report. April CPI will also be reported, with headline inflation expected at 1.70% y/y vs. 1.51% in March. If so, this would be highest since October but not much above the recent low of 1.49% in November and still well below the 2-4% target range. Consensus sees steady rates in Q2, with odds of a hike picking up in Q3 and then fully priced in by Q4. Another hike is expected in Q1 of next year, followed by two in Q2 and one in Q3. If so, this would take the policy rate to 3.0% from the current 1.75%. The peso is still reeling from the recent political noise.



Final eurozone April services and composite PMI readings were reported. Headline services came in at 50.5 vs. 50.3 preliminary, lifting the eurozone composite a tick from the preliminary to 53.8. German composite fell a couple of ticks to 55.8 and France fell a tick to 51.7. Italy composite fell to 51.2 from 51.9 in March, while Spain’s improved nearly five points from March to 55.2. The deterioration in Italy’s readings are worrisome and have helped push BTP yields higher. The 10-year spread to bunds has been edging higher despite PEPP and is currently around 111 bp, the highest since early February.

More details of the ECB’s weekly asset purchases were reported. Redemptions were a sizable EUR7.5 bln and so gross purchases were EUR26.5 bln for the week ending April 30. This compares to EUR25.0 bln the previous week and EUR28.4 bln the week ending April 16. Recall that net purchases were EUR19 bln last week, down from EUR22.25 bln for the week ending April 23 but up from a net EUR16.3 bln for the week ending April 16 and EUR17.1 bln for the week ending April 9. This accelerated pace will be maintained until at least the June 10 meeting, when the ECB said it would reassess its program. If yields continue to rise, then the accelerated pace is likely to be extended into Q3, which would be a dovish sign.

Israeli Prime Minister Netanyahu was unable to form a government by the midnight deadline. President Rivlin now has three days to decide whether to allow other parties a chance to form a government. Rivlin met with the two most likely candidates, Yair Lapid and Naftali Bennett. Bennet’s Yamina party holds seven seats in parliament, but in Israel, that is enough to make him a kingmaker. Lapid already has said he is willing to share the post of prime minister with Bennett, with Bennett serving first in a rotation. However, the two have not yet reached any firm agreements. The March 23 election was the fourth in two years, and if all options fail, then a fifth one is in the cards later this year. 

National Bank of Poland is expected to keep rates at 0.10%. Last week, inflation came in much higher than expected at 4.3% y/y, the highest since March 2020 and above the 1.5-3.5% target range. The bank has flagged this expected spike as temporary and so no policy reaction is expected. That said, markets will be on alert for signs that inflation turns into something more than transitory. Bloomberg consensus sees steady rates through Q1 2022, after which the odds of a hike start to rise very modestly. We think the risks are tilted toward a later lift-off, not sooner. The bank releases minutes from its April 7 meeting Friday.



The Reserve Bank of India will provide additional liquidity to support the economy, including some new facilities. Banks will now have a liquidity window of INR500 bln ($6.8 bln) to extend credit to health services sector, and these loans will receive preferential treatment for their regulatory requirements. The RBI will also conduct a second tranche of bond purchases under its QE program, leading to a 2 bp decline in longer-dated local currency bond yields. The 10-year yield is now below 6% for the first time since mid-February.

Bank of Thailand kept rates at 0.50%, as expected. However, it was a dovish hold as the bank warned that due to the most recent viral outbreak, the economy will recover more slowly than previously expected and may impact its 3% growth forecast for this year. The government recently announced new fiscal support measures and extended some existing ones, such as cash handouts and spending subsidies. Of note, the Finance Ministry last week cut its 2021 growth forecast to 2.3% from 2.8% previously due to the impact of the latest wave, especially on tourist arrivals.

Ahead of the BOT decision, April CPI was reported. Headline inflation came in at 3.41% y/y vs. 2.50% expected and -0.08% in March. This was the highest since December 2012 and nearing the top of the 1-3% target range. However, since the economy has been hit so hard by the pandemic, we expect no policy response from the central bank. Indeed, BOT Assistant Governor Titanun said it was prudent to preserve limited policy space for now, but the bank could use “additional policy tools” if needed. Consensus sees steady rates through 2022 and we concur.  

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