Dollar Treads Water Ahead of ISM Services PMI

March 05, 2024

Win Thin

Atlanta Fed President Bostic remains hawkish; while three cuts are still possible under Bostic’s timeframe, it is starting to look a little tight; February ISM services PMI will be the highlight; Canada February PMI readings will continue rolling out.
Disinflation in the eurozone continues; eurozone final February services and composite PMIs firmed; U.K. BRC retail sales softened in February
Japan February Tokyo CPI ran hot; Japan and Australia reported final February services and composite PMIs; Chinese Premier Li Qiang delivered his annual work report at the NPC; Philippines February CPI ran hot

The dollar is treading water ahead of ISM services PMI. DXY is trading flat near 103.871 as the data deluge begins today and runs strong right into NFP Friday. The euro is trading flat near $1.0855, while sterling is trading lower near $1.2685. The yen is outperforming today after Tokyo CPI ran hot (see below), with USD/JPY trading lower near 150.40. Recent developments support our view that the Fed is unlikely to cut rates anytime soon even as other major central banks tilt more dovish. The U.S. data continue to come in mostly firmer while Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation. This week’s data may be a spark for that move.

AMERICAS

Atlanta Fed President Bostic remains hawkish. With regards to rate cuts, he sees the first one in Q3 but “I would probably not anticipate they would be back-to-back” as “Given the uncertainty, I think there is some appeal to acting and then seeing how participants in the markets, businesses leaders and families respond to that.” Specifically, Bostic noted “This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months. As my staff and I have talked to business decision-makers in recent weeks, the theme we’ve heard rings of expectant optimism.”

While three cuts are still possible under Bostic’s timeframe, it is starting to look a little tight. A Q3 start to the easing cycle suggests a cut July 31 as the earliest. That would be followed by a pause September 18 and if things progress as Bostic expects, a second cut would come November 7. If the Fed were to pause again, that would mean nothing is done December 18 and we end up with only two cuts this year. As we noted last week, it would only take two FOMC members to shift their 2024 Dot from 4.625% to 4.875% in order to get a similar hawkish shift in the 2024 median Dot. This is very possible, bordering on likely. Of note, odds of a June cut have fallen to 80% from being fully priced in at the end of last week.

Bostic is also reluctant to taper the pace of balance sheet runoff. He said “In terms of QT I’m hopeful that we can continue the pace that we’re at for as long as possible. As we get further from the most acute moments of that emergency, I think it’s appropriate for us to return to more normal posture.” We concur. So far, QT has not led to any disruptions in the funding markets as bank reserves continue to climb. Logan is pushing for an earlier start to tapering but the discussions are only going to begin in earnest at this month’s FOMC meeting. Barr speaks today.

February ISM services PMI will be the highlight. Headline is expected at 53.0 vs. 53.4 in January. Keep an eye on prices paid, which is expected to fall two full points to 62.0 from January, which had the highest reading since February 2023. Of note, S&P Global’s preliminary February services PMI came in at 51.3 vs. 52.3 expected and 52.5 in January and so there are downside risks to the ISM reading. Elsewhere, January factory orders will be reported and are expected at -3.0% m/m vs. 0.2% in December.

Canada February PMI readings will continue rolling out. S&P Global services and composite PMIs will be reported. Last week, its manufacturing PMI came in at 49.7 vs. 48.3 in January. Ivey PMI will be reported tomorrow. Earlier in the morning, the Bank of Canada is widely expected to deliver another hold. The post-meeting statement will likely remain balanced and continue to support market pricing for 75 bp of easing in 2024, mostly likely beginning June 5.

EUROPE/MIDDLE EAST/AFRICA

Disinflation in the eurozone continues. January PPI came in at -8.6% y/y vs. -8.1% expected and a revised -10.7% (was -10.6%) in December. PPI should drag CPI lower, but the ECB remains concerned about wage growth. With Q1 wage data out in May, it seems that the June 6 meeting is the most likely timing for a rate cut. The two-day ECB meeting begins tomorrow and ends Thursday. While a hold is widely expected, updated macro forecasts should provide some more clues about policy going forward.

Final February services and composite PMIs firmed. Headline services rose two ticks from the preliminary to 50.2 while the composite PMI rose three ticks to 49.2. Looking at the country breakdown, Germany’s composite rose two ticks from the preliminary to 46.3 and France’s rose four ticks to 48.1. Italy and Spain reported for the first time and their composite PMIs came in at 51.1 and 53.9, respectively.

U.K. BRC retail sales softened in February. Nominal sales rose 1.0% y/y vs. 1.6% expected and 1.4% in January. While this was the slowest gain since August 2022, the data remain consistent with the ongoing recovery in U.K. consumer spending activity. The BRC reading suggests overall retail sales are likely to slow from the outsized 3.4% m/m gain in January when February data are reported March 22. Regardless, the diverging growth outlook between the eurozone and U.K. favors a lower EUR/GBP. Elsewhere, final February services PMI fell half a point from the preliminary to 53.8 while the composite PMI fell three ticks to 53.0.

ASIA

Japan February Tokyo CPI ran hot. Headline came in a tick higher than expected at 2.6% y/y vs. 1.8% in January, while core (ex-fresh food) came in as expected at 2.5% y/y vs. 1.8% in January. This was the first acceleration in core since October and moves back above the 2% target. Of note, core ex-energy also came in as expected at 3.1% y/y vs. 3.3% in January. The pickup in inflation raises the likelihood of an earlier start to liftoff than June currently priced in. Indeed, the market now sees a 40% probability of liftoff in March versus 30% at the start of this week. Nonetheless, Japan’s inflation backdrop and soft economic activity suggest the BOJ’s normalization process will be very gradual and that remains a headwind for JPY.

Japan also reported final February services and composite PMIs. Services rose four ticks from the preliminary to 52.9 while the composite rose three ticks to 50.6.

Australia reported final February services and composite PMIs and Q4 current account data. Services rose three ticks from the preliminary to 53.1 while the composite rose three ticks to 52.1. Elsewhere, the current account surplus widened to AUD11.8 bln SA vs. AUD5 bln expected and a revised AUD1.3 bln (was -AUD200 mln) in Q3. The terms of trade also increased 2.2% q/q.

Chinese Premier Li Qiang delivered his annual work report at the National People’s Congress. He set this year’s growth target at an ambitious 5% but was not backed up by a big fiscal stimulus push. The deficit-to-GDP ratio for 2024 was set at -3% (same target initially last year, which was eventually lifted to -3.8%). CNY3.9 trln special-purpose bonds for local governments will be issued (an increase of CNY100 bln over last year), while CNY1 trln of ultra-long special treasury bonds will be issued to address funding shortages facing some major projects. Of note, defense spending will be boosted 7.2%. This is the biggest increase in five years and is perhaps a not to subtle signal that China is preparing for any spike in tensions regarding Taiwan.

Caixin reported February services and composite PMIs. Services PMI came in at 52.5 vs. 52.9 expected and 52.7 in January, while the composite was steady at 52.5. Last week, Caixin manufacturing PMI came in at 50.9 vs. 50.7 expected and 50.8 in January. The PMIs add to evidence of stabilizing economic activity. However, a sustained pick-up in growth is unlikely without policies that shift growth from unproductive debt-fueled investment towards consumption.

Philippines February CPI ran hot. Headline came in at 3.4% y/y vs. 3.0% expected and 2.8% in January. It accelerated for the first time since September but remains within the 2-4% target range. At the last policy meeting February 15, the bank kept rates steady at 6.5% but the tone tilted less hawkish. It noted that “The risks to the inflation outlook have receded but remain tilted toward the upside” and added that it was “appropriate to keep policy settings unchanged in the near term.” Next meeting is April 4, and no change is expected then. Despite the CPI print, the swaps market is pricing in 25 bp of easing over the next three months and that seems unlikely.

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