Dollar Treads Water Ahead of Key U.S. Data

May 27, 2021
  • Fed manufacturing surveys for May will continue to roll out; weekly jobless claims data will be watched closely; we get the first revision to Q1 GDP; Banco de Mexico minutes will be released
  • Germany reported soft June GfK consumer confidence; taper talk is hitting Polish bonds after yesterday’s weak QE auction
  • The U.S. and China held their first trade talk of the Biden era; BOK delivered a hawkish hold; crude oil futures are down a bit on the day after rising to highest level in a week on tighter inventory data and further signs of demand from the U.S.

The dollar is treading water ahead of key U.S. data today and tomorrow. DXY is trading sideways just above 90. The euro is poking above $1.22, while sterling is trading just above $1.41 after testing support there earlier today. USD/JPY is trading just above 109 but there has been now follow-through buying as the pair remains in narrow ranges on both sides of 109. Until we see stronger U.S. data and higher U.S. rates (both real and nominal), the greenback is likely to remain vulnerable. The 10-year yield is inching up to 1.59% currently, while the breakeven inflation rate is flat at 2.43%, pushing the real yield up to -0.84%.

AMERICAS

Fed manufacturing surveys for May will continue to roll out. Kansas City Fed is expected at 30 vs. 31 in April. So far, Richmond Fed came in at 18 vs. 17 in April, Philly Fed came in at 31.5 vs. 50.2 in April, and Empire survey came in at 24.3 vs. 26.3 in April. While there seem to be some downside risks to this month’s Fed surveys, the U.S. manufacturing sector remains in solid shape. Chicago PMI tomorrow will be another piece of the puzzle ahead of the ISM PMI readings next week. There are no Fed speakers today.

Weekly jobless claims data will be watched closely. Initial claims are expected at 425k vs. 444k last week, which was a new low for the pandemic and for the BLS survey week containing the 12th of the month. The drop in clams point to a solid NFP number for May, with consensus currently at 620k vs. 266k in April. Obviously, this is subject to change as new clues come in. Of note, continuing claims are expected at 3.68 mln vs. 3.751 mln last week. These are reported with a 1-week lag and so this week’s reading will be for the BLS survey week. It’s clear from the April jobs report that the improvement in the U.S. labor market has entered into an uneven and unpredictable phase, but a 620k gain would go a long way.

We get the first revision to Q1 GDP. Consensus sees growth picking up a tick to 6.5% SAAR. For Q2, the U.S. growth outlook has been cut but still remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 10.1% SAAR vs. 10.5% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 4.6% SAAR vs. 4.9% previously. Of note, Bloomberg consensus is in between those two at 9.4% growth in Q2, easing to 6.8% in Q3 and 4.8% in Q4, all in SAAR terms. April durable goods orders (0.8% m/m expected) and pending home sales (0.5% m/m expected) will also be reported.

Banco de Mexico minutes will be released. The bank voted unanimously on May 13 to keep rates steady 4%. Last week, Deputy Governor Irene Espinosa said there’s no room for further easing, and that the bank may eventually need to start withdrawing stimulus if inflation pressures remain elevated. Minutes will be watched closely for signs that other MPC members are following Espinosa’s more hawkish line. Mexico mid-May CPI was reported this week, with headline inflation coming in at 5.80% y/y vs. 5.66% expected and 6.05% in mid-April, still well above the 2-4% target range.

EUROPE/MIDDLE EAST/AFRICA

Germany reported soft June GfK consumer confidence. It came in at -7.0 vs. -5.2 expected and a revised -8.6 (was -8.8) in May. Earlier this week, Germany reported firm May IFO business sentiment. The headline rose to 99.2 vs. 98.0 expected and a revised 96.6 (was 96.8) in April. Both expectations and current assessment rose sharply to 102.9 and 95.7, respectively, with expectations up nearly four full points. German bonds yield have been falling back deeper into negative territory in recent days to -0.20% currently after peaking last week around -0.10%, though this looks to be a part of a larger global move lower in yields.

Taper talk is hitting Polish bonds after yesterday’s weak QE auction. Polish bond yields jumped after the National Bank of Poland bought PLN2 bln ($540 mln) of notes at its QE auction, less than half its offer to purchase despite getting PLN6.8 bln in bids. The yield on benchmark 5-year paper rose 5 bp yesterday and another 5 5p today to 1.27% on rising concerns that the central bank is preparing to taper QE. The surprise move came as the central bank is coming under pressure to hike rates to help limit inflation, which at 4.3% y/y is well above the 1.5-3.5% target range. Governor Glapinski said earlier this month the QE would first stop before a hike is seen, which he doesn’t expect until at least early 2022. Markets are particularly sensitive to the notion that Poland may be falling behind the curve after Hungary and Czech Republic flagged outright rate hikes next month.

ASIA

The U.S. and China held their first trade talks of the Biden era. The language coming out of the talks sounded constructive, even if tempered. However, there is nothing yet to suggest a material change in direction. Indeed, the continued appreciation of the CNY, as seen by yet another strong fixing to a 5-year high, supports this view. That said, news that U.S. is once again looking into the possibility that the coronavirus originated from a lab in China provide a new risk vector for two sides. Furthermore, Biden’s Asian expert on the National Security Council Kurt Campbell warned that “The period that was broadly described as engagement has come to an end,” adding that “the dominant paradigm is going to be competition.” This should be interpreted as a signal that the Biden administration is very unlikely to be “soft” on China.

The Bank of Korea delivered a hawkish hold. Rates were kept on hold at 0.5% as expected. However, Governor Lee said the bank is preparing for an “orderly” exit from its record-low interest rate at some point as the economy recovers. To perhaps emphasize his point, the BOK released strong upward revisions to its growth forecasts. GDP is expected to grow 4% this year, up from 3% in the February forecast. Next year’s forecast was boosted as well, largely on improved external demand. The 2021 inflation forecast was revised higher by 0.5 ppts to 1.8%. Markets assume the bank will start hiking sometime next year. We agree and yet we don’t think they will be in too much of a hurry. Indeed, Governor Lee made it clear that policy will remain accommodative “for a while.” The won has had an unimpressive performance so far this year, down 3% against the dollar, and it has lagged most of its Asian peers on the month (-0.5%).

COMMODITIES AND ALTERNATIVE INVESTMENTS

Crude oil futures are down a bit on the day after rising to highest level in a week on tighter inventory data and further signs of demand from the U.S. The improved pandemic outlook in the U.S. ais raising hopes for a strong driving season over the summer, as seen by rising gasoline demand. Data from the DOE showed crude inventories falling by 1.7 mln barrels last week, double the forecast. On the other hand, it seems like there has been some progress in the multi-lateral talks with Iran. Removal of sanctions against the regime would translated into new source of global oil supply. The WTI front-month future is trading at $65.75 per barrel, down 0.6% on the day after four consecutive sessions of gains.

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