Dollar Treads Water Ahead of Powell

December 01, 2023

Win Thin

Fed Chair Powell’s two speaking engagements today will be very important; we get two updated estimates for Q4 GDP growth; November ISM manufacturing PMI will be the highlight; Canada highlight will be November jobs data
Final eurozone November manufacturing PMIs firmed modestly; ECB and BOE easing expectations have picked up; BOE MPC member Greene remains hawkish
Japan reported solid October labor market data; Caixin reported firm November manufacturing PMI; Korea reported mixed November trade data

The dollar is treading water ahead of Fed Chair Powell. DXY is trading slightly lower near 103.387 after this week’s bounce ran out of steam at the 200-day moving average near 103.595 yesterday. The euro is trading flat near $1.0885 while sterling is trading higher near $1.2645. USD/JPY is trading flat near 148.15 despite solid labor market data (see below). Some Fed officials are starting to push back against the dovish Fed narrative, but today’s two speaking appearances today will be very important (see below). That said, it will likely take a string of firm U.S. data to truly challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow at or above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. That said, the dollar remains vulnerable until we see a shift in market expectations for the Fed and that may be a 2024 story.

AMERICAS

Fed Chair Powell’s two speaking engagements today will be very important. While other Fed policymakers have started to push back against the dovish Fed narrative, Powell has remains largely silent. The media embargo for the December 12-13 FOMC meeting goes into effect tonight at midnight and so Powell has a golden opportunity to try and reset market expectations. Given how much financial conditions have loosened since the November 1 FOMC decision, we believe it would be irresponsible of Powell not to inject a much-needed dose of reality to the markets, which continue to price in a huge pivot in 2024. WIRP suggests no change this month but after that it’s all about the cuts. There are 10% odds of a cut January 31, rising to 55% March 20 and fully priced in for May 1 vs. June 12 at the start of this week. Nearly five cuts are priced in by end-2024.

We get two updated estimates for Q4 GDP growth. The Atlanta Fed’s GDPNow model is tracking Q4 at 1.8% SAAR vs. 2.1% previously and the next update will come today after the data. October construction spending (0.3% m/m expected) and November vehicle sales (15.5 mln annual rate expected) will be reported. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.2% SAAR and the next update will also come today. Despite the Fed’s tightening campaign, the economy continues to grow at or above trend at a time when below trend growth is needed to limit inflation. Financial conditions remain too loose.

November ISM manufacturing PMI will be the highlight. Headline is expected at 47.8 vs. 46.7 in October. Keep an eye on employment and prices paid, which are expected to rise from October to 47.2 and 45.9 in October, respectively. Yesterday, Chicago PMI came in very strong at 55.8 vs. 46.0 expected and 44.0 and was the highest since May 2022. ISM services PMI will be reported next Tuesday and is expected at 52.5 vs. 51.8 in October.

Canada highlight will be November jobs data. Consensus sees a 14.0k gain in jobs vs. 17.5 k in October, while the unemployment rate is seen rising a tick to 5.8%. If so, the rate would be the highest since December 2021 and nearly a full percentage point above the 4.9% cycle low in mid-2022. The labor market is loosening modestly and should keep the Bank of Canada on hold for now. However, markets are getting ahead of themselves and pricing in an imminent easing cycle. WIRP suggests nearly 10% odds of a rate cut December 6, then rising over the course of Q1 to around 66% March 6 and then fully priced in for April 10 vs. June 5 at the start of this week. Four cuts are priced in by next October. This seems very unlikely. November S&P Global manufacturing PMI will also be reported today.

EUROPE/MIDDLE EAST/AFRICA

Final eurozone November manufacturing PMIs firmed modestly. Headline came in at 44.2 vs. 43.8 preliminary and was the highest since May but still well below the 50 boom/bust level. Looking at the country breakdown, both Germany and France improved three ticks from the preliminary to 42.6 and 42.9, respectively. Italy and Spain reported for the first time and came in at 44.4 and 46.3, respectively. Final eurozone services and composite PMIs will be reported next Tuesday.

European Central Bank easing expectations have picked up. WIRP suggests 5% odds of a cut December 14, rising to 15% January 25. After that, a cut is about 60% priced in for March 7 and fully priced in for April 11 vs. June 6 at the start of the week. A fifth cut by the end of next year is now getting priced in. Elderson, de Cos, and Lagarde speak today.

BOE MPC member Greene remains hawkish. She said “Doing too little might be a greater risk only in that it suggests that inflation might persist for longer, and we could end up having to do even more than to lean against that inflation in the end, which could push the economy into greater slowness. I think that’s the worst option.” Greene warned that current conditions in the U.K. suggest that both the natural rate of unemployment and r* may have risen over time, which means that “for a given level of interest rates, this would indicate policy is less restrictive than we’d thought.” Greene was one of the three dissents in favor of a hike at the November 2 meeting and so her hawkishness is no surprise,

Yet BOE easing expectations continue to pick up. WIRP suggests no odds of a hike December 14, rising modestly to top out near 10% February 1. After that, rate cuts are priced in with the first one about 70% priced in for June 20 vs. August 1 at the start of this week and fully priced in for August 1 vs. September 19 at the start of this week.

ASIA

Japan reported solid October labor market data. Unemployment fell a tick to2.5%, while the job-to-applicant ratio rose a tick to 1.30. This was the second straight month that unemployment has fallen but this was the first rise in the job-to-applicant ratio since December. October cash earnings will be reported next Friday but the modest tightening in the labor market is not expected to have much impact on wage growth, which remains weak overall. Policymakers have stressed that next spring’s round of wage negotiations will be very important in terms of normalizing policy. Bank of Japan liftoff expectations continue to get pushed out. At the end of September, the market was pricing in liftoff in March; by early November, it was seen in April and now liftoff is seen in June.

Caixin reported firm November manufacturing PMI. Headline came in at 50.7 vs. 49.6 expected and 49.5 in October. Caixin reports services and composite PMI next Tuesday. We remain skeptical of any signs of recovery in China given the very modest measures taken so far. Of note, Australia’s composite PMI fell to 46.4 in November, the lowest since August 2021, which suggests very little impact from China stimulus.

Korea reported mixed November trade data. Exports came in at 7.8% y/y vs. 5.0% expected and 5.1% in October, while imports came in at -11.6% y/y vs. -8.6% expected and -9.7% in October. This was the second straight month of positive export growth, though the gain was led in part by low base effects. Of note, there was a 24.7% y/y gain in shipments to the U.S. that more than offset a -0.2% drop in shipments to China. The U.S. remains the driver of global growth while regional trade and activity is likely to remain restrained by China’s sluggishness.

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