Dollar Under Pressure as Eventful Week Begins

November 04, 2024

Win Thin

Polls are tightening ahead of U.S. elections tomorrow; the jobs report Friday did not do the dollar any favors; growth remains solid in Q4
ECB easing expectations have been pared back after last week’s firm data; final October eurozone manufacturing PMIs were reported; Turkey reported October CPI
China’s NPC Standing Committee meeting began today and ends Friday
Oil prices are moving higher after OPEC+ announced a delay in its planned output increase

The dollar is coming under pressure as an eventful week begins. DXY is trading lower near 103.694 due to some combination of soft jobs data and some unraveling of the Trump Trade (see below). The yen is outperforming, with USD/JPY trading lower near 151.65. Sterling is stabilizing after last week’s selloff and is trading higher near $1.2975, while the euro is trading higher near $1.0910 on the broad dollar losses today. Looking through the distortions and noise, we believe the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Recent data have showed that the labor market remains firm and supportive of continued robust consumption that is fueling above-trend growth. While the Fed is likely to cut rates 25 bp this week, we believe it will continue to take a cautious tone going forward.

AMERICAS

The dollar is starting the week off on its back foot as polls tighten ahead of U.S. elections tomorrow. The big surprise over the weekend was a poll by the Des Moines Register and Mediacom that showed Harris with a 47-44% lead over Trump in Iowa and a solid 20 point edge with women in that state. The poll also showed that likely independent voters, who have supported Trump in every other Iowa Poll this year, now favor Harris 46-39%. The Poll delivered a blow to the “Trump Trade” because Trump won Iowa by solid margins in 2016 and 2020. We doubt that ruby red Iowa will flip blue this week, but the fact that it’s so close sells trouble for Trump in the battleground states. Please see our special piece here for an in-depth analysis of what the elections could mean for financial markets.

The jobs report Friday did not do the dollar any favors either. Looking through the distorted jobs data, however, we believe most indicators show the U.S. economy growing rather robustly and the labor market remaining in solid shape. Our divergence theme will be tested in the coming months. Before the following FOMC meeting December 17-18, we get one more jobs report and two more CPI, PPI, and retail sales reports. Fed Funds futures are pricing in over 80% odds of a December cut, while the swaps market is pricing in close to 50% odds.

Growth remains solid in Q4. The Atlanta Fed GDPNow model's initial estimate for Q4 GDP stands at 2.3% SAAR and will be updated tomorrow. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.0% SAAR and will be updated Friday, while its initial forecast for Q1 2025 will come at the end of November. Bottom line: the US economy continues to grow at or above trend as we move into 2025. Interestingly, the recession signal triggered by the Sahm Rule in July has now been un-triggered. September factory orders are the only U.S. data today.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank easing expectations have been pared back after last week’s firm data. The swaps market is now pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 2.0% vs. 1.5% in mid-October. There will be plenty of ECB speakers this week. Nagel and Holzmann speak today.

Final October eurozone manufacturing PMIs were reported. Headline rose a tick from the preliminary to 46.0. Looking at the country breakdown, Germany improved four ticks to 43.0 and France was steady at 44.5. Italy and Spain reported for the first time and came in at 46.9 and 54.5, respectively. Services and composite PMIs will be reported Wednesday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 50.0 and 56.3, respectively. Despite the firmer survey data, the eurozone outlook remains weak.

Turkey reported October CPI. Headline came in at 48.58% y/y vs. 48.30% expected and 49.38% in September, while core came in at 47.75% y/y vs. 47.80% expected and 49.10% in September. Headline was the lowest since July 2023 but the large 2.88% m/m increase was little changed from 2.97% in September and suggests inflation progress is stalling. At the last meeting October 17, the central bank kept rates steady as expected at 50.0% and delivered a hawkish message as it expressed concerns about “uncertainty regarding the pace of improvement in inflation.” Next meeting is November 21 and rates are likely to be kept steady again. Forward guidance will be key in determining whether a cut at the December 26 meeting is possible. The central bank publishes its quarterly inflation report Friday and the updated forecasts will be key. In the last report back in August, the bank kept its end-2024 and end-2025 inflation forecasts unchanged at 38% and 14%, respectively. The market is pricing in 450 bp of easing over the next three months.

ASIA

China’s National People’s Congress Standing Committee meeting began today and ends Friday. Policymakers are expected to unveil the details of their fiscal stimulus pledge following the meeting. Reuters reported that China is looking to approve over CNY10 trln (8% of GDP) of additional borrowing in the coming years to support economic activity. This is higher than the CNY6 trln (5% of GDP) figure reported by Caixin a few weeks ago. For reference, China’s 2008 fiscal bazooka totaled CNY4 trln (12.5% of GDP). The prospect of a bigger fiscal thrust out of China can offer commodity sensitive currencies support. However, piling on more debt to support a burst property bubble is not the long-term solution China needs to address its huge debt overhang and rising deflation risks.

COMMODITIES

Oil prices are moving higher after OPEC+ announced a delay in its planned output increase. Rather than December, the group pushed it back by a month to January. Also adding to the oil rally are threats by Iran of a “crushing response” against Israel, with intelligence reports suggesting it would likely happen after the U.S. elections tomorrow. Stay tuned.

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