Factory Fallout Rocks Dollar

June 04, 2024

Factory Fallout Rocks Dollar

  • USD and Treasury yields are consolidating yesterday’s heavy losses. Crude oil prices remain under downside pressure.
  • The US April JOLTS job openings data is today’s highlight.
  • Benign Swiss inflation leaves the door open for the SNB to cut the policy rate again June 20.

USD and Treasury yields are consolidating yesterday’s heavy losses, which were triggered by the sharper contraction in US manufacturing activity. The ISM manufacturing index unexpectedly fell to 48.7 (consensus: 49.5) from 49.2 in April.

Whether this correction in USD continues or peters out will be determined by tomorrow’s ISM services data and Friday’s non-farm payrolls report. In May, US services activity is projected to improve 0.6pts to 51.0 and average hourly earnings are forecast to rise 0.3% m/m. If so, US interest rate expectations can adjust higher in favour of a firmer USD. Otherwise, weaker data would further weigh on USD and Treasury yields.

The US April JOLTS job openings data is released today (3:00pm London) and will likely show that labor demand is still strong but cooling. US job openings are trending lower but not enough to lead to a higher unemployment rate. The job opening rate remains above the 4.5% threshold consistent with a significant increase in the unemployment rate. Moreover, the ratio of job vacancies to people looking for work has come into better balance.

Crude oil prices extended yesterday’s drop and trading near a four-month low. The undershoot in crude oil prices was a delayed reaction to Sunday’s OPEC+ new plan to gradually unwinding some of its oil production cuts. Lower crude oil prices will accelerate the global disinflationary trend currently underway.

CHF weakened slightly on soft Swiss inflation. In line with consensus, headline CPI rose 0.3% m/m and remained at 1.4% y/y. Core CPI was cooler at 1.2% y/y (consensus: 1.3% y/y) for a second consecutive month. Overall, inflation remains well within the SNB’s stability range of 0 and 2%, suggesting the SNB can slash rates again on June 20. The swaps market price-in less than 50% odds of another rate cut in June.

EUR/USD rallied above 1.0900 on a weaker USD. Thursday’s ECB policy rate decision can offer EUR some additional near-term support. The ECB is widely expected to cut the key interest rate 25bps to 3.75%. However, the tone of the post-meeting press conference and the updated macroeconomic projections will likely further dampen expectations the ECB is about to embark on an aggressive easing cycle. Eurozone services inflation remains sticky above 4% y/y and leading indicators point to a modest improvement in economic activity.

GBP ignored the UK BRC same retail sales report. Same store sales recovered mildly by 0.4% y/y in May after falling 4.4% y/y in April. The first televised head-to-head debate between Rishi Sunak and Keir Starmer is today (9:00pm London). Check-out our UK election primer for more insights.

AUD/USD is struggling to gain upside momentum despite USD weakness largely because of lower iron ore prices. China’s property slump and high iron ore inventories continue to undermine iron ore prices. In Australia, the data released overnight points to soft underlying Q1 GDP growth driven in part by inventory restocking. In Q1, net exports dropped 0.9% q/q (consensus: -0.7% q/q) while inventories rose 1.3% q/q (consensus: +0.7% q/q).

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