Greenback Feeling Blue
- Money market expectations for an aggressive Fed easing cycle continues to weigh on USD.
- The spotlight today is on relative growth momentum with the release of the August PMI readings for the EU, UK, and US.
- Watch-out for the ECB Q2 negotiated wage settlements data and Account of the ECB July meeting.
USD made fresh year-to-date lows yesterday following an outsized downward adjustment to annual non-farm payroll gains and dovish FOMC July meeting minutes. USD has since bounced back slightly, US equity futures equity are largely flat, and Treasury yields are holding near recent lows.
The US labor market has not been as strong as the payroll data have been indicating. The US Bureau of Labor Statistics (BLS) preliminary estimate of the benchmark revision indicated a downward adjustment to March 2024 total nonfarm employment of -818k (-0.5%). This was bigger than the range of annual benchmark revisions over the last 10 years of between +/- 0.1 and 0.3% of total nonfarm employment.
Unsurprisingly, most Fed officials are ready to lower the funds rate. The FOMC July 30-31 meeting minutes confirmed Fed Chair Jay Powell’s post-meeting guidance. According to the minutes “the vast majority” of participants observed that “it would likely be appropriate to ease policy at the next meeting [September 18]...A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased.”
Meanwhile, “several” participants “observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting [July] or that they could have supported such a decision.” Powell already flagged this out during his post-FOMC July meeting press conference noting that “there was a real discussion back and forth of what the case would be for moving at this meeting.”
Fed funds futures have firmed up bets for 100bps of total easing by year end. For September, Fed funds futures continue to imply a decent risk of a 50bps cut. We are sticking to our view that the Fed does not need to rush to lower interest rates as rapidly as money market anticipate. US domestic demand is robust, the labor market remains relatively healthy, underlying inflation is sticky, and financial conditions are still loose. Moreover, a jumbo cut in September would send the wrong signal to the market as it would suggest serious issues with the US economic/financial situation.
Powell will have an opportunity tomorrow during his highly anticipated speech to lean against aggressive market pricing for Fed funds rate cuts. If so, a relief rally in USD would materialize and Treasuries would sell off. Check-out our Jackson Hole Economic Symposium Preview for more details.
In the meantime, USD will take its cue today from the August PMI readings as it will show whether growth momentum still favors the US economy. The US composite PMI (2:45pm London) is expected to drop 1.1pts to 53.2. The Eurozone composite PMI (9:00am London) is expected to dip 0.1pts to 50.1. The UK composite PMI (9:30am London) is forecast to rise 0.2pts to 53.0. Stronger US growth momentum versus other major economies can offer USD support via wider bond yield spreads. In contrast, weaker US growth momentum can further weigh on USD in the near-term.
The US weekly jobless claims will also be closely watched because the reading will be for the BLS survey week containing the 12th of the month (1:30pm London). The other US data highlights today include existing home sales (3:00pm London) and August Kansas City Fed manufacturing index (4:00pm London).
EUR/USD broke above its December 28 2023 high at 1.1139, paving the way for an overshoot to 1.1276 (the July 18 2023 high). Watch-out today for the ECB Q2 negotiated wage settlements data (10:00am London). Negotiated wage growth picked up to 4.7% y/y in Q1 vs. 4.5% in Q4 and matched the record high set in Q3 2023. The ECB projects wages to average 4.8% over 2024 and the forward-looking ECB wage growth tracker suggests wage pressures are moderating. Nonetheless, faster wage growth in Q2 can trigger a modest upward adjustment to ECB rate expectations in favor of EUR. Later today, the Account of the ECB July rate decision will likely offer more insights around the debate for a September ECB rate cut (12:00pm London).
USD/JPY remains heavy near 145.00. The Jibun Bank August Flash Japan composite PMI showed business activity expanded at the fastest pace since March 2023. The composite PMI rose to 53.0 in August from 52.5 in July driven by a pick-up in services sector activity and easing contraction in manufacturing activity. Regardless, tomorrow’s Japan July CPI print and BOJ Governor Kazuo Ueda parliamentary testimony will offer better clues about the extent of the BOJ tightening cycle.
AUD/USD is consolidating around recent highs. The Judo Bank Flash Australia composite PMI returned to growth in August printing at 51.4 from 49.9 in July. The details showed services sector activity expanding at the fastest pace in three months while the contraction in manufacturing activity eased to a three-month high. The data supports the RBA’s hawkish policy guidance.
NOK ignored Norway’s disappointing Q2 GDP print. Mainland GDP grew 0.1% in Q2 from a downwardly revised 0.1% rise in Q1 (prior: 0.2%). Household spending was the major growth tailwind over Q2 reflecting increased consumption of cars. We expect the Norges Bank to lay the groundwork for a rate cut later this year at its September 19 meeting. Inflation in Norway is tracking below the Norges Bank’s forecasts.
