Powell and BOJ Weigh on Dollar Ahead of NFP

March 08, 2024
  • Powell delivered a dovish surprise yesterday; February jobs data will be the highlight; Q1 growth estimates have been marked down but remain solid; Canada highlight will also be February jobs data; Peru delivered a hawkish surprise
  • The two-day ECB meeting ended with the expected hold; Lagarde stayed on message at her press conference; some ECB officials are suggesting the April meeting is live; Hungary reported February CPI
  • Reports suggest the BOJ will exit negative rates this month; Japan reported weak January household spending; Japan also reported January current account data; China reports February CPI and PPI Saturday local time

The dollar is soft ahead of the jobs report. DXY is trading at the lowest since mid-January near 102.751. Clean break below 102.282 sets up a test of the late December low near 100.617. The yen continues to outperform after reports suggesting March BOJ liftoff (see below), with USD/JPY trading at the lowest since February 2 near 146.90 and on track to test the February 1 low near 145.90. The euro continues to firm after the ECB decision (see below) and a break above $1.0970 sets up a test of the December 28 high near $1.1140. Sterling is trading at the highest since August 2023 near $1.2840 and is on track to test the late July 2023 high near $1.30. We remain frustrated by the current dollar weakness, as recent developments support our view that the Fed is unlikely to cut rates anytime soon. The U.S. data continue to come in mostly firmer and despite Powell’s dovish comments (see below), most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should recover after this current period of weakness. Today’s jobs data may be a spark for that move.


Powell delivered a dovish surprise yesterday. During his testimony before the Senate Banking Committee yesterday, he said that “We’re waiting to become more confident that inflation is moving sustainably at 2%. When we do get that confidence - and we’re not far from it - it’ll be appropriate to begin to dial back the level of restriction.” Before that, Powell’s testimony had been pretty standard but of course, Powell couldn't help himself and threw a dovish bone to the markets.

Elsewhere, Mester was more cautious. She said the Fed would cut rates later this year if the economy slows as expected. Mester stressed that the Fed will gain confidence as the inflation slowdown continues. There's a subtle difference between their wording regarding "confidence" but clearly, Powell is sending a much more dovish signal than Mester and the damage was done. Williams speaks today. At midnight tonight, the media embargo goes into effect and there will be no more Fed speakers until Chair Powell’s press conference March 20.

February jobs data will be the highlight. Consensus sees a 200k rise in NFP vs. 353k in January, while Bloomberg’s whisper number stands at 214k. We note that NFP has outperformed ADP the past six months. Unemployment is expected to remain steady at 3.7%. The pace of wage growth, a key driver of core services CPI inflation, will also generate a lot of attention. Average hourly earnings are expected to slow to 4.3% vs. 4.5% in January. If so, this would match the cycle lows from Q4.

Q1 growth estimates have been marked down but remain solid. The New York Fed’s Nowcast model is tracking Q1 growth at 2.3% SAAR and will be updated today. Its first Q2 growth estimate should be released at the same time. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.5% SAAR and will be updated next Thursday after the data.

Canada highlight will also be February jobs data. Consensus sees 20.0k jobs added vs. 37.3k in January, while the unemployment rate is seen rising a tick to 5.8%, which would match the cycle high. Clearly, labor market conditions have eased. Job vacancies have returned to near pre-pandemic levels and new jobs are being created at a slower rate. However, average hourly earnings have been sticky above 5% y/y since July, which is too high relative to productivity growth. These earnings are expected to slow to 5.1% y/y vs. 5.3% in January.

Peru central bank delivered a hawkish surprise. It kept rates steady at 6.25% vs. an expected 25 bp cut to 6.0%. This was the first hold since the easing cycle began last September. At the last meeting February 8, the bank cut rates 25 to 6.25% but since then, February inflation came in higher than expected at 3.29% y/y vs. 3.02% in January. It was the first acceleration since January 2023 and moves further above the 1-3% target range and so the central bank’s cautious approach to easing seems justified. Looking ahead, Bloomberg consensus sees the policy rate falling to 5.5% in Q2, 4.75% in Q3, and 4.5% in Q4. Another 50 bp of easing to 4.0% is seen in 2025.


The two-day European Central Bank meeting ended with the expected hold. The bank left interest rates steady and reiterated its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. It said that “The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.”

ECB President Christine Lagarde stayed on message at her press conference. Lagarde poured cold water on an imminent rate cut, noting “We did not discuss cuts for this meeting. But we are just beginning to discuss the dialing back of our restrictive stance.” She stressed that “We clearly need more evidence, more detail. We know that this data will come in the next few months. We will know a little more in April, but we will know a lot more in June.”

Updated macro forecasts were released. The ECB slashed its near-term inflation and growth forecasts, paving the way for looser policy settings. This is not surprising considering the economy stagnated in Q4, while inflation figures had recently been continuously below the ECB’s predicted levels. Of note, the ECB now projects inflation to average 2.3% in 2024 vs. 2.7% previously, 2.0% in 2025 vs. 2.1%, previously, and 1.9% in 2026 and was unchanged.

Some ECB officials are suggesting the April meeting is live. Villeroy said "It seems very likely to me that there will be a first rate cut in the spring," and added that "in Europe like elsewhere, spring is a season that goes from April to June 21.” With regards to rate cuts, Rehn said “We will come back to the matter in the upcoming April and June meetings based on the latest information.” Lastly, Simkus said “I go to each meeting open-minded. I can’t rule out a possibility of a cut in April, but the likelihood is low.” The market sees around 20% odds of a cut next month, which becomes fully priced in for June.

Hungary reported February CPI. Headline came in two ticks lower than expected at 3.7% y/y vs. 3.8% in January. This was the lowest since March 2021 and moves further within the 2-4% target range. At the February 27 meeting, the bank cut rates 100 bp to 9.0%, as expected, and said it still saw the policy rate at 6-7% by the end of June. Since then, the feud between the central bank and the government has intensified and weighed on the forint. This has led the bank to warn that the tensions could limit the scope of further easing. Next policy meeting is March 26. While ongoing disinflation justifies another large cut, the size will depend in large part on how the forint is trading.


Reports suggest the Bank of Japan will exit negative rates this month. Reuters newswire said a growing number of bank officials are leaning toward liftoff at the March 18-19 meeting due to rising confidence that the spring wage negotiations will yield strong results. Of note, Reuters reported that the BOJ may wait for more economic data before lifting rates, including its Q1 Tankan survey due out in April. The market sees over 66% odds of liftoff at the March 18-19 meeting, up from only 30% at the end of last week. Those odds rise to nearly 80% April 25-26 and fully priced in June 13-14. While wage and price pressures are picking up, it seems unnecessary for the bank to hike rates before the outcomes of the spring wage negotiations are known.

Japan reported weak January household spending. Spending came in at -6.3% y/y vs. -4.1% expected and -2.5% in December. This was the weakest reading since February 2021 and supports our view that the Bank of Japan should be very cautious about removing accommodation. We view this drop in USD/JPY as a buying opportunity for those that believe as we do that liftoff this month is unlikely.

Japan also reported January current account data. The adjusted surplus came in at JPY2.73 trln vs. JPY2.074 trln expected and JPY1.810 trln in December. However, the investment flows will be of more interest. The January data showed that Japan investors stayed net buyers of U.S. bonds (JPY3.14 trln) for the fifth time in six months. Japan investors turned net sellers (-JPY4 bln) of Australian bonds again and remained net sellers of Canadian bonds (-JPY199 bln) for the seventh straight month and for eleven of the past twelve months. Investors turned net sellers of Italian bonds (-JPY24 bln) again. Overall, Japan investors stayed total net buyers of foreign bonds (JPY2.53 trln) for the fifth time in six months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.

China reports February CPI and PPI Saturday local time. CPI is expected at 0.3% y/y vs. -0.8% in January, while PPI is expected to remain steady at -2.5% y/y. If so, headline would be positive for the first time since August. Still, deflation risks are likely to be felt throughout much of this year.

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