The Greenback Remains Heavy Ahead of the Employment Report

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Marc Chandler
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Overview: The US dollar is weaker against all the G10 currencies today but the Swiss franc. The backdrop seems fragile even though a few regional bank shares have done better in after-hours trading and Apple's earnings were received well by the markets. Due to seasonal factors and other considerations, many are warning about a US jobs report, even though ADP's estimate surprised to the upside earlier this week. Equities were mixed in the Asia Pacific region, while Europe's Stoxx 600 is edging higher to pare this week's losses. Its bank index is snapping a three-day drop and is up about 1.5%. US equity futures are firmer, will see the jobs report before the opening. Despite a simply dreadful German factory orders report (-10.7%), European bonds are selling off. Yields are 6-8 bp higher and the 10-year Gilt yield is up nearly 10 bp.

The 10-year US Treasury yield is up 1-2 bp near 3.40%. The two-year yield has steadied (up 2 bp to 3.81%) after falling 35 bp over the past three sessions. Although emergency borrowing from the Fed fell last week, it seemed mostly a question of reallocating in light of the First Republic's takeover by JP Morgan. The Fed's balance sheet continued to shrink (QT), falling by nearly $59 bln in the week through Wednesday. The greenback has fallen against all the G10 currencies this week going into the jobs report. The Antipodeans are the strongest (1.75%-1.90%), while the euro is the weakest (~0.10%). The JP Morgan Emerging Market Currency Index is up about 0.4% in what could be the first back-to-back weekly gain since the end of March. After reaching nearly $2063 yesterday, gold is seeing profit-taking that is pushing it below to around $2037. Yesterday's low was near $2030.50. June WTI is snapping a four-day decline after reversing yesterday from a plunging to $63.65. It is up about 2% today and is knocking on $70.

Asia Pacific

Yesterday the Caixin manufacturing PMI confirmed the slippage back into contraction territory telegraphed by the "official" PMI. Today, Caixin reported growth in services slowed to 56.4 from 57.8. The "official" reading had also moderated to 56.4 from 58.2. The Caixin composite stands at 53.6, down from 55.0. China is restricting access to economic data, which makes it difficult to triangulate the high-frequency economic data for support or not. After China reported stronger than expected Q1 GDP, many economists revised up this year's growth prospects, but the disappointing PMI fanned speculation of a rate cut. The first opportunity may be on May 15, when the one-year medium term lending facility rate is set. It has been at 2.75% since it was shaved by 10 bp last August. We are a bit more skeptical of the urgency for a rate cut. Reports suggest spending over the May Day holiday was strong and the drop sharp drop in oil prices is a net positive for the world's largest importer. 

In its monetary policy statement earlier today, the Reserve Bank of Australia lowered its inflation and growth forecasts. It seems to be signaling that the recent hike may be the last as the new forecasts ae based on a 3.75% cash target rate, which now stands at 3.85%. The trimmed mean inflation is now seen at 6.0% in the 12-months through June, down from 6.25% seen in the previous forecast three months ago. It anticipates inflation falling to 4.0% by year-end (vs 4.25% previously). The new forecasts put GDP growth at 1.25% this year, down from 2.7% last year, with consumption slowing to 1.3% by the end of this year from 5.4% in 2022. 

Tokyo markets remained closed for the spring holidays and the yen is in a narrow range, consolidating this week's gains (~1.65%). The greenback peaked Tuesday slightly above JPY137.75, and pressured by sharply lower US rates, and fallen to JPY133.50 yesterday before settling near JPY134.50. Today, the dollar is in less than half a yen range (~JPY133.90-JPY134.30). There are options for nearly $1.4 bln at JPY133.50 that expire today. The Australian dollar showed no reaction to the new central bank forecasts that had been hinted at when the RBA hiked rates earlier this week. It approached a two-week high today near $0.6745 and took out the 200-day moving average (~$0.6730). It settled last week near $0.6615 and has risen every day this week, which it last did in the final week of 2022. The upper end of the two-month range is around $0.6800 and the daily momentum indicators are constructive. Initial support is seen in the $0.6700-20 area. The Chinese yuan is little changed today. The greenback is in a narrow range between roughly CNY6.9055 and CNY6.9155, inside yesterday's range. It settled near CNY6.9125 at the end of last week. Mainland markets were closed Monday-Wednesday. The reference rate was set at CNY6.9114 today compared with expectations (median in Bloomberg's survey) or CNY6.9121.

Europe

The ECB delivered the quarter-point hike that was widely expected, and by characterizing inflation "too high for too long", it was understood to confirm market expectations for another hike at the mid-June meeting. Lagarde was clear that the ECB was not pausing. The swaps market leans toward another hike in Q3. The managed reinvestment of the Asset Purchase Program (APP) is helping reduce the ECB's balance sheet by 15 bln euro a month, but starting in July it will stop the reinvestment of maturing proceeds entirely. This means a 25 bln euro reduction in bond buying a month. The maturing issues from the Pandemic Emergency Purchase Program (PEPP) will continue to be reinvested through the end of next year.

Separately, after Germany reported that March retail sales plunged 2.4% (median forecast in Bloomberg's survey was for a 0.4% gain), it was clear that there were downside risks to today's aggregate retail sales data. Eurozone retail sales fell by 1.2%, and small compensation was that the February decline of 0.8% was revised to -0.23%. Recall that consumer spending slid by 1.3% in France (the median in Bloomberg's survey was for a 0.5% increase). As we have seen with other recent data, the periphery is doing better than the core. Spanish retail sales rose 0.5% in March. Italy's was reported today, and it fell by 0.5%. Also, Germany shocked today with a whopping 10.7% collapse of factory orders. This is five-times the decline expected. The auto sector was particularly hard. Auto and part orders slumped 12.2%, which reflects a 7.3% decline in domestic orders and a 14.5% drop in foreign orders. Sharp declines were also report for computers/electronics (-7.9%) and engineering (-5.9%). Germany reports industrial production figures on Monday, and after today's dismal news, there is downside risk to the 1.6% decline economists project. 

The UK economy continues to show resilience. As we noted yesterday, the final reading of the April PMI (54.9) was unexpectedly revised higher from the preliminary estimate (53.9) and is the highest since last April. Separately, mortgage approvals rose to a five-month high in March and consumer credit rose more than expected. Split roughly evenly between households and businesses, nearly GBP11 bln was withdrawn from banks in March amid US and Swiss banking woes. Still, in local elections, the Tory Party was not rewarded for the economic improvement. All the results have not been tabulated, but among the first 1600 results, the Tories lost 200 seats, which seems be on pace with worst-case scenarios. Labour won more than half of those seats, and the Liberal Democrats made inroads into Tory territory in the south. 

The poor eurozone data hardly impacted the euro, which is holding above $1.1000 and trading well within yesterday's range (~$1.0985-$1.1090). It settled near $1.1020 last week. The 20-day moving average is near $1.0990 today, and although it had been penetrated on an intraday basis earlier this week, it has not closed below it since March 16. There are options for 1.7 bln euros at $1.10 that expire today. Sterling is trading firmly and reached almost $1.2635, its highest level since early last June, when it peaked near $1.2665. It finished last week slightly above $1.2565. After falling for the first two days of the week, it is advancing today for the third consecutive session. The BOE meets next week, and the resilience of both the economy and inflation will likely see a hawkish hike.

America

The Federal Reserve's June decision looks to be a function of three variable: inflation, labor market, and the extent that credit tightens. Today's data speaks the labor market and next week inflation. Bloomberg's survey found a median expectation for nonfarm payrolls to rise 182k after a 236k increase in March. The ADP estimate of private sector employment does not do a good job tracking the BLS estimate on a monthly basis, and after the methodological change recent announced, its tracking ability on a medium-term basis is an open question. Still, the ADP estimate of 296k was nearly twice the expectation, and some observers will say the whisper number (which seems like intuitive guesses) will be higher than the Bloomberg median of 156k for the private sector job growth. The unemployment rate is seen rising to 3.6% from 3.5% while hourly earnings are seen steady at 4.2% year-over-year. The participation rate is also seen unchanged at 62.6%. Federal Reserve Chair Powell was clear that from the Fed's point of view the labor market remains strong, and citing various measures, labor costs are in excess of what is consistent with the Fed's inflation target. We note that nonfarm payrolls increased by more than one million in Q1. That compares with 852k in Q4 22.

Canada also reports April jobs data. The median forecast in Bloomberg's survey is for an increase of 20k jobs. In Q1, Canada filled 206k posts, or which a little more than 170k were full-time positions. This is compares with 165k jobs (~183k full-time) in Q4 22. This is pretty impressive given that Canada's population is about an eighth of the US population. That said, the bar to get the Bank of Canada to renew is tightening cycle after announcing a "conditional pause" in January seems high and too high to be met by today's jobs report, even though it will not see another jobs report before it meets on June 7. The next report with the heft to impact expectations is the April CPI due May 16.

Some observers are attributing the recovery of the Canadian dollar to comments from Bank of Canada Governor Macklem who warned that inflation too high. However, he also noted that price pressures were easing in line with the central bank's forecasts. He said that its focus was on employment growth, wages, corporate pricing behavior and short-term inflation expectations. There was no adjustment in rate expectations in response but the 0.55% gain in the Canadian dollar was the most since late March. Follow-through CAD buying today has pushed the US dollar through CAD1.3500 for the first time in two weeks. The CAD1.3485 area corresponds to the halfway point of the US dollar's rally from the mid-April low near CAD1.3300. Some of the USD selling may be related to expiring options. The next important chart area is around CAD1.3450 and is also where the 200-day moving average is found. For its part, the Mexican peso is trading quietly, a little above six-year high set earlier this week. The greenback has steadied after being sold to MXN17.8315 in the middle of the week. To be anything of note, the US dollar needs to resurface above MXN18.0350, and ideally MXN18.08.