Weakening US data to weaken the US dollar further

USD: Weaker growth concerns increase

Each day brings more data that suggests the US economy could be weakening more abruptly than assumed only recently. The ISM Manufacturing Index revealed on Monday that every sub-index was below the 50-level and this was followed yesterday by the JOLTS data that revealed a 632k drop in job openings in February. It was the second consecutive large drop – indeed the 2mth decline in job openings of 1.3mn was the largest on record when the labour market turmoil during covid is excluded. With the ISM Manufacturing Employment Index down at 46.9, there is growing evidence that the positive demand in the US labour market is now beginning to fade. If that is confirmed on Friday by a weaker than expected non-farm payrolls report it will likely result in a more substantial depreciation of the dollar.

The data also precedes the banking sector turmoil that took place in March. The potential tightening of credit conditions fuelled by that is likely to see another hit to real economic activity. Indeed, it is worth noting that credit conditions were already tightening significantly prior to the March banking sector turmoil that may explain the weakness in the data we are seeing for February. The Senior Loan Officer Opinion Survey from the Federal Reserve for January released on 6^th February revealed credit conditions that had already become the tightest since the Global Financial Crisis when the covid period is excluded. The change in overall credit conditions for commercial and industrial loans to all-sized firms hit a level of tightness consistent with all the four previous recessions back to the 1990-91 recession. The area of the US economy that has held up best continues to be the labour market but we may be on the cusp of that changing.

From an FX perspective we see the US dollar suffering most against the core G10 currencies. The Swiss franc, yen and euro remain three of the top four best performing G10 currencies (the pound is the other) and if yields in the US decline further that’s where we would expect to see the bigger moves. EUR/USD continues to lag where yields imply it should be trading – somewhere between 1.1000-1.1500. The 2-year EZ-US swap spread closed yesterday at -86bps, close to recent highs not seen since October 2021. If that level can be sustained over the short-term, we could very soon see EUR/USD back toward the middle of that 1.1000-1.1500 range.

RECORD 2MTH DECLINE IN JOB OPENINGS (EXCL COVID PERIOD)

Source: Macrobond & MUFG GMR

USD: Central banks stay hawkish despite growth risks

The evidence of slowing economic growth emerging in the US and the risks of a pull-back in banking sector lending in the major economies do not appear to be altering the behaviours of central banks. RBA Governor Lowe today warned that the decision to pause this week should not be seen as the RBA ending its tightening cycle, repeating the guidance from the statement that further tightening “may well be needed”. The RBNZ today surprised the markets by hiking its key policy rate by 50bps, taking the key rate to 5.25%. This despite GDP contracting by 0.6% in Q4 2022 in contrast to the 0.7% growth expected by the RBNZ. The RBNZ added it expects a “continued slowing in domestic demand” which certainly implies the RBNZ being happy to hike into recessionary conditions. Is inflation in New Zealand that problematic? The 2-year inflation expectation fell to 3.3% in the latest data release and further sharp declines seem likely. NZD has advanced today but we continue to expect underperformance later this year as growth in New Zealand slows more markedly.

Tough-talking rhetoric was also evident elsewhere. Cleveland Fed President Loretta Mester stated yesterday that the fed funds rate needs to move “somewhat further into restrictive territory” suggesting she will support another 25bp hike at the meeting in May. As stated above, the jobs data on Friday and then the CPI data on 12^th April will be crucial in determining whether the Fed have the need to act again in May.

Finally, BoE Chief Economist Huw Pill gave a speech in Switzerland last night where he focused a lot on the “persistence of inflation” as an aspect that could give justification to further increases in the policy rate. The BoE is now concerned by the persistence of “intrinsic” inflation as opposed to “extrinsic” inflation. Intrinsic would be more related to inflation expectations persisting and domestically generated inflation through the labour market becoming problematic. The speech did suggest to us that the BoE is trying to send a message that falling inflation in of itself may not be good enough to pause and how fast inflation falls back will be key.

The markets took this as a signal of further hikes to come. However, the rates market did not respond much with the OIS market still implying around 35bps of tightening to reach the terminal rate. GBP/USD has seen bigger moves than in rates. This looks partly technical in nature. The break of around the 1.2450 level yesterday took out the highs from December and January and took cable back to levels not seen since June 2022. With UK sentiment improving relative to the extreme negativity last year, there remains some scope for GBP to outperform EUR which would mean GBP/USD moving toward the 1.3000 level, which 12mths ago was consistent with EUR/USD at 1.1000.

2YR SWAP SPREAD WILL HELP EUR/USD HIGHER

Source: Macrobond

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
FR	08:50	French S&P Global Composite PMI	Mar	54.0	54.0	!!
FR	08:50	French Services PMI	Mar	55.5	55.5	!!
GE	08:55	German Composite PMI	Mar	52.6	52.6	!!
GE	08:55	German Services PMI	Mar	53.9	53.9	!!!
EC	09:00	S&P Global Composite PMI	Mar	54.1	54.1	!!!
EC	09:00	Services PMI	Mar	55.6	55.6	!!!
UK	09:30	Composite PMI	Mar	52.2	52.2	!!!
UK	09:30	Services PMI	Mar	52.8	52.8	!!!
IT	10:00	Italian Retail Sales (YoY)	Feb	--	6.2%	!
IT	10:00	Italian Retail Sales (MoM)	Feb	--	1.7%	!
NO	10:00	House Price Index (YoY)	Mar	--	-0.30%	!
UK	10:15	MPC Member Tenreyro Speaks	--	--	--	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	2.9%	!
US	13:15	ADP Nonfarm Employment Change	Mar	200K	242K	!!!!
US	13:30	Trade Balance	Feb	-69.00B	-68.30B	!!
CA	13:30	Trade Balance	Feb	1.80B	1.92B	!!
US	14:45	S&P Global Composite PMI	Mar	53.3	53.3	!!
US	14:45	Services PMI	Mar	53.8	53.8	!!
US	15:00	ISM Non-Manufacturing Business Activity	Mar	--	56.3	!!!
US	15:00	ISM Non-Manufacturing PMI	Mar	54.5	55.1	!!!
US	15:00	ISM Non-Manufacturing Prices	Mar	--	65.6	!!
US	17:05	Dallas Fed PCE	Feb	--	6.30%	!

Source: Bloomberg