Fed comments offer support for the US dollar but top-tier data will be key

USD: Hawkish Bowman less impactful if jobs market slows

The dollar yesterday recouped some of the losses from the previous session as the comments from Fed Presidents Daly and Goolsbee on Monday were offset by the comments yesterday by Fed Governor Bowman. Governor Bowman was not at all reluctant to provide specifics in expressing her view which was that the inflation outlook was too uncertain to consider a rate cut this year. She was essentially repeating a view already known which indicated the recent more benign inflation data had not been enough to alter her thinking on the timing of a first rate cut. Given her belief that inflation was likely to “remain elevated for some time” it is understandable for her to hold such a hawkish view. Michelle Bowman is a Governor and hence her comments hold more weight – she votes every year – but Bowman is one of the most hawkish members of the FOMC and therefore this tone is not surprising. We know there are four FOMC members who hold the view of no rate cuts this year, so again this is no surprise. Governor Lisa Cook also spoke yesterday and her comments were more balanced only stating that a rate cut would be needed “at some point”. She too seemed cautious though given her view that inflation would only “more sideways” through the remainder of the year. Still, Governor Cook also stated that inflation would “move more sharply lower” next year which would be surely consistent with rate cuts this year.

But the back-and-forth in Fed rhetoric that sees the dollar net-net broadly unchanged highlights two facts – firstly that there is a wide spread of views on the FOMC over the speed in which inflation will fall and secondly, that the real power to move the markets will be the data and not Fed official comment. That was underlined by the market reaction to the CPI data and the FOMC dropping two rate cuts from the median dot profile – yields still fell and the market today still has more priced in terms of rate cuts through to the end of next year than prior to the release of the CPI and dot profile.

So in our view, this week is more about consolidation and we are unlikely to get any big move until we get into next week. The PCE inflation data this week is unlikely to surprise much given we know some of the components already. Next week will see market reaction to the first round of the parliamentary elections in France, the ISM data and the other jobs data culminating with the NFP on Friday. In the context of the first week of the month being so important for jobs data, the comment from Fed President Daly on Monday about possibly reaching an “inflection point” in the labour market, implying increased risks of downside surprises could make next week even more important. Daly’s comment may be an indication of a number of FOMC members being willing to pivot on the first signs of weak labour market data. Goolsbee referencing policy being too restrictive is possibly another sign of how FOMC members could quickly shift their stance if the data justified it.

In the meantime, the US dollar will potentially strengthen further, especially if RN performs well on Sunday. However, there will be limits to any gains until we get through next week and clear the risk of the NFP data finally starting to reflect what most other labour market data is indicating – that the jobs market is weakening.

WEAKER CORRELATION BETWEEN 2-YR US-DXY WEIGHTED SPREAD & USD

Source: Macrobond & Bloomberg

AUD: RBA could be compelled to hike again

Today’s inflation data from Australia will be very concerning for the RBA and could well tilt a decision in favour of a hike when it next meets on 6^th August. YoY CPI in May accelerated from 3.6% to 4.0% while the trimmed mean measure increased from 4.1% to 4.4%, both stronger than expected. The 2-year government bond yield has surged 18bps on the back of the data with OIS pricing on RBA policy changes now indicating a greater than 50% probability of a 25bp hike by September. Governor Bullock at the last policy meeting on 18^th June indicated the RBA’s bias was leaning in favour of a hike given a hike was discussed at the meeting while there was no discussion on the possibility of a rate cut.

That said, Governor Bullock also played down the prospect of a hike and tried to relay a bias that was at least very close to balanced by highlighting concerns over weak economic data and acknowledging that the stance of monetary policy was already restrictive.  

But inflation data is of course key and this upside surprise will be difficult for the RBA to ignore. The data also comes at a time when the government will be adding fiscal stimulus to the economy according to RBA analysis. Additionally, Governor Bullock confirmed that the RBA needed more “comprehensive” information on inflation in order to determine the next move.

The one note of caution on concluding the need for the RBA to hike is that there is no RBA meeting in July with the next meeting not until 6^th August and by then we will have had the Q2 CPI data released on 31^st July. If activity data is uniformly weak in the period ahead and the Q2 CPI data is weak, it could allow the RBA to hold off. But a weak Q2 CPI report is of course less likely now after today’s inflation data but nonetheless there is the potential for the RBA to hold off. Still, from an FX perspective this is supportive of yields and argues for a longer period of time before the RBA considers a cut which reinforces our view of a gradual move higher for AUD/USD.

AUD/USD SUPPORT AS FRONT-END YIELDS SURGE ON STRONG CPI

Source: Bloomberg & Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	09:00	ZEW Expectations	Jun	--	18.2	!!
UK	11:00	CBI Distributive Trades Survey	Jun	1	8	!
FR	11:00	France Jobseekers Total	--	--	2,775.4K	!
EC	11:40	ECB's Lane Speaks	--	--	--	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	0.9%	!
US	13:30	Building Permits (MoM)	--	-3.8%	-3.0%	!
US	13:30	Building Permits	--	1.386M	1.440M	!!
CA	13:30	Manufacturing Sales (MoM)	--	--	1.1%	!
CA	13:30	Wholesale Sales (MoM)	--	--	2.4%	!
SZ	14:00	SNB Quarterly Bulletin	--	--	--	!
US	15:00	New Home Sales	May	636K	634K	!!!
US	15:00	New Home Sales (MoM)	May	--	-4.7%	!!
US	18:00	5-Year Note Auction	--	--	4.553%	!!
US	21:30	Fed Bank Stress Test Results	--	--	--	!!

Source: Bloomberg