Market Briefing: Falling Rate Expectations Snap Dollar's Momentum
Equity futures and risk-sensitive currencies rose slightly last night after the US Senate passed compromise legislation designed to raise the debt ceiling. The ironically-named Fiscal Responsibility Act, which moved through the voting process with extraordinary speed, will suspend the statutory limit on federal borrowing until January 2024, averting a possible default without imposing major constraints on government spending. The measure is now headed to the president for signature.
But the real action came earlier in the day, when a series of data releases combined with increasingly-dovish Federal Reserve rhetoric to put Treasury yields and the dollar under pressure. Following Wednesday’s comments from Fed vice chair Philip Peterson, who said “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” the Institute for Supply Management reported its manufacturing purchasing manager index fell to 46.9 in May from 47.1 in April - the seventh consecutive month below the 50-mark that separates expansion from contraction. More worrying signals were evident below the headline, with new orders falling for a ninth straight month and overall order backlogs hitting the lowest levels since 2009. Philadelphia Fed President Patrick Harker later dropped the hammer, saying “It's time to at least hit the stop button for one meeting and see how it goes”.
Market-implied odds on a move at the June meeting tumbled from two-in-three to less than one-in-three, and slid across the front end of the curve. Investors are now positioned for a skip, hike, pause, and pivot by year end, and we’re looking forward to seeing the Toosie Slide added to the expected policy sequence.
This leaves the dollar on the verge of snapping a three-week winning streak going into the May payrolls report. To our knowledge, forecasts for the number of jobs created fall within a range between 100,000 and 250,000, with the median estimate near the 175,000 mark - and most economists think the unemployment rate will tick up to 3.5 percent from April’s 53-year low at 3.4 percent. A stronger-than-anticipated number could anchor rate expectations back upward, but we think Jerome Powell and Jefferson have succeeded in convincing markets of the merits of a pause, and investors will now focus on July as the next likely hike.
In contrast, the Canadian dollar is holding gains achieved during yesterday’s session, with rising monetary tightening odds intersecting with broad-based greenback weakness to push the exchange rate pair through stubborn resistance around the 1.35 mark. Although we still think caution is warranted, investors are increasingly convinced Canadian policymakers will respond to stronger-than-anticipated signs of economic momentum by delivering a final hike at Wednesday’s meeting - and there are certainly good arguments for doing so. Household spending, housing market activity, and inflation have all surprised to the upside in recent months, defying expectations for a debt-driven slowdown.
Also next week, the Institute for Supply Management’s services index is seen rising to 53.0 in May from April’s 51.9 as consumers increased spending on leisure and hospitality. The Reserve Bank of Australia is expected to deliver a hawkish hold, with growing weakness in retail sales and the housing market acting to reduce the monetary tightening impulse. A final revision in estimates for first quarter euro area gross domestic product - which could see the economy edge closer to technical recession after a negative print in fourth quarter 2022 - is likely to leave markets unmoved. But China’s aggregate financing data (timing unknown) could prove more meaningful, illustrating the degree to which government stimulus efforts are needed to prop up private demand.
USD Non-Farm Payrolls, May
USD Unemployment Rate, May
USD Labor Force Participation Rate, May
USD Baker Hughes Weekly Rig Count
CNY Caixin China Purchasing Manager Index Services, May
CNY Caixin China Purchasing Manager Index Composite, May
EUR S&P Global Eurozone Composite Purchasing Manager Index, May Final
USD S&P Global US Composite Purchasing Manager Index, May Final
CNY Trade Balance, May
AUD Reserve Bank of Australia Rate Decision
AUD Gross Domestic Product, Q1
USD Trade Balance, April
CAD Bank of Canada Rate Decision
USD Department of Energy Weekly Inventories
CNY Aggregate Financing, May
MXN Consumer Price Index, May
MXN Bi-Weekly Consumer Price Index
USD Weekly Jobless Claims
CAD Employment, May
USD Baker Hughes Weekly Rig Count