FX Daily: Focus fixated on US PCE deflator and NFP

Wary of reading too much into Tuesday’s DXY sell-off.
Group Research, Philip Wee30 Aug 2023
    Photo credit: Unsplash/Adobe Stock Photo

    Weaker US jobs openings and a less confident US consumer sent the DXY Index lower by 0.6% to 103.47, last Wednesday’s close before the Fed’s Jackson Hole Symposium. The greenback was dragged by US Treasury yields declining to their lowest levels since 11 August. The 2Y bond yield plunged 15.4 bps to 4.89%, while 10Y eased 8.2 bps to 4.11%. As interest rate futures lowered the odds of a Fed hike in November to 36.5% from 46.3% on Monday, the Dow, S&P 500, and Nasdaq Composite rallied 0.9%, 1.5%, and 1.7%, respectively.

    The US Conference Board consumer confidence index fell to 106.1 in August, missing the 116 consensus by a wide margin. The Board also revised July to 114 from 117. The present situation index declined to 144.8 from 153 (revised from 160) on receding optimism over the US labor market. Slower employment gains and less generous wage increases heightened worries over family finances. The expectations index dropped to 80.2 from 88 (revised from 88.3) over higher inflation expectations and renewed rate hike worries weighing the six-month outlook for business conditions, job availability, and stock market gains. Despite this, the number of respondents calling for a recession receded.

    JOLTS job openings plunged to 8.83mn in July from a downwardly revised 9.17mn in June; consensus had expected a moderation to 9.5mn from 9.58mn. The two sectors that reduced job openings most were business and professional services (-198k) and health care and social assistance (-130k). Information (+101k) and transportation, housing, and utilities (+75k) increased job openings the most. Although fewer people voluntarily quit their jobs, layoffs remained low by historical standards. The job openings/unemployed ratio was high at 1.51 in July, above the neutral 1.0-1.2 range, indicating that the US labor market was still tight and generating inflation.

    Markets are bracing for a weak US ADP Employment report today. Unfortunately, ADP has been moving in the opposite direction as US nonfarm payrolls. Despite ADP adding 324k jobs in July and 455k in June, NFP came in below 200k during the same period. Hence, the significantly fewer 195k ADP jobs expected for August may not necessarily translate into another slide in this Friday’s NFP to 170k (consensus) from 187k in July and 185k in June. Meanwhile, tomorrow’s PCE deflator should take its cue from the higher CPI inflation (3.2% YoY in July vs 3% in June) and 1Y inflation expectations (3.5% in August vs 3.4% in July vs 3.3% in June) in the University of Michigan’s Consumer Survey. Consensus expects the PCE deflator to rise to 3.3% YoY in July from 3% in June and a loftier core inflation to 4.2% from 4.1%. We are wary about reading too much into Tuesday’s DXY drop. DXY rebounded after dropping this much was on the disappointing NFP on 4 August. Cleveland Fed President Loretta Mester, who supports more hikes to bring inflation back to the 2% target, will speak on inflation after the NFP data this Friday.

    EUR/USD appreciated a second day by 0.6% to 1.0880, its highest close since 21 August. Eurozone bond yields eased less than their US counterparts; the 2Y and 10Y yields moderated 2.3 bps 5.5 bps, respectively. However, the EUR’s recovery stalled near a trendline resistance at 1.09 before today’s European Commission Economic SentiMent Indicator and tomorrow’s CPI estimate. Following last week’s disappointing HCOB PMI readings, consensus sees Economic Confidence falling a fourth month to 93.5 in August from 94.5 in July, its worst since November 2020. Markets are also betting that the European Central Bank could pause in September on slowing inflation. Tomorrow, consensus sees August’s CPI estimate falling to an 18-month low of 5.1% YoY and core inflation to a three-month low of 5.3%. Interest rate futures lowered the probability of a hike at the ECB meeting on 14 September to an average of 43% this month, down from 67.3% between the two ECB meetings in June and July. Barring surprises in the Eurozone’s CPI inflation, EUR/USD could languish in the same 1.08-1.09 range with a downside bias in the remaining two days of August.

    Quote of the day
    “It may be hard for an egg to turn into a bird. It would be a jolly sight harder for it to learn to fly while remaining in an egg.”
         C.S. Lewis

    30 August in history
    The last remaining American troops left Afghanistan in 2021, ending US involvement in war.


    Philip Wee

    Senior FX Strategist - G3 & Asia


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