News & Analysis

Reading between the lines for the USD

28 May 2024 By Evan Lucas


Last week I highlighted Governor Chris Waller’s speech – however the more I look into his talk the more it needs greater emphasis as it contained both hawkish and dovish elements. 

The Hawk

Waller indicated that he would need at least three more months of “good” inflation data before considering a rate cut. He was suggesting this might happen late this year or early next year. 

The Dove

However, while he supports delaying the first cut, he emphasised that he does not expect to hike rates further.  More importantly he highlighted that once the initial cut is made it should be followed by a series of cuts at no slower than a quarterly pace. 

That is a pretty aggressive stance it gives traders a clear understanding that once the Fed starts lower yields will be coupled with lower USD values – it’s just a question of when does it start? The catch will be EUR, GBP, SEK etc are also facing dovish central bankers so these pair will have some push on them. Just remember ‘don’t fight the Fed’.

Toeing the line

Waller also reiterated the now-standard Fed caveat about rate cuts: a significant weakening of the labour market would prompt Fed officials to cut rates earlier or more aggressively. 

Reviewed the plethora of labour market indicators out of the US and it is pretty clear further softening is likely. Looking at the non-farm payrolls in April only 175k jobs where added, and the forward-looking  May hiring surveys show further slowdowns. Risks are skewed to the downside, and a sub-100k or even negative reading in the next few months wouldn’t be surprising. 

Hiring rates according to JOLTS and hiring intentions according to NFIB have dropped rapidly, and the employment subcomponents of services PMI and ISM are below 50 in most states. 

Now, the unemployment rate, currently sits at 3.9%, the Fed’s year-end forecast is 4.0% that could be reached this month – so next week’s NFP is going to huge for US indices and USD bulls that are staking everything on a ‘soft-landing’ and rate cuts in 2024.

Looking to the next major indicator – Retail sales, which have been weak in the first four months of 2024. It’s clear rate rises are biting, and consumers are depleting their excess savings acquired during the COVID years. Retail discounts are  starting to ramp up have just to maintain sales volumes.

This leads us to real GDP growth because it has a mixed set of data. Real GDP slowed to an annualised 1.6%, but inside that figure was final private domestic demand . Which was buoyed strong consumer spending and contributions from business and residential fixed investment seeing it come in at 3.1%. A contradiction to the retail sales numbers. However, investment looks to be weakening, with durables orders and shipments remaining soft in the second quarter of the year. Couple is with high mortgage rates and house prices have also resulted in softer housing data. 

This suggests that private demand in Q2 will eventually fall back in line with other components of the GDP reading.

All this again backs the consensus trade views that US indices are riding the soft-landing wave and are in the main driving USD inflow. 

Great example is AUD/USD – the AUD has been a huge performer in 2024 as the RBA looks to be pushing out expectations of rate cuts, couple this with booming commodity markets and a China looking to bounce out of malaise, yet the pair is stuck in a range of $0.64-$0.67. Against EUR, GBP JPY the AUD is going one way – not in the pair though and shows how attractive the US is for investment and flow. 

Let me come back to Waller’s ‘good’ quote on inflation. In his remarks he suggested this week’s PCE expected to come in around 0.24-0.26% MoM April a “C+” grade. That would suggest sub-0.22%  is “good” and would need several months of that kind of figure to move. This is a figure traders need to have in the back of their minds each month especially on the lead up to and just after the data hits the wires. 

One final part of the PCE – Fed minutes indicate that a further slowdown in shelter prices will be crucial for Fed officials to be confident that inflation is easing. This is yet to materialise in the data. Considering how big a component  housing is it needs to slow in this week’s reading or rate cut expectations will drift out even further.

Speaking of the PCE what is expected?

The Trade week

Monday saw the US observe the Memorial Day holiday and trade leading into it was limited. Al three major indices finished last Friday in the green with is a positive sign as holding long positions over a long weekend is rare. In short – indices will be a bit directionless until Wednesday as only then will global markets get their first trading day of the US week.

Thus, we need to turn our attention to end of the week and position for the most important release of May PCE inflation on Friday. This is a core metric of the Fed and if there is any chance of several rate cuts in 2024 this piece of the puzzle must show structural signs of decline.

Based on CPI and PPI elements, the consensus estimates are for core PCE to rise by 0.24% MoM, rounding to 0.2% for the first time since December. Shelter inflation should slow gradually, and core services ex-shelter inflation should also slow relative to March. The consensus range for core PCE is 0.20-0.26% MoM, we will await if this boosts Fed officials’ confidence that inflation is moving towards 2%.

The biggest take out of the consensus data is all expect April to show a slowdown in spending. Weaker goods spending which correlated from the weak retail sales last week should override a modest 0.4% MoM increase in services spending. Overall real spending should remain flat. 

This will create debate in the market as indices bears point to the recent increase in Services PMI, as a sign of accelerating services activity and thus inflation is a long way off ‘returning to sustained level of inflation’

The second release of Q1 GDP will be out on Thursday, providing more comprehensive data on components like net exports, investment, and consumption. With March retail sales revised lower, there is a risk that consumption growth could also be revised down.

Case Shiller index due Thursday is expected to increase by another solid 0.63% MoM in March but anticipate softer home price increases in the coming months due to signs of weakening housing demand and improving supply of existing homes.

Final part of the puzzle for trader is always Fed speak and there is a big one this week with NY Fed President Williams on Thursday. Recently, he indicated that he does not expect to gain “greater confidence” on inflation in the near term – and he is a voting member of the Board.

Turning to home: Oz data to watch


April’s CPI data is due Wednesday. Consensus is headline CPI to slow to 3.4% YoY from 3.5% in March (range is 3.2%-3.5%), following three months of flat or rising prints. As this is the first print of the second quarter, the sample will likely skew towards goods prices, resulting in softer monthly growth, consistent with the prior two quarters. Either way a further softening in the monthly data will elevate fears the RBA’s narrow path is evaporating.

Retail sales came out on Tuesday at 0.1% MoM a 0.5% jump on the March read. However, this blurs the biggest take out the annual growth is at historically low levels outside of the COVID period (1.2% YoY). Consumers are finally slowing their spending habits.

Australia 200

The A200 ended a five-week winning streak, on Friday down 1.1% for the trading week. For the month A200 is up 1.36%, any good news that can be taken from the CPI data on Wednesday should see the index lock in a positive May over all.

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