The US Employment Situation Report concluded last week. The US economy added almost 300,000 jobs in March, surpassing the median forecast of 210,000 jobs (previous data: slight downward revision from +275,000 to +270,000). This was a big beat for the markets in terms of employment growth.This was the biggest one-month increase in almost a full year. With a lower range estimate of 3.7% going into the event, the unemployment rate came in at 3.8%, slightly below the 3.9% expectation and down from the 3.9% previous figure. When it came to YoY and MoM, average hourly earnings were exactly as expected by the market, coming in at 0.3% and 4.1%, respectively. The lackluster jobs data that Canada also posted, along with the positive data from the US, allowed for long trades in the USD/CAD on Friday, which saw a gain of +0.5% in the first half hour following the announcements. Naturally, EUR/CAD presented itself as yet another excellent trade opportunity based on the facts.
Naturally, the US data led to a hawkish repricing of interest rates. The July decrease (-24bps) is almost entirely priced into Fed funds futures. Just barely, June is still up for grabs. We now have a year’s worth of easing priced in at a total of -67bps. The US economy is remarkable, with robust job growth and low unemployment, robust economic activity, expansionary ISM manufacturing and services PMIs, and record highs in the US equities market. As a result, the repricing shouldn’t raise too many red flags.
The Bank of Japan’s (BoJ) response to this week’s data and, of course, the recent surge in the USD/JPY pairing—which is currently approaching the ¥152.00 handle—will be intriguing to watch. Following the announcement of the US jobs data, traders were obviously trading this pair cautiously because policymakers have been warning of a possible intervention to save the struggling Japanese yen (JPY).
Looking forward
For those involved in the market, this week will be crucial since midweek trading presents a plethora of event risk. Along with the much awaited US CPI inflation print and FOMC meeting minutes, three developed central banks (the RBNZ, the BoC, and the ECB) will provide updates.
ECB to hold steady; June cut?
Given the current dovish sentiment around the central bank, a lot of attention will be focused on the European Central Bank (ECB) this week. The conference is set to broadcast on Thursday at 1:15 p.m. GMT+1. For the fifth meeting in a row, it is widely anticipated that the ECB will keep all three of its major benchmark rates constant; markets are pricing in a pitiful 9% reduction. However, a total of -89bps is factored in for the year, with the first 25bp reduction anticipated as early as June (-24bps).
If the ECB continues in its present dovish direction, there could be a noticeable increase in euro volatility during the announcement. The euro area inflation data for March, which showed further disinflation and a headline print that softened to 2.4% year over year (from 2.6%), ultimately aligning with ECB projections, and underlying inflation (core) that cooled to 2.9% from 3.1% over the same period, further reinforced the dovish sentiment last week. When combined with Germany’s meager and stagnant economy, this has reduced inflationary pressures.
The majority of ECB members are reportedly keeping an eye out for a potential rate cut at June’s meeting in addition to STIR markets. Recent comments from ECB President Christine Lagarde indicated that the eurozone’s economy is going through a disinflationary phase. Inflation is “making good progress,” the chairman of the European Central Bank continued, adding that further data is required and that more information would be available in June. They are confident, but “not sufficiently confident.” Furthermore, in comments with newspapers more recently, Yannis Stournaras and Robert Holzmann of the European Central Bank (ECB) emphasized that the institution might be the first to lower rates ahead of the Federal Reserve and possibly reduce rates by 100 basis points, in line with market expectations.
US CPI inflation eyed
This week, the FOMC meeting minutes at 7:00 pm GMT+1 and the US CPI inflation release on Wednesday at 1:30 pm will be the two primary points of interest outside of the US.
From a data perspective, the US CPI report for this week will be the focus of attention after the stronger-than-expected jobs statistics on Friday. If the pace of inflation rises, investors may start to think that the Fed would only lower rates twice this year instead of three times. Better-than-expected figures might cause the USD to rise, but there is always a chance that the BoJ will step in and that could reduce demand in this situation. Of course, any significant broad downward departure would definitely create possibilities for dollar shorting.
We probably won’t learn anything new from this report regarding the FOMC minutes because most of the important Fed members were out and about last week. Recall that the FOMC meeting in March maintained the overnight lending rate at 5.25%–5.50% for the fifth consecutive meeting, marking the highest rate in over two decades. Additionally, the majority of Fed officials continue to support three rate cuts this year, which was quite dovish; as you may remember, there was conjecture prior to the announcement that Fed officials might drop to two rate cuts. The market was primarily focused on the quarterly SEP, which was announced concurrently with the rate announcement.As previously said, Fed officials continue to predict that policy would be eased by three quarter-point rate reduction by year’s end, which is unchanged from their December 2023 projections. It is crucial to remember that rates are expected to remain higher for a longer period of time than first predicted three months ago, indicating a more hawkish tone.
The markets are unmistakably indicating that a rate decrease in June is uncertain. Markets are currently pricing in a total of +71bps of rate hikes from the Fed this year. This represents a significant departure from the SIX rate cuts that were anticipated at the start of the year and is currently just shy of the three rate reduction that the Fed is presently expected to implement (see above). The likelihood of a rate cut during the policy-setting meeting in May has significantly decreased; the first 25 basis point cut is scheduled for July (-27bps). June is still currently a 50/50 coin flip, though.
In the end, inflationary pressures will determine whether the Fed acts in June, July, or even later in the year. The Fed will also like to see wages decline and the labor market become weaker.