Fed Chair Powell’s comments in focus ahead of NFP report
USD: Fed Chair Powell expresses more optimism over US inflation
The US dollar has continued to trade at modestly weaker levels following yesterday’s sell-off in response to dovish comments from Fed Chair Powell. It has resulted in the dollar index moving further below the recent high from towards the end of last month at 106.13 although the softer US dollar has not prevented USD/JPY from hitting a fresh year to date high overnight at 161.94. The US dollar has weakened modestly following comments from Fed Chair Powell in a panel discussion at this week’s ECB annual Central Bank Forum held at Sintra. He stated that the latest inflation data from the US shows that prices are resuming the disinflationary trend but wants to see more data like we’ve been seeing recently before they have enough confidence to begin lowering rates. He also added that an unexpected weakening of the US labour market could prompt the Fed to cut rates sooner with the Fed more aware now of two-sided risks. He believes that the Fed has made real progress on slowing inflation with the Fed’s restrictive policy working hand in hand with the improving supply side of the economy to slow demand and help ease inflation pressures. As a result, he expects inflation to be around 2.0-2.5% a year from now. However, he refrained from giving any calendar specific guidance over the likely timing of the Fed’s first rate cut. When asked if he was setting the table for a September rate cut, he replied “I’m not going to be landing on any specific dates here today”.
The Fed is still not in a rush to begin cutting rates “because the US economy is strong and the labour market is strong” allowing the Fed to take their time to get the timing of easing right”. Fed Chair Powell did though indicate more concern over the health of the labour market. He highlighted that “you can see the labour market is cooling off, appropriately so, and we’ve been watching it carefully”. The release yesterday of the latest JOLTS report revealed a modest pick-up in job openings in May although it followed a sharp drop in the previous two months. Job openings have fallen to their lowest levels since in early 2021 providing an indication of softening labour demand. The quits rate also held at its lowest levels since the 2H 2020 and remains consistent with softening wage growth. However, there has been little evidence so far of slowing employment growth in the nonfarm payrolls data. The Fed has indicated recently that recent nonfarm employment growth could be overstating the underlying strength of the US labour market. It has averaged around 250k job gains/month so far this year. The release of the nonfarm payrolls report on Friday for June would have to show a sharp slowdown in employment growth to prompt US rate market participants to price in a much faster pace of Fed rate cuts in the year ahead. The US rate market is already pricing in around 18bps of Fed cuts by the September FOMC meeting and 45bps cuts by year end. Chair Powell indicated that he would be happy if the unemployment rate remained where it is at 4.0%. It has been moving gradually higher since the 2H of last year placing more pressure on the Fed to begin lowering rates. Our outlook for slowing US inflation and weaker US labour market support our forecast for the US dollar to weaken modestly heading into next year (click here).
FRENCH POLITICAL RISK PREMIUM HAS BEEN SCALED BACK
Source: Bloomberg, Macrobond & MUFG GMR
EUR: Probability of RN winning majority continues to fade
The euro has been holding on to gains against the US dollar at the start of this month. After hitting a low of 1.0666 towards the end of last month, EUR/USD initially jumped to a high of 1.0776 on Monday after the release of results from the first round of the French elections triggered a relief rally for the euro but the pair has since fallen back towards the 1.0700-level. The market impact has once again been more evident in the government bond market where the yield spread between the 10-year French and German government bonds has narrowed to around 71bps from a high of 82bps towards the end of last month. The easing of the first risk premium priced into French government bonds that had reached the highest levels seen the euro-zone debt crisis back between 2011 and 2012 reflects building investor optimism that the far-right RN party will fall short of winning a majority in parliament.
Those expectations will have been reinforced by French media reports that between 214 and 218 third placed contenders have decided to pull out of the race in their constituencies. So, there will now be around 108 three-way races instead of just over 300. The alliance between the centrist and left leaning parties to withdraw third-placed candidates will make it harder for the right-wing RN party to win a majority. Jordan Bardella from the RN party has condemned the arrangements as the fruit of an “alliance of dishonour”. It helps to further ease downside risks for the euro ahead of the second round of the French elections on 7th July.
One other focus for the euro at the start of this week have been comments from ECB officials at their annual Central Bank Forum at Sintra. ECB President Lagarde and Chief Economist Lane both indicated that a back to back rate cut this month is not on the table. They both indicated that they want to see more evidence that inflation is continuing to slow before having the confidence to cut rates again. The release yesterday of the latest euro-zone CPI report revealed that core inflation unexpectedly held at 2.9% in June. We still expect the ECB to deliver a second rate cut in September.
KEY RELEASES AND EVENTS
|
Country |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
EC |
09:00 |
Services PMI |
Jun |
52.6 |
53.2 |
!! |
|
UK |
09:30 |
Services PMI |
Jun |
51.2 |
52.9 |
!!! |
|
EC |
10:00 |
PPI (YoY) |
May |
-4.1% |
-5.7% |
! |
|
EC |
11:30 |
ECB's Lane Speaks |
-- |
-- |
-- |
!! |
|
US |
12:00 |
FOMC Member Williams Speaks |
-- |
-- |
-- |
!! |
|
US |
13:15 |
ADP Nonfarm Employment Change |
Jun |
163K |
152K |
!!! |
|
US |
13:30 |
Initial Jobless Claims |
-- |
234K |
233K |
!!! |
|
US |
13:30 |
Trade Balance |
May |
-76.30B |
-74.60B |
!! |
|
US |
15:00 |
ISM Non-Manufacturing Business Activity |
Jun |
-- |
61.2 |
!!! |
|
EC |
15:15 |
ECB President Lagarde Speaks |
-- |
-- |
-- |
!! |
|
US |
19:00 |
FOMC Meeting Minutes |
-- |
-- |
-- |
!!! |
Source: Bloomberg
