Will NFP report support expectations for early Fed rate cut this year?
USD/JPY: Recalibrating BoJ & Fed policy expectations
The yen has underperformed at the start of the new calendar year giving back gains over the holiday period. It has resulted in USD/JPY rising back above the 145.00-level overnight as it moves further above the low from 28th December at 140.25. The pair is now trading at its highest level since just before the BoJ’s last policy meeting on 19th December at which they refrained from providing any indication that they were considering raising rates imminently. Recent comments from BoJ Governor have reinforced expectations that the BoJ is unlikely to exit negative rates as soon as this month. He stated that the possibility “does not seem very high at this point” that they will receive a substantial amount of information ahead of the January policy meeting to give them more confidence that stronger wage growth will be sustained which is a key requirement for the BoJ to begin hiking rates. Furthermore, any remaining speculation that the BoJ could still hike rates this month has since been dampened further by the uncertainty created by the earthquake in Japan. While we expect the negative economic impact to prove relatively limited, the near-term uncertainty has raised the hurdle for the BoJ to exit negative rates at this point in time. It is more likely that the BoJ will delay raising rates until at least March or more likely April. The BoJ’s delayed exit from negative rates even if it is just a couple of months has encouraged renewed yen selling at the start of this year.
Yen weakness has also coincided with yields outside of Japan rebounding modestly after the sharp adjustment lower at the end of last year. The 10-year US Treasury yield has risen by just over 20bps since the low in late December. After pricing in earlier and deeper rate cuts expectations for the Fed and other major central banks in 2024, market participants have moved to scale back those expectations at the start of this year perhaps wary of the risk that rate cut expectations have already moved a long way now and will require further confirmation of slowing inflation and growth in the coming months to prompt central banks into action. On the whole the economic data flow yesterday has cast some doubt on whether the Fed and other major central banks will cut rates as soon as Q1. The ADP survey estimated that private employment growth likely increased by 164k in December which would be stronger than the average NFP private job gains of 130k/month in the six months to the end of November. It stands in contrast to the signal from the JOLTs report for November released earlier in the week which showed the hiring rate falling to its lowest rate since the COVID shock in early 2020. The Fed will want to see further evidence that labour demand continues to slow in today’s NFP report alongside improving labour supply to give them more confidence that they can begin to lower rates in response to slowing inflation. If there is any disappointment in today’s NFP report, the US dollar rebound could extend further at the start of this year.
SOFTENING DEMAND FOR LABOUR IN THE US
Source: Bloomberg, Macrobond & MUFG GMR
EUR/GBP: PMI surveys signal improving cyclical momentum at year-end
The rebound in yields outside of Japan was also encouraged yesterday by the release of stronger economic data from Europe. It has helped to lift EUR/JPY back up closer to the 159.00-level and GBP/JPY has risen back above the 184.00-level. The UK composite PMI reading was revised higher by 0.4 point to 52.1 in December which was the highest reading since June of last year, and follows on from the three sub-50.0 prints recorded between August and September. The pick-up in business confidence heading into year-end has helped to ease concerns that the UK economy has fallen into technical recession in Q4 after contracting by -0.1% in Q3. Admittedly, the composite averaged 53.9 in Q2 when the UK economy still stagnated so it has not been the most reliable indicator of cyclical momentum recently. The improvement in business confidence supports market expectations that the BoE will lag behind the Fed and ECB in cutting rates this year which is providing some support for the pound.
Business confidence in the euro-zone was revised higher as well for December. The euro-zone composite PMI reading was raised by 0.6 point to 47.6 in December. While the improvement was a welcome development, the level of confidence remains weak and more consistent with economic contraction below the 50.0-level. Over the last five months the composite PMI has averaged 47.1 which continues to highlight that the euro-zone economy remains at risk of falling into technical recession. The weak growth outlook in the euro-zone should keep pressure on the ECB to begin cutting rates this year when they become more confident that slowing inflation will be sustained. The national CPI reports released yesterday provided mixed news on the inflation front. They have supported expectations that headline inflation in the euro-zone when it is released this morning will rise back up towards 3.0% in December after falling sharply to 2.4% in November. If confirmed it will dampen expectations for an imminent rate cut from the ECB in Q1 although we still expect inflation to return to target in the year ahead opening the door for the ECB to lower rates back towards more neutral levels at around 1.5% to 2.0%. Yesterday’s data was not sufficient to lift EUR/USD out of the 1.0500 to 1.1000 that has been in place for over a year now after the pair failed to sustain levels above 1.1000 over the holiday period.
KEY RELEASES AND EVENTS
|
Country |
GMT |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
EC |
10:00 |
Core CPI (YoY) |
-- |
3.5% |
3.6% |
!! |
|
EC |
10:00 |
CPI (YoY) |
Dec |
3.0% |
2.4% |
!!! |
|
US |
13:30 |
Average Hourly Earnings (MoM) |
Dec |
0.3% |
0.4% |
!!! |
|
US |
13:30 |
Nonfarm Payrolls |
Dec |
170K |
199K |
!!! |
|
CA |
13:30 |
Employment Change |
Dec |
13.5K |
24.9K |
!! |
|
US |
15:00 |
ISM Non-Manufacturing Business Activity |
Dec |
-- |
55.1 |
! |
|
US |
18:30 |
FOMC Member Barkin Speaks |
-- |
-- |
-- |
! |
Source: Bloomberg
