Written by US jobs data imply lower Fed rates down the road
The US dollar finished Thursday higher against most of its major counterparts, even after the shutdown-delayed US employment for September revealed more cracks in the labor market and boosted somewhat the probability of a December rate cut by the Fed. The greenback lost some ground only against the pound, while today it is pulling back against all its peers.
The official jobs data for September revealed that the world’s largest economy added 119k jobs, more than double the forecast of 50k. However, other parts of the report were not so impressive. The August print was revised down to -4k from +22k, while the unemployment rate rose to 4.4%, instead of remaining unchanged at 4.3%.
This prompted investors to drive the probability of a December Fed cut up to around 30% from 25% ahead of the release. Although the dollar finished the day positive, it pulled back at the time of the release, and it is on the back foot today as well, despite the probability of a December rate reduction settling at 27% today.
Following no-urgency remarks by Fed officials and the hawkish message of Wednesday’s Fed minutes, most investors remained convinced that policymakers will remain sidelined next month. However, they have added some basis points worth of cuts for 2026. From around 75bps ahead of the NFP report, they are now pencilling in 83 throughout next year.
Katayama ramps up intervention warnings, Ueda talks rate hike
The yen remained on top of investors’ agendas, losing more ground on Thursday, but rebounding today after Finance Minister Katayama said that intervention is a possible way to deal with extremely volatile and speculative moves in the yen.
On top of that, speaking before parliament, BoJ governor Ueda said that he and his colleagues will continue assessing the timing of when a rate hike will be appropriate, adding that they are also aware of how a weak yen can impact underlying inflation.
His remarks followed Japan’s CPI data, which revealed a slight acceleration in inflation, and thereby slightly increased bets of a December rate hike. The probability of a December move is now hovering at around 30%, while a 25bps rate increase is fully pencilled in for April, instead of June as it was yesterday.
What may have also helped investors start examining whether a December rate hike could still be on the table is the fact that Japan’s parliament approved a 21.3 trillion-yen stimulus package, one of the largest since the pandemic, which creates extra room for a rate hike by the BoJ.
Now the big question is whether intervention can be avoided or whether the yen will resume its slide and force authorities to take action. Although policymakers never mention a specific price level, an intervention episode could become increasingly likely if dollar/yen gets closer to the round psychological number of 160.00.
AI bubble fears return
On Wall Street, all three of its main indices tumbled, with the tech-heavy Nasdaq shedding more than 2%, marking its biggest slide since April 9 when Trump’s tariff announcements spurred panic among investors.
The retreat may have been triggered by Fed officials expressing concerns about financial market stability and clearly mentioning the risk of a sharp drop in asset prices. One of them was Lisa Cook, who said that she would not be surprised by a collapse in historically elevated asset prices.
These remarks come on top of the worries revealed in the Fed minutes about stretched valuations and shrugged off any optimism due to Nvidia’s strong earnings results. Having that in mind and considering that the forward price-to-earnings ratio of the S&P 500 remains near its pandemic highs, further corrective action in stock indices cannot be ruled out.
by XM.com
