Written by US labour market data in the spotlight
After a rare US bank holiday yesterday, markets are preparing for a plethora of US labour market data. Despite the fact that the importance of jobs-related data for monetary policy purposes has diminished a bit following the December 18 Fed meeting, today’s data could potentially impact Fedspeak going forward.
With the December Fed dot plot pointing to two rate cuts for 2025 and inflation not expected to drop to 2% until 2027, Fed’s Bowman stated yesterday that she supported the December rate cut as the final step in policy recalibration. Bowman is a known hawk, but it is evident that most Fed members are highlighting the need for patience to examine the incoming data before committing to further rate cuts.
Following the decent ADP report and the solid increase in the employment subcomponent of the ISM Services survey, there are expectations for a 160k increase in nonfarm payrolls today. Similarly, both the unemployment rate and the average hourly earnings growth are forecast to remain stable at 4.2% and 4% respectively, thereby reflecting a healthy US labour market
Strong jobs data to complicate the Fed outlook
A strong set of economic data prints today could worry the Fed hawks, as it would counter their projections that the jobs market will continue to cool, with a diminishing impact on price pressures. The dollar stands to benefit in this case, but the market’s focus would shift to US equities, where risk sentiment remains weak.
On the other hand, a possible disappointment today, particularly a nonfarm payrolls print below 50k, could reopen the door to a Fed rate cut in the first quarter of 2025. The market is currently fully pricing in a 25bps rate cut by June 2025.
Amidst these developments, the dollar remains on the front foot, fully recovering its recent underperformance against the euro. This has been a relatively easy task for the mighty dollar considering the continued negative newsflow from the eurozone. However, its performance against both the yen and the pound is coming under closer scrutiny.
The yen remains under pressure
Despite the solid labour cash earnings and household spending figures, the yen cannot catch a break against the dollar. Volatility has eased considerably compared to the latter part of December, but dollar/yen is still hovering around the 158 area. The next BoJ meeting is just two weeks away with expectations for a 25bps rate hike slightly diminishing this week, making it even harder for Governor Ueda to take the next crucial step in the current monetary policy adjustment process.
The pound has started the year on the back foot
More interestingly, the pound is suffering the most at the start of the new year. Most analysts focus on Elon Musk’s repeated attacks on British PM Starmer to justify the current market rout, but one could argue that the questionable Labour government budget, announced in late October 2024, may be the true cause.
Significant public spending was announced, funded by considerable tax increases and a solid jump in bond sales. This plan is backfiring at the moment as investors are less willing to absorb the extra bonds. The current market movements have brought memories of the famous Liz Truss budget crisis in 2022, when the continued selloff in bonds forced the BoE to intervene. PM Truss was eventually replaced, just 49 days after taking office, with pound/dollar quickly recovering from its all-time low of 1.0325.
By XM.com
