Will The NFP Report Take June Off The Rate-cut Map?

Economic

Summary:

Investors have second thoughts about a Fed rate cut in June.Dollar benefits from latest market repricing.

Data and Fed rhetoric weigh on Fed rate cut bets

At its latest gathering, the Fed appeared more dovish than expected, still pointing to three quarter-point rate cuts for 2024. This allowed market participants to add back to their June cut bets, lifting the probability for a 25bps reduction to around 80%.

However, this proved to be a temporary assessment. Last week, Fed Governor Waller said that the Committee is in no rush to start cutting interest rates, a view echoed by Fed Chair Powell on Friday, after the core PCE index came at 2.8% y/y, as it was expected. Will The NFP Report Take June Off The Rate-cut Map? _1

Will The NFP Report Take June Off The Rate-cut Map? _1

This allowed dollar bulls to jump back into the action, adding to their positions on Monday after the ISM manufacturing PMI for March expanded for the first time since September 2022. The prices subindex rose to 55.8 from 52.5, corroborating the outlook painted by the S&P Global flash PMIs for the month, which revealed that selling prices rose at the fastest pace in just under a year.

Combined with the upward revision of the Atlanta Fed GDPNow model to 2.8% from 2.3% for Q1, the latest developments prompted investors to push back again their rate reduction bets According to Fed funds futures, the probability of a first quarter-point reduction in June has dropped to around 65%, while the total number of basis points worth of rate cuts by the end of the year has been decreased to 68. Will The NFP Report Take June Off The Rate-cut Map? _2

Will The NFP Report Take June Off The Rate-cut Map? _2

From anticipating around 160bs at the start of the year, the market is now expecting less reductions than the 75bps projected by the Fed itself, which adds downside risks to the dollar in case of disappointing data moving forward.

Will further easing in labor market ring the alarm bells?

With that in mind, the next major event on investors’ agenda may be Friday’s US employment report for March. The unemployment rate is expected to have held steady at 3.9% and nonfarm payrolls are forecast to have slowed to 205k from 275k. That said, the rebound in the employment subindex of the ISM manufacturing PMI tilts the risks to the upside. Average hourly earnings are expected to slow somewhat to 4.1% y/y from 4.3%. Will The NFP Report Take June Off The Rate-cut Map? _3

Will The NFP Report Take June Off The Rate-cut Map? _3

These numbers point to further easing in the labor market, but they are far from suggesting that a rate cut is urgent. After all another month of above 200k jobs is very encouraging for the economy, while a wage growth rate at around 4% is unlikely to help inflation come down faster than previously thought.

Dollar may continue to outperform the euro

The dollar is likely to stay the course north especially against the euro, as according to money markets, a June quarter-point reduction by the ECB is more than fully priced in, while following recent dovish remarks by ECB member Villeroy de Galhau and Stournaras, there is a nearly 20% chance for a cut at the upcoming meeting on April 11.

Euro/dollar fell below the key support zone of 1.0795 on Thursday and accelerated its slide this week, headed for the very important area between 1.0655 and 1.0695. A decisive dip below 1.0655 could carry larger bearish implications and perhaps pave the way towards the 1.0520 barrier, marked by the lows of October 26 and November 1.

Nonetheless, in case the jobs report disappoints, the pair may rebound and break back above 1.0795, but for the outlook to start looking brighter, a move all the way above the round number of 1.1000 may be needed.

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Zi Cheng

Economic

Growth in the US services sector eased in March for a second month while a gauge of input costs slumped to a four-year low.

The Institute for Supply Management’s composite gauge of services fell 1.2 points to 51.4, largely reflecting a drop in the supplier deliveries index to a record low. Readings above 50 indicate expansion, and the March figure was lower than all but one estimate in a Bloomberg survey of economists.

The index of prices paid for materials and services decreased more than 5 points to 53.4, the lowest since March 2020, according to the report issued Wednesday.

Source: Insitute for Supply Management

That stands in stark contrast to ISM data earlier week showing a manufacturing input-cost gauge climbed to the highest level since July 2022, suggesting the pace of goods disinflation is leveling off.

The services price data may temper concerns that the Federal Reserve’s progress on inflation is at risk of stalling. Policymakers are tracking developments in the services sector, the largest part of the economy, for signs of easing price pressures as they debate when to reduce interest rates.

“The plunge in the prices paid index to the lowest level since the pandemic began implies that core services ex-housing inflation, aka supercore, will resume falling back toward its pre-pandemic normal rate,” Stephen Brown, deputy chief North America economist at Capital Economics, said in a note.

With the decline in March, ISM’s gauge of prices paid by services dipped below the manufacturing input-cost measure for the first time since May 2022.

Still, service-industry respondents noted “that even with some prices stabilizing, inflation is still a concern,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.

Nieves said on a call with reporters that because fuel costs are rising again, he doesn’t anticipate input costs for services to continue falling.

The overall services index was depressed by the gauge of delivery times, which dropped 3.5 points to the lowest in ISM data back to 1997. Signs of improving supply chains help explain why order backlogs at service providers shrank at the fastest pace since August.

Twelve services industries reported growth in March, led by accommodation and food services. Four indicated a decrease in activity.

The ISM new orders gauge fell to a three-month low, though remained consistent with resilient demand.

The group’s business activity index — which parallels its factory output gauge — showed the strongest growth since September.

The measure of services employment ticked up slightly but remained in contraction territory.

Meanwhile, an index of inventories at service providers retreated to the lowest level since the end of 2022. A gauge of sentiment about inventories, while still indicating companies see stockpiles as too high, fell for the second straight month.

Source: Bloomberg

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Zi Cheng

Economic

Federal Reserve Chair Jerome Powell signaled policymakers will wait for clearer signs of lower inflation before cutting interest rates, even though a recent bump in prices didn’t alter their broader trajectory.

Powell said recent inflation figures — though higher than expected — did not “materially change” the overall picture. He reiterated his expectation that it will likely be appropriate to begin lowering rates “at some point this year.”

“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Powell said Wednesday in the text of a speech at Stanford University in California. “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%.”

The Federal Open Market Committee held interest rates steady last month. Officials narrowly maintained their outlook for three interest-rate cuts this year, even as key inflation metrics have picked up in 2024. Powell and other Fed officials have repeatedly said they are in no hurry to cut rates, and that their moves will depend on incoming data.

Following the release of Powell’s prepared remarks, Treasury yields remained higher as did the S&P 500. Investors are putting roughly even odds on an initial cut in June, and pricing suggests they see a chance of fewer than three reductions this year, according to futures.

“Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy,” Powell said in the opening remarks ahead of a fireside chat. “If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.”

Powell’s prepared remarks reinforce those he’s made following the March meeting. They also suggest that the Fed is unlikely to reduce rates at their next gathering taking place April 30-May 1.

Inflation Gauge

The Fed’s preferred gauge of underlying inflation cooled in February after an even larger increase than previously reported in January, government data released Friday showed. Even so, the back-to-back increases in the core personal consumption expenditures price index — which excludes volatile food and energy costs — were the biggest in a year.

Powell said last month that an unexpected weakening in the labor market could warrant a policy response from Fed officials. The Fed will get another update on the health of the job market Friday with the release of the monthly employment report, which is expected to show a gain of 213,000 jobs in March.

Fed officials in March were split on how aggressive rate cuts will be this year. The central bank’s “dot plot” showed 10 officials forecast three or more quarter-point cuts this year, while nine anticipated two or fewer.

The Fed chair also used part of his speech to emphasize that the central bank makes its decisions independent from politics. Powell added that he feels it is improper for him to weigh in on other public policy issues, like climate change policies.

“Our analysis is free from any personal or political bias, in service to the public,” he said. “We will not always get it right — no one does. But our decisions will always reflect our painstaking assessment of what is best for our economy in the medium and longer term — and nothing else.”

Source: Bloomberg

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Alex

Economic

Labor markets across most of the developed world just keep on beating expectations, pushing back bets on interest-rate cuts as hopes grow that central banks can pull off a soft landing after all.

The reasons for the high demand for workers — an aging workforce, lack of skilled labor and companies hoarding staff — are holding firm even as economies start to slow.

In all, the unemployment rate in developed economies remains near a record-low, according to quarterly data from the OECD. The consequences of that resilience for borrowing costs triggered a selloff in stocks and bonds this week. World Labor Markets Defy Odds And Force A Reset Of Rate-Cut Bets_1

World Labor Markets Defy Odds And Force A Reset Of Rate-Cut Bets_1

While demand for workers may have waned from the initial post-pandemic surge, it’s still much higher than experts forecast it would be by now. In the US, for instance, the Congressional Budget Office last year forecast the US unemployment rate would hit 5.1% by now; it remains at 3.9% today.

Data due Friday is set to show the US economy added more than 200,000 payrolls in March, double the level that Federal Reserve Chair Jerome Powell has said is sustainable.

As a result, markets continue to recast their pricing for Fed rate cuts — the odds for a move in June have slipped to around 59% — and those forecasts could be pushed out again. They slipped below 50% briefly this week after strong US factory data.

The S&P 500 saw its worst day in almost a month on Tuesday and the US 10-year yield touched its highest level since November as investors started to come to terms with that shift.

Economists at Goldman Sachs Group Inc. estimate it would take an increase of 0.2 to 0.3 percentage points to the US unemployment rate to justify three consecutive Fed cuts this year.

It’s a similar story elsewhere, even in economies that are slowing.

In Europe, where inflation has cooled in recent months, European Central Bank President Christine Lagarde has cited pay increases as one of three main factors officials are watching. Investors have pushed back expectations for a first interest rate cut to June, while at the end of 2023 their bets pointed to a 50% chance of a move in March and certainty the ECB would have eased by its April meeting.

In Canada, where the population soared by the most in more than 60 years in 2023, the jobless rate has barely budged as employers soaked up the new workers. In New Zealand — which entered a double-dip recession — unemployment has only just reached 4% and in Australia, a surprise surge in employment in February pushed the unemployment rate back down to 3.7%.

Central banks have consistently cited tight labor markets as an inflationary force and one of their top considerations when deciding interest rates. Powell last week said the strong job conditions give officials more time to consider when to cut.

“The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates,” Powell said at an event at the San Francisco Fed.

To be clear, inflation remains the north star for central banks and the primary driver of policy. Powell has also said recently that strong hiring on its own wouldn’t be a reason to avoid cutting rates.

Lagging Indicator

To be sure, jobs tend to be a lagging indicator with monetary policy taking about 18 months to filter through into the economy, so higher rates may yet take a toll. The UK in January registered its first increase in unemployment since July, but the rate remained below 4%.

As consumer price pressures moderate back toward central banks’ comfort zones, forecasts that mass unemployment would be needed to get inflation down now look misplaced.

Usually during an extended period of high interest rates, companies cut back on expansions. Not so this time. If anything, the jobs picture could remain tighter for longer as business sentiment and planned investment remain healthy.

“Many firms are likely engaged in labor hoarding,” said Citigroup Inc. senior global economist Robert Sockin. “Firms know how difficult it is to find and train workers, and likely do not want to go through the same process in several quarters time when demand is stronger.”

The JPMorgan/S&P Global manufacturing index expanded again in March with the highest reading since July 2022 as companies worldwide broadly saw higher orders and output. Business Roundtable’s CEO Index rose to the highest level since 2022 in the first quarter on higher capital spending, employment and sales expectations.

“Higher interest rates appear only to have destroyed demand for jobs that never existed, i.e. vacancies,” said Freya Beamish, chief economist at TS Lombard.

Source：Bloomberg

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Samantha Luan

Economic

Central Bank

Euro-area inflation slowed more than expected, cementing prospects for an interest-rate cut by the European Central Bank in June.

Consumer prices rose an annual 2.4% last month, down from 2.6% in February, in line with a Bloomberg Economics Nowcast model. Analysts predicted an increase of 2.5%. A measure excluding volatile items such as food and energy also eased more than anticipated, to 2.9%. Euro-Area Inflation Inches Toward 2% With Focus On June Cut_1

Euro-Area Inflation Inches Toward 2% With Focus On June Cut_1

The report adds to evidence that policymakers are on track to return inflation to the 2% target, allowing them to soon dial back some of the restriction needed after price gains surged into double digits. President Christine Lagarde has signaled a first cut in June — informed by fresh forecasts and an update on wage growth in the early months of the year.

Most of the Governing Council — including officials from Germany, France and Spain — have signed up to that timeline, with few clinging to hopes of an earlier move. Economists and money markets are equally aligned, suggesting it would take a big shock to change course.

Traders held wagers on the scope for rate cuts this year after the report, pricing three quarter-point reductions starting in June with the chance of a fourth at around 60%. That compares to as many as four cuts priced ahead of last month’s monetary-policy decision.

While shipping disruptions in the Middle East haven’t affected inflation in Europe much and last week’s collapse of a bridge in Baltimore — a key port for carmakers and other manufacturers — is also unlikely to do so, rising pay within the 20-nation euro zone may yet stoke prices.

Euro-Area Inflation Inches Toward 2% With Focus On June Cut_2

Chief Economist Philip Lane insists wage increases must continue to retreat for him to consider reversing some of the ECB’s past hikes.

While a key compensation gauge showed some moderation at the end of 2023, salaries continue to expand by more than 4%. That’s sustaining price pressures in services, where labor has an outsized impact on final costs.

Inflation in that sector remained at 4% in March, while the rate for non-energy industrial goods fell to 1.1%. Euro-Area Inflation Inches Toward 2% With Focus On June Cut_3

Euro-Area Inflation Inches Toward 2% With Focus On June Cut_3

Across the region, trends also diverge. Spanish inflation accelerated after the government removed some of the support put in place to keep a lid on energy costs, and Italy also saw an uptick. Meanwhile, German and French readings both showed that inflation eased for a third month.

Such trends make it harder to determine the optimal path following the ECB’s initial cut. Policymakers have already shifted some attention to discussing the pace of later steps, though insist that ultimately economic data will decide.

Lagarde, too, says the ECB will respond to new information as it comes in. “This implies,” she said last month, “that, even after the first rate cut, we cannot pre-commit to a particular rate path.”

Source：Bloomberg

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Warren Takunda

Economic

Commodity

Oil prices extended gains on Wednesday, as investors mulled supply risks stemming from Ukrainian attacks on Russian refineries and the potential for escalation in the Middle East conflict, while OPEC+ ministers made no changes to current output cuts in a meeting.

Brent crude futures for June rose 75 cents, or 0.84%, to $89.67 per barrel at 1130 GMT, while U.S. West Texas Intermediate crude futures for May gained 73 cents, or 0.86%, to $85.88 a barrel.

OPEC+ ministers made no fresh policy recommendations in a meeting on Wednesday, two sources said, after the group already decided to extend current production cuts until June last month.

Oil futures compounded Tuesday's gains, when both Brent and WTI climbed 1.7% to their highest since October.

Prices jumped higher on Tuesday after a fresh round of Ukrainian drone attacks on Russian refineries threatened to take even more of the country's processing capacity offline.

Investors were also concerned that conflict in the Middle East could spread, after Iran vowed revenge against Israel for an attack on Monday that killed high-ranking military personnel.

A wider conflict in the Middle East involving more oil-producing nations could cause supply disruptions. Iran, which provides support for the Hamas militia fighting Israel in Gaza, is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC).

"The rise in hostilities in both hotspots pushed the price of the two crude oil futures contracts to their highest levels this year," PVM analyst Tamas Varga said of Tuesday's rise.

Bank of America Global Research raised its 2024 Brent and WTI forecasts to $86 and $81 a barrel respectively, it said in a note on Wednesday, on firming demand and escalating political tensions.

"Geopolitical turmoil has also boosted oil demand via longer trade routes and impacted supply by reducing refining capacity via attacks on Russian energy infrastructure." the bank said.

Elsewhere on Wednesday, Taiwan's strongest earthquake in at least 25 years briefly caused Formosa Petrochemical to halt operations at its Mailiao refinery as a precautionary measure, but works have since restarted.

The U.S. Energy Information Administration (EIA) will also release oil inventory data later on Wednesday. Data from the American Petroleum Institute reported crude inventories fell by 2.3 million barrels last week, traders said on Tuesday.

Source: Reuters

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ING

Economic

Markets question the Fed June cut and overall easing to be delivered

US yields continued their move up on Tuesday and the 10-year US Treasury yield has now hit 4.36%, a level last seen in 2023. The move upwards started on Monday when European markets were still on their Easter break. Good Friday had shown us a 0.3% PCE deflator – well flagged but still hot – and a Chairman Jerome Powell who signalled a Fed in no rush to cut. Monday then brought a strong manufacturing ISM reading. Before these events markets seemed dedicated to a Fed cut in June, but now that conviction is down to a 60% probability.

Monday had seen yields rise more uniformly across the curve, but Tuesday’s price action was marked by a noticeable bear steepening. One way to interpret this is that speculation about the endpoint of Fed cuts took the foreground. Tuesday’s data added to the notion that the economy keeps cruising forward with JOLTS job openings (despite some weakness beyond the headline figure) and factory orders still not conveying a material slowdown. Investors will start to question not only when but also how much the Fed will need to cut.

While there are indications that point to pockets of weakness, official data that the Fed relies on has kept up. But crucially, (core) inflation will have to come down again to the 0.2% month-on-month readings that would give the Fed room to finally cut rates. We still expect this to happen – a June cut is still our base case for now, meaning also lower market rates ahead. In the near term, we don’t dismiss UST 10-year yields staying in elevated ranges on the presumption of macro resilience – until proven otherwise. But we have earlier also flagged the broader 4.25-4.50% range as an area where market participants could begin to think about getting long the market more strategically.

EUR rates dragged higher, but conviction for a June ECB cut is unfazed

Eurozone yields had some catching up to do on Tuesday. Also here yields were pushed up starting from the back end, albeit the UST-Bund 10y spread still widened overall by 5bp since last week to 196bp, the widest level year to date. US yields are the clear driver here since the eurozone data does not show the same strength that would argue for a revaluation of long run rates. Spanish and French PMI numbers may have exceeded expectations, but the overall picture for the eurozone remains one of stagnation with only careful signs of a recovery. If anything, German CPI coming in below expectations at 2.3% would have had a dampening effect on yields.

Whether those higher eurozone yields can withstand today’s eurozone CPI release will be the next question. Headline inflation is expected to come down to 2.5% and core still a bit sticky at 3.0%. We think the ECB will start cutting in June, at a steady pace, and for a total of three cuts this year. If core comes in below the symbolic 3.0% markets may get excited and price in more than this. However, we don’t think the ECB will be in a rush to cut faster given a recession does not seem imminent and rushing could convey a sense of panic.

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