October 07, 2024

“Last Friday’s monster jobs report has suddenly reset expectations for the Federal Reserve and the dollar has rallied sharply. This week, Thursday’s US inflation release stands out as a highlight, and we’ll be keeping an eye on the geopolitical risks that could spark some safe haven moves.”

Tim Hallinan – Trading Director

USD

After months of the data skewing weaker in the US, Friday’s blowout non-farm payrolls report revived the US economic exceptionalism narrative and wiped out remaining bets on a more aggressive Federal Reserve easing cycle. 254K jobs were added in September – far more than even the most optimistic estimate in the Bloomberg survey – and 72K jobs were added to the previous two reports, while the unemployment rate fell to 4.1%. The stronger macro picture negates the need for such a rapid decline in rates to shore up the economy and, given how tight the decision was to cut by 50bp last month, there is a strong chance that the Fed would have gone for a 25bp cut if they had known these backward-looking revisions in advance. The market is now pricing in only two more 25bp moves before the end of the year.

The hawkish turn in the US macro data has come at a time where its peers are all becoming a bit more dovish – thanks to Bailey’s comments in the UK, softening growth data in the eurozone, and a cautious PM in Japan. The dollar index has lifted 2.5% from its one-year low less than two weeks ago. This week, Thursday’s CPI release is likely to be the biggest event, where the data should simply continue to give the green light for further rate cuts.  Upside risks may have increased following Friday’s jobs report, but the consensus is looking for a bit more progress on the headline figure, which is expected to fall from 2.5% to 2.3%.

GBP

A stronger dollar and a Bailey-induced dovish BoE repricing handed sterling its worst week this year with a 1.9% loss. The suggestion that rate cuts could become ‘a bit more aggressive’ somewhat upended the hawkish narrative underpinning sterling’s summer rally: that the Bank of England would cut much less aggressively than its peers. Chief Economist Huw Pill capped the pound’s losses on Friday, however, as he argued that ‘there is ample reason for caution’ and that ‘the need for such caution points to a gradual withdrawal of monetary policy restriction’. Cut bets were trimmed slightly on Friday, with the market now looking for a surefire rate cut in November and then around a 50/50 chance for a third in December. Friday’s GDP report is the report to watch this week, and the estimate is for 0.2% month-on-month growth for August.

EUR

The 1.10 level gave the euro little support as Friday’s US jobs report dragged EUR/USD 0.5% lower. A German factory orders report has reminded the market of one of the reasons why this morning, contracting by almost 6% in August. The pace of ECB and Fed cuts are now identically priced over the next year – gone is the divergence between a frontloaded Fed cycle and a cautious, once-per-quarter rate of cuts in the eurozone. This reset has mirrored diverging surprises in the data, with the US economy suddenly looking healthy again while a bleak eurozone growth outlook puts the pressure on ECB policymakers to get moving. Sentix investor confidence and retail sales are the two main data points on offer this morning, alongside a fresh raft of ECB speakers that includes Cipollone, Lane, Escriva, and Nagel. Traders will want to see if there are any hawks still ready to argue against a 25bp move this week.

Markets

The strong US jobs numbers lifted Wall St indexes on Friday as investors revised up their estimates for US economic growth and company earnings, with the Dow up 0.8%, the S&P up 0.9%, and the Nasdaq higher by 1.2%. Oil continued to rise towards the end of the week as commodities traders await Israel’s response to the Iranian attack, although Biden’s eventual discouragement of Israel hitting oil facilities capped gains.

Main Economic Events (All Times CET)

9:00am: Swiss FX Reserves
10:30am: Eurozone Sentix Investor Confidence
11:00am: Eurozone Retail Sales

To learn more about Ballinger Group, please visit our website or our LinkedIn page.