The strong Non-farm Payrolls report has caused a tremor for markets that had been previously pricing for a new Fed rate cutting cycle being implemented. We look at what has changed and the implications on forex, equities and commodities markets.
Last week’s forward looking global PMIs continue paint a picture of a global slowdown taking hold. Major central banks continue to come out with dovish rhetoric. Bond yields have fallen sharply as the US 10 year Treasury yield has dropped below 2% and significantly the German 10 year Bund yield last week dropped to below the -0.40% level of the ECB deposit rate. Markets are pricing in a huge renewed monetary easing from major central banks. However, whilst the Atlanta Fed’s GDPNow projection has fallen to +1.3% annualised US GDP in Q2 (from +3.1% in Q1), this reflects faltering growth but nothing too horrendous yet. This means the Fed has a decision to make in July. In June, Fed Chair Powell said that he had “one overarching goal, to sustain economic expansion”. Fed Funds futures are pricing in four rate cuts by the end of 2020, whilst the Fed’s dot plots have just one. US data does not require a panic move. Is the Fed going on global economic trends, or domestic? Is the subdued nature of inflation (holding around +1.6% on core PCE) warranting a new cut cycle? We have been saying for some time that the market has gone too far in pricing for cuts. A July cut of 50 basis points would be seen as a panic move, whilst we even question the wisdom behind a 25bps cut. The key question for traders is just how the strong jobs growth in Friday’s payrolls report impacts on the Fed. If CPI inflation holds up well this week, perhaps we will begin to see guidance for a less dovish position? The dollar is rallying off the payrolls report, this could be set to continue.