A sense of cautious optimism is settling over global markets this morning after payroll revisions and Federal Reserve minutes helped recalibrate expectations for the central bank’s policy actions this autumn. Trading ranges are narrowing across fixed-income, equity, and foreign exchange markets, with most major currency pairs moving sideways as participants avoid taking directional positions ahead of tomorrow’s appearance from Fed Chair Jerome Powell at the Jackson Hole economic symposium.
The Bureau of Labor Statistics yesterday said the number of jobs created in the year through March was significantly less than initially believed. Revisions subtracted 818,000 jobs from total payrolls over a twelve-month period, bringing average monthly payroll growth down to roughly 174,000 from the 242,000 previously estimated – although the difference was likely partly driven by a discrepancy in the number of recent immigrants counted, and could be revised slightly upward in the future.
Minutes taken during the Federal Reserve’s July meeting showed a “vast majority” of officials supporting a September rate cut, with “several” seeing a case for moving even earlier. “Almost all” of the central bank’s rate-setting committee saw price growth continuing to slow, with members acknowledging that “risks to the inflation goal had decreased,” even as threats to the employment goal had grown. “Some participants noted the risk that a further gradual easing in labour market conditions could transition to a more serious deterioration,” implicitly bolstering the need for a move out of restrictive policy territory.
With underlying economic data and Fed officials pointing in the same direction, investors are back to pricing four quarter-point rate cuts this year, implying at least one half-point move in the three meetings scheduled between now and December. Real currency market momentum is unlikely to develop before Powell’s comments are released tomorrow morning, but could also fail to emerge over the coming months. A record of the Fed’s last six easing cycles shows no discernible trend in the trade-weighted dollar in the year following the first rate cut, suggesting that the intersection between US fundamentals and the global backdrop can have bigger implications than the simple direction of policy.
The euro is softening after an Olympics-related surge in France helped obscure deeper weakness in euro area purchasing manager indices. The French composite index jumped from 49.1 – below the 50 threshold separating expansion from contraction – in July, to 52.7 in August, but the services sector did the heavy lifting, offsetting persistent weakness in manufacturing and private sector employment. The German economy remained mired in a downturn, with both the manufacturing and services sector posting month-over-month declines. Separate data showed annual wage growth slowing to 3.6 percent in the second quarter, pointing to a slight easing in inflation pressures ahead. Traders think the European Central Bank will deliver at least two rate cuts in the next three meetings, with the odds gradually tilting toward a third move as the economy underperforms.
The British pound, in contrast, is sitting on another gain, boosted by signs of continued growth in an economy that outperformed forecasts in the first half of the year. The country’s composite index hit its highest levels since April, solidly in expansionary territory for a tenth consecutive month in August. The services sector reported an acceleration in activity, lifting the sub-index to a four-month high, and manufacturing output held near a two-and-a-half-year peak, helping support expectations for a reasonably-strong expansion in the third quarter. The Bank of England is seen delivering at least one, perhaps two, rate cuts in the back half of the year as it cautiously responds to a moderation in still-elevated services-sector inflation – but market views could shift when Governor Bailey speaks at the Jackson Hole conference on Friday.
Japan’s yen is seeing incremental moves amid plunging volumes. Bank of Japan Governor Ueda is expected to deliver a relatively hawkish message when appearing in front of the Diet tomorrow, outlining the case for further monetary tightening over the year to come, but events in US markets could easily overshadow his words, and exchange rate swings are narrowing as traders move to the sidelines.
The Canadian dollar has some upside potential as the greenback loses altitude, but the rail shutdown now underway should instil a growing sense of alarm in those holding bullish positions. With the federal government thus far refusing to intercede in negotiations between Canadian National Railway, Canadian Pacific Kansas City, and the Teamsters union, the prospect of a prolonged lockout is raising the threat of serious economic damage, with the timing landing just as farmers harvest crops and North American retailers restock shelves for the holiday season. According to the Railway Association of Canada, around 70 percent of all intercity surface freight, and half of the country’s exports are moved by rail, suggesting that an already-vulnerable exchange rate could suffer negative consequences – even if the greenback enters a deeper decline.
In contrast with its major counterparts, Mexico’s peso remains incredibly volatile, moving from one extreme to another in just the last few days. With carry traders in a trigger-happy mood, domestic economic fundamentals showing signs of a slowdown, and Claudia Sheinbaum’s incoming government promising to follow through on Andres Manuel Lopez Obrador’s effort to dismantle checks and balances in the legal system, market sentiment has shifted toward assuming greater downside risks in the months ahead. Implied volatility – a measure of expected turbulence in the exchange rate – has marched higher across one-, three- and six-month tenors, suggesting that market participants don’t see pressures easing anytime soon.
