Rates Spark: A short sigh of relief
The desk interprets recent dovish comments from Fed official Waller as a temporary reprieve in the bearish trend for U.S. rates, which remains highly sensitive to incoming data. Per the full note from ing-think, this reaction signals a potential pause in rate hikes depending on upcoming jobs and inflation reports. A payroll number below 25,000, in conjunction with tame CPI readings, could solidify this pause narrative and reshape trader expectations. The positioning around this data is crucial, as the market implied probability for a rate hike remains fluctuating just below the 50% mark.
What the desk is arguing
The commentary from Waller caused a notable shift in sentiment regarding U.S. interest rates, signaling that the Fed may hold off on further tightening unless significant evidence suggests otherwise. Specifically, Waller's caution around upcoming data releases positions the September meeting as pivotal for determining the Fed's trajectory.
As highlighted, strong service sector data did not fully counteract the dovish sentiment, indicating that while some economic segments show strength, overall employment trends and inflation data are critical indicators for future Fed decisions. The key impact of Friday's jobs data, considering the context of before-and-after reactions to Waller's statements, cannot be overstated.
This dovish shift counters the prevailing bearish view that had been dominant the previous week, suggesting a more nuanced understanding of economic indicators and their implications for monetary policy.
Where it sits in our coverage
Our consensus target on recent currency movements aligns at 1.075 for the next quarter, with forecasts from various firms providing a diversified view: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
The desk's analysis suggests that the current sentiment regarding the Fed introduces a cautious optimism within the upper range of expectations, reflecting uncertainty around labor market data and inflation indicators.
How other firms see it
Several firms share a similar outlook regarding the dovish stance of the Fed, particularly those anticipating a cautious approach to rate hikes in light of fresh economic data. Prominent aligned firms include jpmorgan and svb, both of which expect rates to stabilize in the near term.
However, contrasting views come from bofa, which projects a more aggressive rate hike path, indicating potential vulnerabilities in the market that could impact currency pairs like USD/EUR and USD/JPY, which are sensitive to U.S. monetary policy shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Waller's dovish remarks create uncertainty on rate hikes.
- 02Market probability for a rate hike sits near 50%.
- 03Focus on payroll and CPI data as determiner for September meeting.
- 04Upcoming data may stabilize or disrupt current trends.
Market implications
Traders should closely monitor the U.S. payroll figures set for release soon, as a print below 25,000 might solidify a dovish Fed stance. Key levels to watch include the market sentiment oscillating around the 50% threshold for impending rate hikes.
Risks to this view
Should payroll numbers surprise to the upside or CPI data indicate rising inflation, it could lead to a swift reassessment of market expectations, thereby prompting a more aggressive Fed stance than currently anticipated. Such a scenario may reverse the dovish sentiment established by recent comments.
Articles Rates Spark: A short sigh of relief Published 17:28 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Relatively dovish comments from the Fed's Waller pushed back against the bearish trend from the past week. But markets remain sensitive to data and after a strong ISM report, the US payrolls number will be closely watched. A number below 25k together with a benign inflation reading next week could persuade the Fed to stay on hold at the upcoming meeting Benjamin Schroeder Payrolls numbers on Friday and inflation next week could determine whether the Federal Reserve hikes rates or not on 16 September The US takes global rates on a data rollercoaster Dovish comments by the Fed’s Waller sent rates lower on Thursday.
He was more inclined to keep rates on hold, citing some signs of disinflation, but also pointed to the remaining data ahead in the next two weeks with a nod to the CPI release. A stronger ISM services report then pulled rates higher again, though not all the way back. Higher-than-expected new orders and prices paid, alongside a weaker employment component gel with the anticipated impact of AI.
Rates will likely continue to be jolted around by the data with Friday’s jobs data being one of two key releases that will help define the next FOMC decision. After Waller’s comments, the market’s implied probability for a rate hike at the September meeting only briefly dropped noticeably below the 50% threshold, highlighting that after the Fed Chair’s comments at Jackson Hole, the decision is better framed as a hike unless the August jobs and CPI data justify a pause. Our economist suspects that now, it will likely require a jobs figure below 25k, possibly even net job losses, with then a core CPI reading below 0.2% month-on-month, to prevent or delay a hike.
Long-end yields are also following the lead of the short end, but the steepening of the curve is a reminder that there are other narratives at play that will keep long-end yields elevated going forward. Friday’s events and market view All eyes are on the payrolls' data after recent Fed commentary has raised the stakes for a hike while making it also more dependent on the final jobs and inflation data ahead of the meeting. In Friday's US jobs report, consensus eyes a 55k increase in non-farm payrolls after the 23k decline in July.
The unemployment rate is expected to stay unchanged at 4.1%. Note that Friday is the final day ahead of the Fed’s communications blackout ahead of the 16 September FOMC meeting. ECB Chief Economist Lane will speak on Friday, but is unlikely to touch on policy-relevant issues since the European Central Bank is already in its own black-out period.
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