sign up log in
Want to go ad-free? Find out how, here.

April US jobs numbers softer. US treasury yields and the dollar initially crunched; claw back some losses. Fed rate cuts expected to commence in September. Market pricing in 2 @ -25bps

Currencies / analysis
April US jobs numbers softer. US treasury yields and the dollar initially crunched; claw back some losses. Fed rate cuts expected to commence in September. Market pricing in 2 @ -25bps

By Stuart Talman, XE currency strategist

The dollar's retreat extended into a third day, softer-than-expected US jobs data the catalyst, driving the dollar index (DXY) back below 105.00 for the first time in four weeks whilst the antipodeans continued their recent run of outperformance, the New Zealand dollar ripping through 60 US cents to mark intraday highs a couple of pips shy of 0.6050, spiking to its highest level since 10 April.

Handing back gains through the New York afternoon, NZD/USD closed the week near 0.6010, logging a week-on-week gain of +1.31%, a top three performer amongst the G10.

The Japanese yen claimed top spot, surging +3.37% for the week on two bouts of MoF/BoJ intervention which will have the desired effect of slowing carry trade related institutional flows.

For the week, the Kiwi was stronger against most major peers, +0.78% and +0.58% gains against GBP and EUR respectively lifting those pairs to the top of prevailing two-month ranges. Against its trans-Tasman neighbour, the Kiwi was flat, NZD/AUD remaining under pressure below 0.9100.

Spiking near 95.50 to start the week, NZD/JPY plunged below 91.00 following Wednesday's follow-up intervention before ending the week -2.15% lower, closing sub-92.00.

A session that was punctuated by buoyant risk sentiment yielded impressive gains for the three major US equity markets, the Dow gaining +1.18%, the S&P500 +1.26% whilst tech stocks lead the broader market higher, the Nasdaq gaining +1.99%.

April's Bureau of Labor Statistics employment data reported that headline jobs growth missed consensus estimates, non-farm payrolls falling from 315K (revised up from 303K) to 175K (vs 243K, expected), printing its lowest reading since October 2023. It was the first time in six months NFP has fallen short of expectations.

The unemployment rate ticked up from 3.8% to 3.9% (vs 3.8%, expected) whilst average hourly earnings eased from 0.3% month-on-month to 0.2%, bringing the annualised rate to 3.9%, marking the first time wage inflation had fallen below 4% since June 2021.

The cooler labour market data will be welcomed by Jerome Powell and his fellow Fed governors given the Fed Chair made it abundantly clear in his FOMC presser, mid-week, that he is stinging to commence lowering the Fed funds target rate.

However, despite the below consensus numbers, April's employment report does little to alter the Fed's current psyche: absent the required confidence that inflation is currently tracking towards the 2% target. Despite the NFP miss, monthly jobs growth of 175K is indicative of a healthy labour market. Furthermore, an unemployment rate at 3.9%, historically,  is not conducive to dampening household spending, thereby inducing a material slowdown in economic activity.  

Following the release of the data, rates shifted to price in more Fed easing through the backend of 2024, pricing in circa 45bps of monetary easing.

The next FOMC decision falls on 12 June, with four more to follow in July, September, November and December.

An on-hold decision is assigned a greater than 90% probability at the June meeting. Given unwelcome higher inflation prints through the first quarter it's unlikely CPI will decline enough between now and the July meeting to enable the Fed to cut.

Therefore, September looms as a popular pick for the Fed to commence an easing cycle.

Yet, with the election in early November, provided prices and activity data hold up, the Fed will be reluctant to cut less than two months out from election date.

Therefore, the path for Fed policy for the remainder of the year may only include a solitary cut, or maybe none at all should inflation remain sticky.

So, despite a week that just delivered a dovish on-hold Fed decision, softer jobs data and downside misses for both the ISM Manufacturing and Services PMIs, its too premature to declare an end to the dollar's dominance.

The reality is that most, if not all central banks within the G10 will be cutting before the Fed given economic activity is notably softer in these developed economies whilst the world's largest economy outperforms due to unprecedented fiscal largesse. 

A quick point regarding last week's ISM PMIs and other recent survey data……

The survey data, also referred to as soft data (as opposed to hard, quantitative data), has turned notably softer in recent weeks. Both the ISM Manufacturing and Services PMIs printed below the 50.0 threshold, for the latter (released Friday evening), dipping into contractionary territory (49.4 vs 52.0, expected) for the first time since December 2022.

Recent deterioration in both the Conference Board's Consumer Confidence Survey and the University of Michigan's Consumer Sentiment Index represents US households that are becoming more pessimistic about future business conditions, job security, inflation and income.

Often, softening survey data is the prelude to weaker hard data (jobs, retail spending, house prices, etc…), in turn leading to recessionary outcomes.

Next month's PMIs will garner even more scrutiny to confirm this trend. The latest read of Michigan consumer sentiment is released this Friday.

Looking to the week ahead, a more subdued economic calendar presents eurozone retail sales, UK GDP and the aforementioned Michigan Consumer Sentiment.

The Reserve Bank of Australia and the Bank of England both meet - both widely. expected to deliver on-hold decisions.

Following recent upside inflation surprises, the accompanying RBA statement and Governor Bullock's presser will be closely observed for any suggestion that rate hikes have re-entered the periphery. The base case still holds for the RBA to be cutting late in the year, but this could shift if inflation fails to track lower in the months ahead.

Meanwhile, the BoE is expected to deliver a few cuts before year-end, potentially commencing the easing cycle at the June meeting.

Also in focus this week - a flurry of Fed speakers.

It would not surprise if the likes of Bowman, Kashkari and Williams (regarded as hawks) adopt a more hawkish tone than Powell did in his FOMC presser causing US treasury yields and the dollar to claw back some of last week's concessions.

Having stalled its upside near 0.6050 which also coincides with both the 200-day moving average and 38.2% Fibonacci retracement of the December-April sell-off, we suspect NZD/USD upside may be capped in the low to mid 0.6000's as the dovish afterglow of last week's FOMC meeting fades.

Expectations are for sideways action, the Kiwi to range between 0.5960 and 0.6050.

Stuart Talman is Director of Sales at XE. You can contact him here

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.