UPCOMING EVENTS:
Tuesday: RBA Policy Decision, Fed Chair Powell speaks.
Thursday: US Jobless Claims.
Friday: University of Michigan Consumer Sentiment.
What an end of the week it was last Friday. The labour market report showed 517K jobs added vs. 185K expected, which is almost double even the most optimistic forecasts. The unemployment rate came in at 3.4% vs. 3.6% expected, which is the lowest since May 1969. People rushed to call it “too good to be true”, maybe it is but recent beats in Job Openings and Jobless Claims are testimony of the extremely tight labour market.
Later on that day, we got another big beat in the ISM Services PMI report, which bounced back strongly from the contractionary territory to 55.2 vs. 49.2 in the previous month. New orders sub-index, which is a proxy for demand, went from expansion to contraction in the previous report to expansion again with the latest one. Looks like the easing in financial conditions sparked immediately a reacceleration in economic activity.
This is something that will make the Fed’s job much trickier going forward as they try to bring inflation back to their 2% target while getting close to their projected pause. If this trend is to continue, we may see not only a “higher for longer” policy, but a “higher-er for longer” one. The market had a quick rethinking on Friday and is repricing its future interest rates expectations. The 2 year note’s yield, which is more sensitive to Fed’s policy, jumped by more than 20 bps and reversed completely the drop seen in the aftermath of the FOMC Policy Decision. The market’s expectation for the terminal rate also rose to 5.04% vs. 4.90% before Friday.
The US Dollar gained across the board on Friday, and given the Friday’s data, we should see some repricing going forward. Technically, the swing support at 101.25 held and we may see a run to the 108.00 level.
Tuesday: The RBA is expected to hike by 25 bps bringing its cash rate to 3.35%. The central bank is expected to reiterate its willing to increase rate further and be data dependent until inflation is seen returning to their 2-3% target band. As a reminder, recent inflation data surprised to the upside with the Y/Y figure coming at 7.8% vs 7.5% expected.
The market will focus more on Fed Chair Powell and see what he has to say about the recent huge beat in the labour market report. There will also be other Fed speakers throughout the week.
Thursday: Given the focus on the labour market, the US Jobless Claims is something to keep an eye on. We saw beats after beats in the data and the big surprises on either side may be market moving. The expectation for Initial Claims is 194K.
Friday: The University of Michigan Consumer Sentiment survey is expected to tick up again to 65.0 from the prior 64.9 in January. The market will keep an eye on inflation expectations data in the report.
This article was written by Giuseppe Dellamotta.