US
USD clawed back some of yesterday’s losses as broad JPY weakness lifted USD/JPY. Otherwise, USD is broadly steady alongside stocks, bonds, and crude oil prices.
Fed funds futures trimmed odds of a September 16 hike to 50% from 62% after yesterday’s favorable inflation comments by Fed Governor Christopher Waller. Waller stressed that “underlying inflation is doing better than the core numbers suggest” and noted the rapid decline in the three-month annualized core PCE “is encouraging.”
Importantly, Waller highlighted that his next decision on interest rates will be “heavily influenced” by the August CPI print on September 11. Waller said “If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level…But if inflation comes in hot, I would consider a rate hike.”
As a result, Fed funds rate hike pricing will remain elevated and USD supportive until that policy-relevant CPI reading next week. Leading inflation indicators remain mixed, mirroring the FOMC’s divide over the outlook for prices. The Prices Paid indexes of the August ISM surveys point to upside inflation risks. However, the negative San Francisco Fed Inflation Shock Momentum Index indicate downward pressure on inflation.
Our base case is for the FOMC to hold rates steady on September 16. US wage growth is consistent with the Fed’s 2% inflation target, Fed policy is already somewhat restrictive, assuming a nominal neutral rate of 3.00%, and labor demand is soft.
The August non-farm payrolls (NFP) report takes the spotlight today (1:30pm London, 8:30am New York). Consensus is looking for NFP gains of +55k vs. -23k in July. Bloomberg’s whisper number is lower at +30k while ADP private payrolls and Revelio Labs employment imply NFP gains of +64K. The unemployment rate is expected to hold at 4.1%, below the FOMC’s 4.3% projection, but this largely reflects weak labor supply growth rather than robust demand.
CANADA
USD/CAD is a little firmer near 1.3800 after testing a multi-day low of 1.3765 yesterday. Canada’s August labor force survey is the domestic highlight (1:30pm London, 8:30am New York). The economy is expected to add +15.0k jobs vs. +75.1k in July with the unemployment rate holding at a two-year low of 6.4%. Overall, the labor market has improved in recent months, but demand for labor remains subdued.
We are sticking to our view that BOC rate hike pricing (88bps in the next twelve months) is too aggressive given core inflation is near the banks’ 2% target and indicators point to continued excess supply in the economy. Bottom line: scope for a dovish BOC repricing leaves CAD vulnerable to a dovish repricing.
JAPAN
USD/JPY rebounded towards 156.60 after nearing its post July intervention low of 155.23 and key technical support at 155.00. The sustainability of the USD/JPY downswing hinges on the Bank of Japan (BOJ) September 18 decision. In the meantime, USD/JPY faces immediate resistance at it 200-day moving average of 158.46.
A 25bps BOJ rate hike to 1.25% is fully priced-in, but a jumbo 50bps increase cannot be ruled out. Inflation expectations account for most of the rise in 10-year JGB yields, strengthening the case for a forceful action. A larger hike could re-anchor inflation expectations, cap the long end of the curve, and turbocharge the JPY recovery.
