Market Briefing: Markets rebound on declining rate expectations
Markets seem to be enjoying a bit of a dead cat bounce this morning, with risk-sensitive currencies advancing, commodity prices climbing, and most major equity indices bulling up ahead of the opening bell. With Treasury yields rising on improved risk appetite, the safe-haven greenback and Japanese yen are weakening, and measures of implied volatility are inching lower.
To some extent, this may reflect a shift in near-term rate expectations. After Jerome Powell failed to take rate cuts decisively off the table during Wednesday’s press conference, bets on a policy reversal have surged - markets are currently assigning near-50 percent odds to a quarter-point cut at the Federal Reserve’s July meeting.
But stronger-than-expected payrolls numbers - today, or next month - could wreck these assumptions. Consensus forecasts currently suggest 185,000 jobs were created in April, down from 236,000 in March, with the unemployment rate ticking up to 3.6 percent from 3.5 percent in the prior month. Average hourly earnings should hold at the same 4.2 percent pace set in March.
Economists think Canada added 20,000 jobs in April, down from 34,700 in March, with the unemployment rate moving incrementally higher from 5 percent to 5.1 as immigration volumes outpace job creation. Hourly wage growth is seen slipping to 4.8 percent year-over-year, from 5.2 percent in the prior month. Risks are tilted to the downside, with softer data releases suggesting that labour market slack is ebbing, along with the number of job vacancies.
The St. Louis Fed’s James Bullard and Governor Lisa Cook will make appearances later in the day, and the Fed will release its latest consumer credit data. All are likely to sing from the same hymnbook, telling markets that underlying inflation pressures remain sticky even as credit conditions tighten.
The cadence of economic releases will slow next week, but will retain the capacity for surprise.
The SLOOS won’t be on the loose. Monday’s first quarter Senior Loan Officer Opinion Survey - which captures shifts in bank lending through the end of March - is widely expected to show a sharp contraction in credit conditions across the US economy. In Wednesday’s press conference, Chair Powell hinted at this, saying, “I would just say that the SLOOS is broadly consistent when you see it with how we and others have been thinking about the situation and what we're seeing from other sources."
Wednesday’s US inflation print is expected to show core price pressures remaining stubbornly elevated, with non-energy, non-food prices rising 5.4 percent year-over-year even as the headline measure holds at 5 percent. Core services costs - typically less sensitive to changes in monetary conditions - are likely to drive much of the headline number.
And markets think the Bank of England will deliver another quarter-point hike on Thursday, with resilient employment, relative economic stability, and ongoing government energy offsets helping to support the case for further tightening. Updated forecasts should show labour markets cooling more slowly, the economy growing by more than previously expected, and inflation trending sharply downward in the latter half of the year. The statement will again note the rise in global bank funding costs, and should largely retain the forward guidance language deployed previously - helping maintain expectations for a final hike at the June meeting.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Non-Farm Payrolls, April
CAD Employment, April
USD Baker Hughes Weekly Rig Count
CNY Trade Balance, April
CNY Aggregate Financing, April
USD Senior Loan Officer Opinion Survey, Q1
MXN Consumer Price Index, April
MXN Bi-Weekly Consumer Price Index
USD Consumer Price Index Index, April
USD Department of Energy Weekly Inventories
GBP Gross Domestic Product, Q1 Preliminary
GBP Monthly Gross Domestic Product, March
GBP Trade Balance, March
GBP Bank of England Rate Decision
USD Weekly Jobless Claims
USD University of Michigan Sentiment, May Preliminary
USD Baker Hughes Weekly Rig Count