Fed hawks spook markets ahead of NFP

Fed officials cast doubt about rate cuts 

Fresh uncertainty about the timing and pace of Fed rate cuts this year weighed on markets on Friday as policymakers grew increasingly wary about the inflation outlook. The expectation that the Fed will be able to cut rates three times by year end has been under scrutiny all week, initially coming into doubt from the hot ISM manufacturing survey before the softer services PMI eased concerns mid-week.

Fed Chair Powell and other speakers seemed to endorse the view that three rate cuts were feasible in 2024, but the tune changed on Thursday when Kashkari and others sounded less optimistic. Minneapolis Fed chief Neel Kashkari suggested that rates might have to stay on hold for the rest of the year if inflation continues to move sideways. Richmond Fed’s Barkin and Chicago Fed’s Goolsbee also questioned whether inflation was headed in the right direction.

Stocks knocked back, dollar lifted as NFP eyed next 

The hawkish remarks dented sentiment in equity markets, with all three of Wall Street’s leading indices closing more than 1% lower, while the US dollar halted its decline that was driven by the somewhat more dovish commentary earlier in the week.

Treasury yields were more subdued, however, with the 10-year yield edging up only marginally, as rate cut expectations remained steady. Investors still expect around 70-basis-points of rate reductions in 2024 so the latest comments from Fed officials haven’t led to a significant repricing.

It’s likely that traders are holding their nerve ahead of the March jobs report due at 12:30 GMT. The consensus forecast is for nonfarm payrolls to have risen by 200k and for wage growth to have moderated to 4.1%. If the NFP numbers underscore the not too hot, not too cold narrative, then there’s the potential for stocks to stage a late rebound and for the dollar to resume its slide.

Some reprieve for the yen despite dollar bounce 

But it’s notable that even as the greenback bounced back, currencies such as the euro stood their ground and the Australian dollar lost only a fraction of its recent gains amid improved optimism about China’s economic recovery.

The yen, meanwhile, spiked to a two-week high as Japanese officials maintained their verbal intervention, repeating the usual warnings, and Bank of Japan Governor Kazuo Ueda also weighed in on the debate.

Ueda told the Asahi newspaper that a weaker yen could force the BoJ to respond with tighter policy if import costs go up. But it was the hints on future rate hikes that came close to pushing the Japanese currency out of its recent tight range against the US dollar. Ueda raised the prospect of a follow-up rate increase in Q4 should inflation pick up again from higher wages in the “summer towards autumn”.

However, it didn’t take long for the yen to lose steam after briefly strengthening past the 151.00 per dollar level. Dollar/yen was last trading at 151.40.

Oil extends gains amid ME tensions 

Safe-haven demand is also likely contributing to a broadly steadier yen today amid the heightened tensions in the Middle East. Israel has warned of a possible attack by Iran over the weekend in retaliation to the Israeli airstrike earlier this week that destroyed the Iranian consulate in Syria.

The threat of a fresh disruption to oil supply has been bolstering oil prices in recent days. Both WTI and Brent crude futures have climbed to more than five-month highs, with the rebound in global manufacturing in March, including in China, further boosting prices on signs of improving demand.

Gold came under pressure for a second day on Friday, however, as the mildly stronger dollar likely triggered some profit taking for the precious metal following another record peak yesterday when it hit $2,305/oz.