FX

Friday’s US jobs and ISM services data push back market’s ‘dovish’ Fed rates pricing

_{Posted on Feb 4, 2023}

USD: US nonfarm payrolls rise by a very substantial 517k in January, much higher than consensus looking for 188k and even above Citi analysts’ high estimate of 305k and the strongest gain since July 2022. Private payrolls rise 443k with goods employment up 47k with 19k manufacturing jobs added and private services employment up 397k. Average hourly earnings (AHE) rise 0.3%MoM, in line with consensus but just below Citi analysts’ expectations of 0.4%. AHE though is revised higher for previous months, up 4.8%YoY in December compared to 4.6% previously, and still up 4.4% in January. The benchmark revisions to 2022 data show the employment level by the end of 2022 to be around 800k (0.5%) higher than previously estimated, a somewhat abnormally large revision. The average pace of monthly job growth over the last 6 months of 2022 is also revised higher from around 300k/month to about 350k/month. Meanwhile, the unemployment rate falls below the levels reached pre-pandemic to 3.43% even as the labor force participation rate rises modestly to 62.4%.

USD: The strength of the January employment report however, is largely due to seasonal adjustments with both July last year and January 2023 exhibiting seasonal extremes of the year. Indeed, Friday’s report is more notable for the massive seasonal swings as seasonal factors had anticipated a 3.022 million drop in unadjusted employment but the actual drop was 2.505 million, hence the +517K gain after adjustments. The reported 517k gain in employment looks to be out of line with forward looking fundamentals for the US economy and weaker data for hiring is likely in the coming months. Indeed, with the very strong January increase and benchmark revisions showing employment 800k higher in 2022, the upcoming pace of monthly job growth is likely to be notably slower. Wage growth also continues to slow in January, which should help ease fears of a wage-price spiral. Nevertheless, for now at least, the report is likely to push back on what is now seen to be too-dovish market pricing for the Fed though is unlikely to influence the FOMC to return to rapid tightening even if it leaves additional rate hikes on the table.

US services ISM activity rebounds but still at odds with the S&P services PMI report

USD: US ISM Services Index increases to 55.2 from 49.2 in January, higher-than-consensus with the gains in part due to the jump in the business activity index to 60.4 from 53.5. The more forward-looking new orders index also jumps to 60.4 from 45.2 and the employment index ticks back up to 50 while the prices index declines modestly to 67.8, still elevated in comparison to the pre-pandemic period. The ISM Services index rebounds back to expansionary levels after a weak December report to still growing services activity that suggests the temporary weakness in December was likely weather - related. However, the ISM report still remains at odds with the S&P Services PMI index that rose in January but remains below 50, as it has been since last summer.

RBA meeting preview – a higher terminal rate and inflation forecast for Australia

AUD: RBA will likely raise its policy rate for the 9th consecutive time at the February Board meeting (by 25bp), taking the cash rate to 3.35%. With inflation well above the target band at 7.8%, the real policy rate remains negative and likely to remain there until around mid-2024. The RBA is also likely to signal further interest rate increases are likely and the risks to this week’s meeting also remain tilted hawkish with a non-trivial likelihood of a 50bp increase. The monthly policy statement should remain consistent with December with a repeat of the sentence “the board expects to increase rates further over the period ahead, but it is not on a pre-set course“. Any removal of this sentence would be dovish and one which the market would interpret as being a pause to the hiking cycle. The probability of removing this sentence however, remains low. Citi analysts now expect the RBA’s terminal cash rate view to rise from 3.35% in Q1 to 3.85% in Q2 while also lifting their inflation forecast for Australia with year-ended headline inflation for 2023 now forecast to be 1.4pp higher to 5.4% and underlying inflation also 1.3pp higher at 5.0%. Citi analysts expect the RBA to lift the inflation forecasts to June 2024, ie, inflation to remain higher for longer in the February SMP due on Friday. This brings into focus the March and April RBA meetings that leaves at least two more 25bps hikes on the table to take the cash rate to 3.85%.

Week Ahead – Fed/ ECB/ BoE speak and the RBA board meeting in focus

USD: This week will hear from a number of Fed speakers - Chair Powell speaks at the Economic Club of Washington on Tuesday following the strong jobs report Friday. Relative dove Williams is scheduled to speak during a WSJ Live event on Wednesday, and relative hawks Kashkari and Waller also speak on Wednesday. The newer Fed Governors such as Lisa Cook and Michael Barr will also speak this week.

USD: University of Michigan Sentiment – Citi: 64.8, median: 64.9, prior: 64.9; University of Michigan 1y Inflation Expectations – Citi: 4.1%, median: NA, prior: 3.9%; University of Michigan 5-10y Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.9% - higher gasoline prices mean the 1Yr inflation expectations median will likely increase moderately to 4.1% following a sharp drop in the last couple of months. More importantly, 5-10Yr expectations will likely stay unchanged at 2.9% within the range of comfort for the Fed.

EUR & GBP: ECB and BoE central bank speeches - plenty of ECB & BoE policy makers scheduled to speak throughout the week., clarifying the decisions of last week - Austrian central bank governor Holzmann – hawkish; Bank of France Governor Villeroy – neutral; Dutch central bank governor Knot – hawkish; Bundersbank’s Schnabel – hawkish; BoE MPC member Mann – hawkish; BoE deputy governor Ramsden; BoE chief economist Pill; BoE Governor Bailey; BoE MPC members Tenreyro and Haskel; ECB Survey of Monetary Analysts.

AUD: RBA Board Meeting: Citi forecast; +25bps to 3.35%, Previous; +25bps to 3.10% - the RBA is expected to raise the cash rate target by 25bps on Tuesday for the 9th consecutive time (refer above).

CAD: Canada Net Change in Employment (Jan) – Citi: 25k, median: NA, prior: 69.2k; Unemployment Rate – Citi: 5.1%, median: NA, prior: 5.0%; Hourly Wage Rate Permanent Employees – Citi: 4.8%, median: NA, prior: 4.7% - Citi analysts expect a solid 25k increase in employment in January and continue to see upside risks for employment figures in the near term. A strong 25k pace would put some downward pressure on the unemployment rate, although a more modest increase to 5.1% is more likely due to the rise in participation that could also be related to stronger immigration. Citi analysts expect usual start-of-year wage increases to boost YoY wages of permanent employees to 4.8% - wage growth of 4-5% is not consistent with 2% inflation.