Fed Chair Jerome Powell hinted that the Fed was getting closer to starting the process of reducing monetary policy. During his panel discussion at the European Central Bank Forum in Sintra yesterday, Powell wanted more of the recent inflation readings that signalled a return to a “disinflationary path” for the US economy. He reckoned that inflation would be in the mid to low twos a year from today. Interest rate futures increased the odds of a Fed cut at the September FOMC meeting to 64.5% from 56% last Friday. While the Fed did not want to lower rates too soon only to have inflation return, Powell acknowledged that lowering rates too late could lose the economic expansion. The Atlanta Fed GDPNow model projected US GDP growth staying low at an annualized 1.7% QoQ saar in 2Q24 vs. 1.4% in 1Q24, significantly lower than the 3.4% in 4Q23 and 4.9% in 3Q23. 
Powell’s comments elevated the significance of this Friday’s US monthly jobs report. He echoed San Francisco Fed President Mary Daly’s warning about the US labour market reaching an inflection point. On June 24, Daly drew attention to the Beveridge Curve, which highlighted the declines in job openings in lifting the unemployment rate. Powell had played down the higher-than-expected 272k (vs. 180k consensus) nonfarm payrolls in May. Instead, he found the increase in the unemployment rate to 4% in May as significant, most likely because it hit the Fed’s projected level for 4Q24.
Economists polled by Bloomberg see Friday’s nonfarm payrolls declining to 190k and the unemployment rate holding at 4% in June. The market’s conviction will increase if today’s ADP Employment stays below 200k in June again, amid a rise in initial jobless claims to 235k for the June 29 week vs. 233k a week ago. Pay attention to the ISM Services PMI survey for declines in its prices paid and employment components, like the earlier ISM manufacturing report. Looking for more evidence that the labour market is cooling, Powell will likely pay attention to the average hourly earnings, which consensus sees declining to 3.9% YoY in June for the first time since June 2021.
Interestingly, the DXY Index did not push above and retreated below 106 on Powell’s “balanced risks” comments at Sintra, just as it did at the FOMC meeting on May 1. Even so, we are mindful of volatility in the GBP from tomorrow’s UK elections, and the EUR at France’s second round elections on Sunday. Beyond that, a softer US jobs report this Friday and continued declines in US CPI inflation (on June 11) and PCE deflators (on June 26) should keep markets alert to the Fed cut preparation risks at the FOMC meeting on July 30-31. If so, the Bank of Japan meeting on July 31 could take the pressure off the JPY, if the central bank provides unambiguous guidance on the next interest rate increase and the pace of reduction in JGB purchases.
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