This Friday’s US monthly jobs report will significantly assess if the Fed is approaching the September interest rate cut indicated in the futures market. Per its Summary of Economic Projections in June, the Fed did not need PCE inflation to hit the 2% target to deliver the 1-2 rate cuts projected in the dot plot for 2H24. Core PCE inflation fell a second month to 2.6% YoY in May, below the 2.8% level the Fed projected for 4Q24. The Fed’s recent narrative suggested that the labour market has become as important as inflation data in providing the Fed the confidence to lower the highest real interest rates since 2009.
Hence, please pay close attention to Fed Chair Jerome Powell at the European Central Bank Forum in Sintra on July 2 and his semi-annual testimony to the US Senate Banking Committee on July 9. During the FOMC meeting on June 12, Powell played down the higher nonfarm payrolls (NFP) in May and considered the unemployment rate – which hit the Fed’s 4% level projected for 4Q24 – an important statistic. Notably, Powell said the Fed was ready to respond if US jobs weakened unexpectedly. Hence, the market is bracing for June’s NFP to decline below the 200k level for the second time in three months and is wary that the unemployment rate might push further above 4%.
Our view remains that the USD will depreciate due to two Fed cuts in 2H24. Fed cuts should eclipse the efforts of other central banks (including Singapore) to remove top-level restrictions in their monetary policies.
While we do not rule out volatility from this week’s elections in France and the UK, global financial markets have demonstrated resilience and adaptability to geopolitical risks such as Russia’s invasion of Ukraine, the Israel-Gaza crisis, and trade tensions between the US/EU and China. The US Presidential Elections in November will likely be more significant for the USD. Apart from an increase in the momentum of dedollarisation this year, attention is also falling on the sustainability of large fiscal deficits and federal debt in America.
Quote of the day
“Every new beginning comes from some other beginning’s end.”
Seneca
1 July in history
The United States–Mexico–Canada Agreement replaced NAFTA in 2020.
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