The USD surged from its two-week low yesterday following remarks by Minneapolis Federal Reserve President Neel Kashkari suggesting that rate cuts might not be necessary this year if inflation remains subdued. This week has seen significant developments on the macroeconomic front, with Eurozone inflation continuing its decline and the ISM PMI surveys indicating a gradual convergence between the manufacturing and services sectors. However, the primary concern for central banks globally and the current low-volatility environment stems from the recent rise in commodity prices, the USD, and inflation expectations.
This interconnected trio of challenges for risk assets demands close monitoring in the weeks ahead, particularly as the Stoxx 600 European equity index just experienced its most negative week in over two months. Looking forward to today, volatility is expected to increase around the release of the jobs report for two main reasons. Firstly, the non-farm payrolls report has consistently been the most volatility-inducing data release globally for several years. Secondly, recent months have witnessed staggering revisions to the initial numbers, with an average downward revision of jobs growth for seven months since the start of 2023, with revisions typically reducing the initial figures by 7%. Notably, December's figures were revised upwards by 74 thousand jobs while January's figures were revised downwards by 124 thousand. Given this volatility in the data and market reactions, similar fluctuations are anticipated today.
Recent hawkish adjustments to Fed policy expectations, coupled with Chairman Powell's apparent inclination towards a June rate cut, suggest that the risks to the USD after today's US jobs report may lean asymmetrically towards the downside. In simpler terms, a weaker jobs report could potentially weaken the USD more than a stronger report would strengthen it.
The US Unemployment Rate is projected to remain unchanged at 3.9% during the same period. Meanwhile, Average Hourly Earnings, a key indicator of wage inflation, are expected to increase by 4.1% in the year ending March, showing a slight deceleration from February's growth of 4.3%.
