FX Daily: Growth fears return ahead of US nonfarm payrolls report
Today, we cannot rule out US nonfarm payrolls not falling as much as consensus expects to 225k in February from 517k in January. Despite the weaker readings in initial jobless claims and the ISM manufacturing employment index, ADP employment and the critical ISM Services employment index were significantly stronger. Moreover, consensus sees the unemployment rate holding a record low of 3.4% in February and average hourly earnings growth up to 4.7% in February from 4.4% in the previous month.
Next week, consensus expects US CPI inflation to ease modestly to 0.4% MoM in February from 0.5% in January, with core inflation unchanged at 0.4%. Assuming no major surprises in the above US jobs and inflation data, the FOMC meeting on 22 March should see the Fed delivering a second 25 bps hike to 4.75-5%, and the dot plot leaving the door open for two more hikes in the second quarter.
However, growth fears have returned to hammer US stocks and bond yields. The Dow, S&P 500, and Nasdaq Composite indices fell by 1.7%, 1.9%, and 2.1%, respectively. The US Treasury 2Y yield fell 20 bps to 4.87% after closing two days above 5%. Risk appetite weakened after Fed Chair Jerome Powell reaffirmed the Fed’s stance for “higher for longer” rates during his semi-annual congressional testimonies on Tuesday and Wednesday. Banking stocks were pressured by fears of consumers and businesses confronting elevated cash burn levels over persistently high interest rates.
On 7 March, the Canadian Association of Insolvency and Restructuring Professionals reported that Canadian consumer and business insolvencies surged by 33% YoY and 55%, respectively, in January. Canada’s six major banks also set aside provisions for credit losses in the event of a recession from weaker consumer spending and gross fixed investment. The Bank of Canada became the first major central bank to pause its hiking cycle on 8 March, adopting a wait-and-see stance to assess the impact of the 425 bps of hikes over the past year on output and prices. Earlier this week, the Reserve Bank of Australia delivered a dovish hike and signalled that it was closer to a pause on the belief that monetary policy has become restrictive.
Hence, the DXY’s 0.3% depreciation to 105.3 may not be the start of a trend. Pitting currencies against one another on monetary policy divergences works only in an economic soft-landing scenario. However, the greenback will reprise its haven status if market fears take hold for high and higher interest rates to bring economies to their knees eventually. We are already seeing a debate within the European Central Bank between the risk of under-tightening to control inflation and over-tightening hurting growth ahead of next week’s governing council meeting on 16 March. The newest member of the Bank of England’s monetary policy committee, Swati Dhingra, considers over-tightening a material risk to the UK economy, and has advocated a wait-and-see stance to assess the impact of past hikes. Hence, a back-to-back (MoM) decline in today’s UK GDP report for January will not be welcomed. Against this background, let’s see what Bank of Japan Governor Haruhiko Kuroda has to say at his farewell monetary policy meeting today.
Quote of the day
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
Ernest Hemingway
10 March in history
The Nasdaq Composite Index peaked in 2020 before the bursting of the dot.com bubble.
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