Diverse DigestFollowing the Federal Reserve’s (Fed) May 1st FOMC decision, which was highly anticipated amid rising inflationary pressures, Chair Powell’s message remained cautiously dovish, according to insights from Saxo Bank’s Head of FX Strategy, Charu Chanana.
While market expectations had speculated on a potentially hawkish turn, Powell’s address didn’t sway towards rate hikes. Instead, he emphasized the likelihood of future rate cuts, aligning with the Fed’s continued cautious approach. This stance was further underscored by the balance sheet runoff (QT tapering) decision, which leaned towards a more dovish position than anticipated.
The announcement detailed a tapering of quantitative tightening (QT), with a reduction in the pace of asset runoff set to begin in June. Specifically, the cap on maturing Treasury securities rolling off the balance sheet will be lowered from $60 billion to $25 billion monthly. In contrast, the cap on mortgage-backed securities (MBS) will remain unchanged.
Jobs data is turning; April NFP due on Friday
Regarding employment data, the upcoming Friday’s April non-farm payroll report is significant. Consensus forecasts indicate expectations of modest cooling in the US labour market, with headline jobs projected at +240k, private jobs added at +190k, and an unchanged unemployment rate at 3.8%.
However, leading indicators suggest a mixed outlook, with soft spots emerging across various sectors. Data such as US JOLTS job openings, ISM manufacturing employment index, and Flash S&P PMIs for April all point towards a nuanced picture of the US labour market, with signs of cooling amid ongoing strength.
Market reactions to the Fed decision and the upcoming employment report remain uncertain. However, the potential for dovish repricing looms large, particularly in the event of any deviation from consensus forecasts. Such a scenario could trigger rallies in equities and Treasuries while exerting downward pressure on the US dollar.
On the other hand, a significant beat in the employment data could spur a hawkish surprise, leading to potential sell-offs in specific sectors and measured strength in the dollar.
For further insights and analysis, visit the Saxo Bank website.
Diverse Digest
