The central bank bonanza carries on with the Fed and Bank of Japan meetings taking centre stage this week. To add into the mix, markets will have to juggle US inflation data released a few hours before the FOMC gathering. Indeed, the reaction to Friday’s non-farm payrolls report will take up some grey matter, after another strong headline print, even if unemployment saw an upside surprise.
Markets will likely take Monday at least to digest those latest US employment figures. We got a big rebound in headline job and wage growth. But the unemployment rate did print with a four handle which hasn’t been seen since January 2022 and the labour participation rate came down. That jobless rate broke 28 straight months of prints below 4%. In addition, the household survey paints a much weaker picture. Rate cuts bets got shaved with the July FOMC meeting now firmly off the table for any first historic reduction.
The Fed is likely to want to retain maximum optionality and flexibility. Forward looking data still looks soft while activity figures remain solid. Questions are being raised about how restrictive Fed policy actually is with financial conditions variable. The watchwords will likely be “patience” and needing “confidence” for Chair Powell and other policymakers to kick off policy easing. He will likely bat away suggestions of a hike, with the majority in the new dot plot inking in two rate cuts for 2024, down from three in the prior plot in March. There may be minor tweaks to growth and inflation, but nothing significant. It seems the Fed may have won the war with inflation, but also doesn’t want to lose the battle with a soft landing.
The Bank of Japan will keep rates unchanged at its meeting on Friday, but Governor Ueda will likely signal further rate hikes, with July potentially signposted. Consensus expects an announcement about the start of QT with the BoJ reducing its bond buying. USD/JPY has been messy recently, but the authorities will be relatively happy there is now two-way risk. Of course, they will be hoping their $62bn spent on intervention in May turns out like events in 2022 when the major turned sharply south as US rates cooled.
