Dollar on the front foot
The dollar advanced across the board yesterday as the market pared back substantially expectations for a Fed rate cut at next month’s meeting. This followed the announcement that, after today’s US jobs report (for September), the next report will not be published until after the December 10th meeting, leading the market to conclude that, in the absence of this important data, the Fed is more likely to sit on its hands and keep rates unchanged. Whether today’s report shifts expectations again remains to be seen, though a weaker than expected outturn might bring a rate cut back into play. The euro is trading at around $1.1520 against the dollar this morning, a circa 2-week low and down about a cent from last Friday’s close. Sterling has fallen to around $1.3060, also a 2-week low, and is trading at about £0.8815 versus the euro. Also notable is the slide in the Japanese yen – down almost 1.5% against the dollar over the past 24 hours – which alongside rising bond yields points to concerns about the country’s public finances as the new government prepares a fiscal stimulus for the economy.
US government bond yields rose by 3-4bps across the curve as the chances of a December rate cut were marked down, while German yields were flat on the day. UK bonds underperformed with 10- and 30-year yields rising by 5-7bps, suggesting some market angst ahead of Rachel Reeves budget next week. In equity markets, better than forecast results from Nvidia sees European stocks open in positive territory this morning (up more than 1%) with US indices set to do likewise later today.
The minutes of the Fed’s October meeting noted “strongly differing views…about what interest rate decision would most likely be appropriate at the December meeting.” While “most” members judged that further reductions in rates would be required, “several of these” indicated they did not necessarily view another 25 basis point reduction in December as a given. Some other members believed another cut in rates “could well be appropriate in December“, while a few more suggested rates should remain unchanged through the end of this year.
Today’s jobs report is expected to show employment rose by about 50k in September according to the consensus forecast, following an increase of 22k in August, with the unemployment rate seen holding steady at 4.3%. An outturn along these lines would probably leave expectations for a rate cut next month unchanged (now at about 30%). Weaker than forecast jobs growth and/or an increase in the unemployment rate might see the market mark up the chances of a cut, which in turn could weigh on the dollar.