Fed Decision: High-for-longer, not higher-for-longer

Macro 3 minutes to read
Charu Chanana 400x400
Charu Chanana

Head of FX Strategy

Key points:

  • Fed Chair Powell did not meet the high hawkish bar set by market pricing,
  • However, the announcement on balance sheet run-off (QT tapering) tilted dovish vs. expectations.
  • More importantly, soft spots in jobs data are broadening, as seen from job openings, quits rate or surveys.
  • Non-farm payrolls comes next on Friday, and consensus expects only modest cooling in the US labor market
  • Markets remain more vulnerable to a miss, which can spark dovish repricing easily.

Fed's next move is still likely to be a rate cut

The May 1 FOMC decision had a high bar for Chair Powell to surprise hawkish with markets having pushed back expectations of the first full rate cut to December and pricing in less than two rate cuts this year.

However, with three back-to-back reports of inflation coming back higher than expected, it was prudent for Chair Powell to address that. And he did. However, as some feared, he did not put rate hikes back on the table.

He said that future moves remained skewed to rate cuts, even though cuts have been delayed and the bar has been raised.

What was, however, more dovish was the announcement on balance sheet run-off or QT (quantitative tightening) tapering. Having flagged, in March, that it would be appropriate to slow the pace of asset runoff “fairly soon”, the FOMC duly delivered the taper to quantitative tightening that many had been expecting. Consequently, from the start of June, the cap on maturing Treasury securities rolling off the balance sheet will be lowered from $60bln per month, to $25bln per month, while the cap for mortgage-backed securities (MBS) will remain unchanged at $35bln per month.

Overall, the meeting outcome therefore tilted dovish. Rate decision and Chair Powell’s press conference were neutral, or rather avoided the hawkish turn suggested by market pricing. But a dovish surprise came from the QT tapering announcement. This can support risk assets for now.

Jobs data is turning, April NFP due on Friday

Focus now shifts to the April non-farm payrolls or jobs data due on Friday. Here is what is expected by consensus:

  • Headline jobs added: +240k (vs. 303k in March)
  • Private jobs added: +190k (vs. 232k)
  • Unemployment rate: 3.8% (unchanged)
  • Average hourly earnings, or wage growth: 4.0% YoY (vs. 4.1%) and 0.3% MoM (unchanged)

    Leading indicators are mixed but soft spots are seen more broadly:

  • US JOLTS jobs openings in March fell to 8.488mln from the prior, revised lower, 8.813mln and beneath the consensus of 8.686mln which highlighted demand for workers continues to ease, with the headline metric declining to the lowest level in more than three years. Quits rate also fell to 2.1% from 2.2%, its lowest since August 2020, pointing to slower wage growth in the months ahead. There were 1.3 vacancies for every unemployed worker in March, the lowest since August 2021.
  • US headline ADP jobs rose by 192k in April, above the 175k forecast but it did ease from the prior revised up 208k (initially 184k, however).
  • The employment index of ISM manufacturing for April improved to 48.6, but still remained in contraction.
  • Flash S&P PMIs for April pointed to an overall decline in employment for the first time since June 2020, with weakness in both the manufacturing and services sectors.
  • Initial jobless claims have however been stuck in the 200k range in April.

This gives a sense that April employment report will once again bring a mixed picture of US labour market cooling but remaining incredibly tight, with job gains continuing at a strong pace, unemployment still low, and earnings growth starting to cool. And given the Fed’s dual mandate, the Fed needs to keep its policy options flexible.

Markets remain more vulnerable to a miss, which can spark dovish repricing easily. This is likely to see equities and Treasuries rallying, while the dollar will soften. USDJPY could threaten a move back towards 155 while AUDUSD could re-test the 100DMA around 0.6585. Gold and silver could also extend gains.

Meanwhile, a hawkish surprise will only come if the beat is significant. Tech and AI sectors in equities will likely see a sell-off if the jobs data surprises to the upside. Dollar strength is also likely to stay measured, and USDJPY is unlikely to revert to 158+ levels.


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