US Money Markets Increasingly Push a First Cut by Fed Further into Time

Markets

Friday’s March payrolls were strong across the board. Employment topped all estimates by growing 303k, wage growth was solid and the unemployment rate eased back to 3.8% despite an uptick in the participation rate. The first Fed governors commenting after the release erred to the hawkish side. Dallas president Logan said there’s no urgency in cutting rates, adding that the risk of cutting too soon is higher than being late. She’s worried about disinflation stalling. Fed governor Bowman continues to see upside inflation risks and isn’t comfortable with cutting until disinflation returns. Both Logan and Bowman stated the possibility of a higher neutral rate, which would limit the Fed’s overall cutting capacity. US yields across the maturity spectrum revisited the YtD highs. We expected the break higher would need confirmation from Wednesday’s US CPI (March). Yet, it’s already happening as we speak. Granted, Asian dealings usually just pick up where US financial markets left off but the technical breaks are there. Apart moving beyond the YtD high, the US 2-y yield also surpasses resistance from the 200dMA to trade around 4.78%. The 10-y tenor jumped above the 4.40% resistance (50% recovery on the 2023Q4 decline) this morning and eked out further gains to a new 2024 high. US money markets increasingly push a first cut by the Fed further into time and will look for additional evidence supporting their case in a reaccelerating (headline) CPI. The dollar neither on Friday neither this morning really stands to benefit from the yield support, despite being driven by the real component and concentrating at the front-end of the curve (>10 bps). EUR/USD rebounded from an intraday-low just south of 1.08 to close unchanged at 1.0837. It’s hanging around these levels this morning. Rising German yields offer only part of the explanation since the move higher was only a fraction of what happened in the US (1.2-3.9 bps). A surprisingly resilient risk environment (US stock markets rose up to 1.2%) is a second piece of the puzzle. Equally astounding is the ongoing rally in gold, with new record highs for the shiny metal (again) today. Oil prices retreated sub $90/barrel with a partial retreat by Israeli forces from southern Gaza easing some of the geopolitical/supply concerns. Other than inflation figures in the US, the eco calendar gives the stage to the ECB on Thursday. Frankfurt won’t have the desired wage negotiation data by then, giving Lagarde an easy way out of tricky questions. It does have input from the Bank Lending Survey (Tuesday). The central bank of Canada and New Zealand both meet on Wednesday and US banks kick off the Q1 earnings season on Friday. A slew of Fed speeches are scattered across the week.

News & Views

Peter Pellegrini has won the presidential elections in Slovakia this weekend as he defeated the pro-Western candidate Ivan Korcok. Pellegrini is an ally of Prime Minister Robert Fico and is seen as Russia-friendly. Pellegrini secured 53.1% of the votes. Even as the president in Slovakia has only limited executive powers, the victory of Pellegrini is seen as supporting a policy of the country further withdrawing its support for Ukraine. Pellegrini who, as a president, can veto laws and can nominate judges, also might support reforms of the government with respect to criminal law and media that might be contested by the EU. Despite his Pro-Russian, Ukraine sceptic stance, Pellegrini reiterated that Slovakia will remain a strong member of EU and Nato.

In a news conference on Friday, Governor of the National Bank of Poland (NBP) Glapinski said that the NBP didn’t discuss rate cuts at last week’s policy meeting. He even indicated that no one is talking about 2024 rate cuts altogether. The room for rate cuts in 2025 will depend on the inflation figures at the end of this year. Glapinski reiterated that there is still a high the degree of uncertainty. Polish CPI in Q4 is seen in a wide range between 3.9% (if anti-inflation measures are maintained) and 7.5% (if fully removed). Glapinski sees current decline in inflation as temporary (1.9% Y/Y in March) as higher VAT on food prices will filter through in coming months. Glapinski is also worried about the inflationary impact of real wages rising fast together with a reacceleration of the economy. Polish 2-y swap yields jumped 9 bps Friday afternoon (5.43%), even as this was partially due to the overall rise in core yields post strong US payrolls. The zloty remains well bid. At EUR/PLN 4.28, the Polish currency is holding within reach of the strongest levels against the euro since February 2020. (YTD low 4.2749).