Another day and another above-consensus US inflation release. Yesterday it was the turn of the 1Q24 Employment Cost Index to surprise on the upside and return to levels last seen a year ago. Interestingly, it seems like a lot of the rise was driven by compensation in the public sector – a topic that touches on what the next US administration will do with the 2025 expiration of the Tax Cut and Jobs Act (TCJA). The high 1.2% quarter-on-quarter ECI figure has now seen the pricing of this year’s Federal Reserve easing cycle narrow to just 29bp. Two-year US swap rates are closing in on the cyclical highs seen last October. And the late 2023 disinflation story feels like a dream.
It will be in this context the FOMC releases its statement at 2000CET today and Fed Chair Jerome Powell will hold a press conference at 2030CET. As we note in our Fed preview, the dollar has ended the day lower after the last three FOMC meetings. Today, however, Jerome Powell will have to acknowledge that US price trends have reversed higher, activity is holding up well and that any easing this year will have to be delayed. And at the moment it is hard to argue against the market pricing out the one last 2024 Fed cut at some stage soon.
A less dovish Chair Powell today can see US rates staying on the firm side. And market analysts note that option pricing for the S&P 500 index is warning that equities could see their biggest single-day move in a year. As we have noted over recent months, rising equity markets have prevented the dollar from rallying as much as yield differentials would suggest. An equity sell-off on the back of the higher-for-longer Fed rate story should therefore prove a clean dollar bull story – especially against those currency pairs most correlated with equities such as the Australian and Canadian dollars. USD/CAD could retest the recent high at 1.3845 under this scenario.
With much of Europe on holiday today, we are not sure US data released before the FOMC will have much impact on markets. We note, however, the big divergence between soft confidence data and strong hard US data. For example, it is not clear whether a soft US manufacturing ISM will move markets much today. We are interested in today’s job opening, JOLTS, data. Here, any sharp decline – and also a decline in the quit rate – would suggest that excess labor demand is abating. This could prove a dollar negative on another day – but for today we think the FOMC will dominate.
DXY is now very close to this year’s 106.52 high. And last October’s high is barely a per cent away. The oft-quoted phrase of the dollar being ‘our currency, your problem’ remains more apt than ever.
Chris Turner
