The March non-farm payrolls NFP report which was the most anticipated this week, exceeded expectations yesterday, showing a gain of +303K jobs compared to the expected +212K. Additionally, key details such as labor force participation, unemployment, and earnings were also improved. This positive data has led to a hawkish response in the rates market, with Treasury yields increasing by 7-8 basis points across the curve and the USD jumping higher, but the Buck gave back all the gains.

Following the report, the market’s expectations for the FED lowering rates this year have decreased slightly. Fed fund futures now indicate 65 basis points in rate cuts for the year, down from 70 basis points before the report. The probability of a rate cut in June stands at 58%, while expectations for a cut in July have dropped below 100%.

The US dollar experienced a significant surge of 50-70 pips following the release of the non-farm payrolls report, as the data and details were exceptionally strong. The unemployment rate remained relatively stable due to an increase in participation rates, while wages would have been higher if not for some rounding and adjustments to previous figures. Interestingly, despite the positive data, equity futures remained in positive territory, suggesting optimism in the market.

This was a departure from the previous day, when late-day concerns about conflict in the Middle East led to a sell-off in risk assets. However, these concerns began to unwind, leading to a reversal in the currency markets, with the US dollar giving back all of its gains from the NFP report while equities rallied. Although there has been a more hawkish tone in recent Fedspeak, the market continues to be data-dependent.

Late selling pressure was also observed in the bond market, which will be worth monitoring, especially with CPI data on the horizon. Looking ahead, there is speculation that the market may be looking overseas, where government spending is lower and inflation is returning to target. This contrasts with the situation in the US, where fiscal stimulus has been more pronounced, suggesting that once this stimulus fades, so too will the US’s outperformance. In the short term, the US dollar may benefit from these factors, but there could be a reversal once the consequences of fiscal policy become apparent.

Bowman Speaking on “Risks and uncertainty in Monetary Policy: Current and Past Considerations”.

• Potential Rate Cuts: Bowman indicated that the Fed may consider cutting rates if inflation continues to decline. However, he emphasized that any decision to cut rates would depend on the prevailing economic conditions.
• Appropriate Policy Calibration: Bowman stated that the current monetary policy is appropriately calibrated based on the Fed’s assessment of economic conditions and inflationary pressures.
• Upside Risks to Inflation: Despite the current downward trend in inflation, she highlighted the presence of numerous upside risks to inflation. These risks could potentially lead to inflationary pressures in the future.
• Expectations of Declining Inflation: Bowman expressed expectations for further declines in inflation amid a strong economy. However, he noted that the progress on inflation may be slower than anticipated.
• Job Market Dynamics: She acknowledged that some of the vigor in the job market is attributed to part-time workers and immigration. This suggests that changes in immigration policies or shifts in labor market dynamics could impact the job market outlook.
• Possible Future Rate Hikes: While she indicated that rate hikes to cool inflation are not currently likely, he acknowledged the possibility of such actions in the future if inflationary pressures become more pronounced.
• Disinflation Threshold for Rate Cuts: Bowman emphasized that he would not be comfortable with cutting rates until disinflation returns. This suggests that the Fed may prioritize addressing disinflationary pressures before considering rate cuts.
• Impact of Economic Deterioration: Bowman highlighted that any deterioration in economic conditions would affect the Fed’s policy view. This indicates that the Fed’s monetary policy decisions are contingent upon ongoing assessments of economic data and developments.