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TOKYO (Reuters) – The dollar rose to a one-month high versus the yen on Thursday as robustness in the U.S. jobs market backed the idea that the Federal Reserve does not need to rush to cut interest rates.The yen came under strong selling pressure on Wednesday after Japan’s new prime minister said the country is not ready for additional rate hikes, following a meeting with the central bank governor.The euro languished not far from a three-week trough reached in the previous session, after normally hawkish European Central Bank policymaker Isabel Schnabel took a dovish tone on inflation, cementing bets for a rate cut this month. The safe-haven U.S. currency saw some additional demand on Wednesday after Iran launched a salvo of some 180 ballistic missiles into Israel, spurring a vow of retaliation and stoking worries of all-out war.The dollar index, which measures the currency against the euro, yen and four other top rivals, ticked up to 101.70 as of 0023 GMT, a three-week high, extending a 0.45% climb from the previous session.Private U.S. payrolls increased by a larger-than-expected 143,000 jobs last month, the ADP National Employment Report showed on Wednesday, raising expectations for a strong reading for potentially crucial monthly non-farm payrolls figures on Friday.Currently, traders lay 34.6% odds of another 50 basis-point U.S. rate cut on Nov. 7, after the Fed kicked off its easing cycle with a super-sized reduction last month. That’s down from 36.8% odds a day earlier, and 57.4% odds a week ago, according to the CME Group’s (NASDAQ:CME) FedWatch Tool, but still seems too high, according to Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY).Although the ADP report is often a poor predictor of the non-farm payrolls number, Wednesday’s data “does reduce the odds of an outsized downside miss on payrolls,” Attrill said. “I do think that if the payrolls report overall is not too shabby tomorrow night, then we will see that pricing (for a 50 basis-point cut) coming in quite significantly.”The dollar added 0.09% to 146.575 yen after earlier reaching 146.885 for the first time since Sept. 3.Dovish Bank of Japan policy maker Asahi Noguchi, who dissented against the rate hike in July, will give a speech later in the day.The euro was little changed at $1.10455, sitting not far from Wednesday’s low of $1.10325, a level last seen on Sept. 12.Sterling was steady at $1.3261.The Australian dollar was flat at $0.6884.Risk-sensitive currencies were sold off on Wednesday in the initial knee-jerk reaction to Iran’s offensive, but there has been little sign of retaliation by Israel as yet, allowing traders to recover their poise. “Markets are inherently bad at trying to price tail risk,” said National Australia Bank’s Attrill.”Those events are things that markets deal with as and when” they happen, he said. “Markets are aware of it, but they’re sticking to their knitting I think, which is focusing on economic fundamentals.” More
(Reuters) – A look at the day ahead in Asian markets.Japanese markets, particularly the foreign exchanges, continue to digest the rather blunt comments on monetary policy from new prime minister Shigeru Ishiba after he met with Bank of Japan governor Kazuo Ueda on Wednesday.”I do not believe that we are in an environment that would require us to raise interest rates further,” Ishiba said, sparking a huge wave of yen selling.The yen shed almost 2% against the dollar on Wednesday, its biggest fall since February last year. Excluding the pandemic-related volatility of March 2020, it was one of the steepest declines in over a decade.Meetings between Japan’s prime minister and central bank governor are not unusual, but this one came only days after Ishiba took office. His comments were unusually direct too – “somewhat unseemly,” according to Washington-based economist Phil Suttle.Analysts at JP Morgan reckon the Ishiba administration will adopt a “market-friendly” policy stance until next summer when the upper house election is scheduled, which should soothe market concerns about growth.The yen’s plunge reflects how extreme market positioning has become. U.S. futures market data show hedge funds are holding their biggest ‘long’ yen position since 2016 and one of their largest ever. Asahi Noguchi, a dovish BOJ board member who dissented against the central bank’s rate hike in July, on Thursday delivers a speech and holds a media conference, where he is likely to be asked about Ishiba’s comments. Elsewhere in Asia, Thailand’s finance minister Pichai Chunhavajira and central bank chief Sethaput Suthiwartnarueput speak at a central bank event on Thursday.Asia’s economic calendar sees the release of purchasing managers index data from Australia and Singapore, and the latest international trade figures from Australia.The dollar’s rally against the yen and U.S. economic data on Wednesday helped lift the greenback to a three-week high against a basket of currencies and register its third daily rise of around 0.5%. Escalating tensions between Iran and Israel continue to sustain safe-haven demand for the dollar and the rebound in oil prices. Brent crude rose above $76 a barrel for the first time in a month, but only ended the day up around 1%. Investors will also be assessing news that France, Greece, Italy and Poland will vote on Friday in favor of hefty tariffs of up to 45% on imports of electric vehicles made in China. That could push through the European Union’s highest profile trade measures, risking potential retaliation from Beijing. How will Germany vote? Finance Minister Christian Lindner said the country must oppose the EU proposal, adding: “A trade war with China would do us more harm than good for a key European industry and a crucial sector in Germany.”Here are key developments that could provide more direction to Asian markets on Thursday:- Australia trade (August)- Japan, Australia, Singapore PMIs (September)- Hong Kong retail sales (August) More
WILMINGTON, North Carolina (Reuters) – The U.S. central bank’s fight to return inflation to its 2% target may take longer than expected to complete and limit how far interest rates can be cut, Richmond Federal Reserve President Thomas Barkin said on Wednesday. In an interview with Reuters, Barkin said he supported the half-percentage-point rate cut the Fed approved last month and agreed the benchmark rate could fall perhaps by another half a percentage point by the end of this year to take account of how far inflation has declined.But he said he was concerned inflation could prove sticky next year and prevent the Fed from cutting rates as far as investors and some of his colleagues expect, with the benchmark rate potentially being held short of the “neutral” level many policymakers expect to reach.Beyond the next few months and into the second half of 2025, “I’m more concerned about inflation than I am about the labor market,” Barkin said, with a combination of continued solid demand and renewed tightness in the labor market making it hard for the Fed to travel the “last mile” in lowering inflation.”I’m not talking about some big resurgence … But I do think getting stuck is a very real risk,” he said after a speech to an economic conference organized by the University of North Carolina Wilmington. “There are pressures out there which work against us getting the final mile done.”The Fed lowered its benchmark interest rate to the 4.75%- 5.00% at its meeting last month, and new economic projections showed policymakers anticipate the rate will fall through 2025 and into 2026 to around 2.9% – a “neutral” level that is felt to neither encourage nor discourage spending and investment. The Fed is expected to cut interest rates by a quarter of a percentage point at its Nov. 6-7 meeting, a step Barkin said would be a “reasonable path” if the unemployment rate and inflation stay roughly stable, as he expects.Barkin’s views are a counter of sorts to the market narrative that the Fed is on a steady path to a neutral rate, conjecturing that, instead of a “soft landing” from inflation, in which inflation is tamed without a painful recession, the central bank may face a “no-landing” situation and some potentially uncomfortable choices late next year.’WAGE PRESSURE’Barkin said the Fed’s ability to reach a neutral interest rate hinges heavily on how the economy behaves heading into the second half of 2025, which could hold the prospect of ongoing economic growth but the risk of inflation lodged above the central bank’s 2% target.In particular, he said immigration may not provide the same boost to labor supply as it has in recent months, allowing growth without excessive wage pressure, consumers may be spurred by lower interest rates to buy big-ticket items like homes and autos, and global risks including deglobalization and the fallout from regional military conflicts could deliver unexpected price shocks. “As long as demand stays anywhere near healthy, I think we’re going to use up the available supply” of labor, Barkin said.”No one would be happier if we got into the first quarter and inflation continued to look settled, and that would give you the confidence to say … ‘lets go back to neutral,'” he said. But “normalization comes when you’re convinced that inflation hits 2%,” Barkin said, adding that he remained “open-minded” on how fast rates can fall and if they can be reduced to the level where monetary policy is neither encouraging nor discouraging buying and spending.For the next few months, Barkin said he agreed the risks were “modest on inflation and meaningful on unemployment,” with an open question whether the jobless rate will flatten out from here, as he expects, or start to rise. From there, he said things are less certain, and noted that the port strike that began on the U.S. East Coast and Gulf Coast this week, and the wage increases of 50% or more being discussed as possibly needed to settle it, did not seem like evidence of collapsing inflation or a weak economy.”That feels like wage pressure,” Barkin said, and a reason to view current rate cuts as a needed “recalibration” of policy that may or may not give way to a full-scale “normalization.””My take is dial back the level of restraint, see where you are,” he said. More
Inflation dipped under 2% last month and the 20-nation currency bloc is skirting a recession, so markets are already betting that the ECB will have to speed up interest rate cuts with its next move seen on Oct. 17.The comments from Schnabel, an outspoken conservative, or policy hawk in central bank parlance, will likely bolster these bets and reinforce expectations for a follow up move in December.”We cannot ignore the headwinds to growth,” Schnabel said in a speech in the German town of Freiburg. “With signs of softening labour demand and further progress in disinflation, a sustainable fall of inflation back to our 2% target in a timely manner is becoming more likely, despite still elevated services inflation and strong wage growth,” she said.Markets see about a 90% chance of a 25 basis point cut in the 3.5% deposit rate later this month, coming on top of moves in June and September.While Schnabel sounded more confident about inflation, Portuguese central bank chief Mario Centeno, one of the most dovish members of the Governing Council, said the ECB now faced the risk of undershooting the target, its top problem in the decade before the pandemic. “Now we face a new risk: undershooting target inflation, which could stifle economic growth,” Centeno said on Wednesday. “Fewer jobs and reduced investment would add to the sacrifice ratio already endured. A sluggish economy would reinforce, in a vicious cycle, inflation undershooting.”However, Schnabel tried to temper expectations about the impact the ECB could have, arguing that Europe’s economic problems were so deeply rooted that lower rates were not going to get the bloc out of its hole. “Monetary policy is no panacea,” she said. “Monetary policy cannot resolve structural issues.”The key problem was Germany, the euro zone’s biggest economy, which has fallen on especially hard times, with its export-focused, industry-driven economy now facing more permanent headwinds.Geopolitical tensions will continue to hamper trade, more expensive energy is weighing on its competitiveness and high-value-added production from China is eating into its market share, she said. Europe and Germany in particular, needs a new industrial policy that focuses on innovation and entrepreneurship, areas where it has trailed for decades now, Schnabel added. More
“Despite the faster than expected first cut, the tone of the meeting, subsequent communications and recent economic data in the US leaves us to expect two 25bp cuts into year-end,” analysts at Morgan Stanley said in a Wednesday note. But a larger rate cut can’t be completely ruled out, the analysts said, flagging the risk of weaker jobs data forcing the Fed to turn more dovish on policy.Sub-100,000 job gains for monthly payrolls would pose a risk to the call for two 25bp cuts at the Fed’s upcoming meetings. The analysts added this ahead of the September payrolls number due Friday.Economists expect the economy created 144,000 jobs in September, up from 142,000 in the prior month, while the unemployment rate is expected to remain unchanged at 4.2%.The Fed delivered a 50 basis point cut in September, surprising many who had expected the central bank to kick off its easing cycle with a smaller 25 basis point cut.Following the meeting, Fed members continue to suggest that the labor market holds sway to future decisions on whether to go big again on rate cuts. While the labor market has shown signs of cooling, robust consumer spending has provided some comfort for Fed members that the economy can avoid recession and achieve a so-called soft landing.Consumer spending in August rose in line with expectations, with spending on services running stronger than goods. Recent data showed consumer spending tracking at 3.1% in the third quarter.”We continue to expect a broad deceleration into year-end, but without recession,” Morgan Stanley added.The bank expects real GDP to grow 2.2% in the fourth quarter compared with the same period a year ago.Inflation, meanwhile, continues to moderate, with the Fed’s preferred inflation measure, the core personal consumption expenditures price index, running slightly below expectations.The August core PCE inflation print is at 2.6% for 2024, consistent with the Fed’s median forecast from the projections released with the September Federal Open Market Committee meeting. More
