Federal Reserve Governor Christopher Waller's dovish comments have significantly cooled rate hike expectations, with futures scaling back the chance of a rate hike this month to just 50% from about 63% a day ago. In remarks for a Reuters NEXT Newsmaker event, Waller said that recent data suggested some signs of disinflation and that, if upcoming reports reinforced that trend, he would favour holding rates steady at this month's policy meeting. JPMorgan analysts noted that Waller is pushing back against the thrust of the argument made by Warsh last week that there is little evidence that underlying inflation has moved lower. The dovish shift comes after a global bond rout drove long-dated yields to multi-year highs, fuelled by concerns over stubborn inflation and swelling government debt.
Asian markets showed strong performance on Friday as investors embraced the global rally ahead of crucial US jobs data. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1%, tracking broad gains on Wall Street, though the index still remains down 0.4% for the week. Japan's Nikkei gained 0.8% but was down 2.7% this week, while Chinese blue-chips rallied 1% and South Korea's KOSPI increased 1.1%. The rally was supported by the yen's strong performance, gaining 2.6% this week to trade at 155.7 a dollar, putting it within striking distance of the 155.2 level reached after joint intervention by Tokyo and Washington in late July. US economic data overnight showed activity in the services sector picked up pace with a measure of prices paid jumping to a three-year high, while the Fed's 'Beige Book' survey showed economic activity edged up in recent weeks.
The latest ADP report showed US private businesses added 38,000 jobs in August, the weakest increase since January and below expectations of 47,000, pointing to a broader cooling in the labor market. Forecasts are centred on a rise of 56,000 jobs after the US economy unexpectedly shed 23,000 jobs in July, with the unemployment rate expected to hold steady at 4.1%. Both Wall Street futures and EURO STOXX 50 futures were flat as traders braced for the US payrolls report for August due later in the day. The market wants soft enough payrolls to give cover for Warsh to sit out this month, as the Fed has never raised rates immediately after two consecutive payroll clunkers. If payrolls come in hot, that shelter disappears quickly, with oil still hovering around $95.52 a barrel after Brent crude futures rose 7% this week.
After Waller's dovish comments, Treasuries rallied, led by the short-end, as the yield curve bull steepened on fading fears of imminent rate hikes. Two-year yields held at 4.3381% after falling 5 basis points overnight to move away from a 20-month peak of 4.4102%, while ten-year yields were little changed at 4.7620% and 30-year yields were at 5.2433% after a 2 basis point fall overnight. The dollar drew scant support from higher yields and was fetching 98.96 against its major peers, after skidding 0.6% overnight. Markets now imply a 75% chance of a September move by the Bank of Japan, while a hike by October is fully priced in, raising the prospect of either a larger increase or back-to-back tightening. Investors in longer-dated bonds remain wary of inflation risks amid few signs of progress between the US and Iran to end the war and reopen the Strait of Hormuz.
Gold held at $4,470 an ounce after rallying 2% overnight, though it was set to end the week little changed. In commodity markets, oil prices held near six-week highs, with Brent crude futures up 7% this week to $95.52 a barrel, as investors remain wary of geopolitical tensions. The dollar's retreat turbocharged a rally in the yen, which has gained 2.6% this week to trade at 155.7 a dollar, while the dollar is set for a weekly drop of 0.7%. Tony Sycamore, analyst at IG, noted that while officials can't rule out another round of price checks or intervention, it could also be pre-positioning in expectation of a soft non-farm payrolls tonight and a potentially hawkish BOJ meeting in a fortnight.
