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Strong Job Data and Rising Yields Shake Fed's Dovish Outlook

Published 06/10/2024, 02:00 AM

The sight of the 272K new nonfarm job additions and the fastening wages growth above 4% on a yearly basis smashed the dovish Federal Reserve (Fed) expectations on Friday, and sent the US 2-year yield from around 4.70% to 4.90% in a single move, the 10-year yield spiked to 4.45% and the US Dollar Index cleared the 100 and 200-DMA without hesitation and jumped over the 50-DMA this morning in Asia. We are back to the starting point where the Fed could hardly justify a rate cut when jobs data remains strong and inflation is not easing as fast as it should.

Happily, suspense about what the Fed thinks about this won’t last long; the Fed will start its two-day policy meeting tomorrow and announce its latest decision on Wednesday, just after the CPI update for May due the same day. Price pressures in the US may have steadied and even slightly eased for the core figure in May. But the numbers are still hanging around the 3.4-3.5% levels, well above the Fed’s 2% target, and the last mile – easing from these levels to lower levels – proves to be harder than many thought. Therefore the Fed and its Chair Jerome Powell will probably ask for more patience and their quarterly dot plot will more likely than not show lesser rate cuts this year than they predicted in March. I believe that the median forecast on the dot plot will show one, or maximum two rates penciled in by the Fed members – down from 3 rate cuts that were still flashing back in March. And let me tell you one thing: two rate cuts would hint that the Fed officials are worried about a hard landing and a recession. To me, the best outcome for the mood would be a single rate cut.

All Eyes on Apple

Equity markets’ reaction to Friday’s strong jobs data was contained. The S&P 500 and Nasdaq closed last Friday slightly in the negative after having advanced to a fresh record. The GameStop (NYSE:GME) frenzy probably came to an end last Friday, when fun couldn’t overweigh fundamentals anymore. While Roaring Kitty was on yet another mission to pump the market on livestream, GameStop decided to reveal its latest quarterly results earlier – and the results were unsurprisingly bad because it’s a non-profitable company. But they also happened to be worse than expected: the revealed a 29% drop in revenue and a quarterly loss of 12 cents of a dollar per share. So the GME shares finished the day 40% lower. I guess this is the end of this wave.

More seriously, if the major US indices could eke out weekly gains last week, it was mostly thanks to a decent rally in chip stocks that saw the Computex event in Taipei give them a platform to show off their new chips and talk about their future plans. This week, tech investors’ focus will be on Apple’s (NASDAQ:AAPL) annual WWDC event, where it’s expected to reveal a roadmap regarding its own AI ambitions. Apple fell off the early AI race as it hasn’t come up with a solid AI plan while its tech competitors like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL) have been racing relentlessly to get out the most efficient and impressive AI models to gain field. Interestingly, Apple’s stock price recovered a lot of its AI-related losses in the hope that a partnership will eventually pop and make Apple devices appealing again. Happily, many investors don’t see Apple as a cutting-edge technology company but rather as a luxury brand that sells millions of hardware that could be home to any reasonably appreciated AI model. But everyone agrees that Apple should develop their AI offering fast, and this week’s WWDC is a line in the sand. Either Apple will come up with a satisfactory AI plan and see its share price pushed to a record or the week will end with disappointment and Apple will give back the AI-hope related gains. What’s sure is: the world is watching.

Euro Hammered

The post-jobs data rally in the US dollar pushed the USD/JPY above the 157 level and the EUR/USD off a cliff. The yen traders lack conviction that Friday’s Bank of Japan (BoJ) meeting could bring any hawkish shift after the latest growth numbers showed a contraction in Q1. The BoJ could make minor adjustments to its JGB purchases to keep the yen’s weakness contained.

In Europe, the EUR/USD got smashed from around 1.09 to 1.08 after Friday’s surprisingly strong US jobs data and got a further hit to 1.0735 at the weekly open, after the weekend’s European Parliament elections ended in tears for France’s Emmanuel Macron and Germany’s Olaf Scholz’s parties. The far-right Marine Le Pen secured 32% of the votes from the French, a shocker that pushed Macron to call a snap election in France to get things straight. As such, the French 10-year yield kicks off the week with a 2% advance, and the advance is similar elsewhere, as well. The EUR/USD returns to the bearish consolidation after taking out the major 38.2% Fibonacci support on the April to June rally. The outlook turns negative, again. I believe that the impact of the political shenanigans will remain short-lived but a hawkish Fed outcome this Wednesday could prove to be harder to shake off.

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