Tuesday: Fed Chair Powell.

Thursday: US Jobless Claims, US CPI.

Last Friday was incredible. Not because of another good NFP report, but because the ISM Services PMI showed a huge dive into contractionary territory.

FX majors

The labour market, which is a lagging indicator, remains tight and that will keep the Fed uncomfortable in easing monetary conditions. Remember that they see 4.6% unemployment this year keeping rates at 5%.

But if we look at leading indicators, the Fed may very well overtighten and act too late when unemployment starts to shoot up fast.

The market took the miss in average hourly earnings and the big miss in ISM Services PMI as good news, but I think the reaction is wrong.

There’s this hope among participants that the recession will be mild or short, which makes a deep recession an out of consensus call and something that is not priced in. That’s where we are going in my opinion.

If inflation indeed falls but the Fed keeps at it, which is what they will most likely do based on comments from the officials and their focus on the lagging labour market, then real rates, which is the ultimate form of tightening, will go up and stay there when there will be a need for them to fall.

Historically, the burst of asset bubbles precedes a deflationary period. For this reason, the next thing the Fed may be fighting with is deflation.

Looking ahead the Fed will hike by 25 bps at the next meeting barring any upside surprise in the CPI report.

Given the recent data, I think the USD dump out of those reports was a wrong reaction. The market seems to be trading on the mild recession hopes at the moment. Technically, the price action doesn’t look healthy for an upside continuation as there’s clearly a loss of momentum.

FX majors

Looking at the other markets, my highest conviction is in bonds. I strongly feel that we are about to see a strong bull market in bonds.

Fighting the Fed is usually a bad idea, but at tops and bottoms, it can be done and the bond market in my opinion will do that. The market expects rate cuts by the end of 2023, I think rate cuts will be bigger than the market currently expects.

Tuesday: Fed Chair Powell speaks in Sweden and after the recent economic data, the market will want to hear what the Fed Chair has to say. I don’t expect him to be on the dovish side. He may acknowledge improvements on the inflation side but complain about the labour market. So, all in all, I expect him to basically reaffirm his last stance.

Thursday: As I mentioned last week, I expect the labour market data now to be more important for the market than the inflation data. We saw this new development last week as well when the ADP and Jobless Claims reports moved the market more than they used to last year.

Initial Jobless Claims are expected to come at 220K and Continuing Claims at 1708K.

The Headline CPI Y/Y is expected to fall to 6.5% from the prior 7.1% and the M/M reading to remain unchanged at 0.1%. The Core CPI Y/Y is expected to fall to 5.7% from the prior 6% and the M/M figure to tick up to 0.3% from the prior 0.2%.

If the data comes out as expected or misses, we can be sure the Fed hikes by 25 bps at the next meeting. A beat would make the market uncertain on the magnitude of the next hike with a possible split between 25 bps and 50 bps.

This article was written by Giuseppe Dellamotta.