It was a quiet one yesterday up until the release of weekly jobless claims in the US. The release here was weaker than estimated and that kicked off more fears about a softening in the labour market, following the non-farm payrolls report on Friday last week. As a result, the dollar fell alongside bond yields while risk trades pushed higher.
The nature of the move was not too drastic though. Even though equities are rebounding well from the April drop, the Fed outlook hasn't changed too much from last week. The odds of a September rate cut are at ~89% and traders are still seeing roughly ~45 bps worth of rate cuts this year.
If anything else, this is a bit of a teaser of what sort of reaction we can expect to the slew of US data next week.
In the week to come, we will be getting the PPI, CPI, and retail sales data most notably. If price pressures are continuing to moderate and the US consumer shows signs of stuttering, that will keep up the momentum we're seeing in the last week or so.
And then of course, there is also the next set of weekly jobless claims figures on Thursday. If that continues with a trend of softening labour market conditions, it might see traders rethink on the Fed outlook.
The odds of a July rate cut are at ~36% currently. It's not the base case for a first cut so we'll have to see if that changes.
The other possibility to consider is what happens if inflation pressures remain stubborn as employment conditions ease? That will certainly be interesting and will pose a bit more of a conundrum to the Fed.
