Payrolls are going to set the tone today.
Government bonds markets are braced for a key reading of domestic U.S. wage pressures Friday as investors slowly re-set interest rate expectations from the Federal Reserve amid concerns over a global trade war and rising political risks in Europe.
Friday's non-farm payroll report is expected to show that American employers added 190,000 new jobs last month, keeping the nation's headline unemployment rate a at multi-year low 3.9%. However, investors are far more likely to be focused on the underlying growth in average hourly earnings, which is expected to hold at 2.6%, in order to gauge the Fed's ability to follow-through on three more rate hikes between now and the end of the year.
Looking forward to seeing the employment numbers at 8:30 this morning.
- Donald J. Trump (@realDonaldTrump)June 1, 2018"Global growth has been synchronized over the past year, but recent developments pose some risk. Political developments in Italy have reintroduced some risk, and financial conditions in the euro area have worsened somewhat in response," Fed Governor Lael Brainard told the Forecasters Club of New York Thursday. "I continue to view gradual increases in the federal funds rate as the appropriate path, although I will remain vigilant for the emergence of risks and prepared to adjust if conditions change.
?? 1/2 ?? 1/2 ?? 1/2 ?? 1/2 The 12-month change in core PCE prices is near Fed's objective. Solid momentum reinforces view that core inflation will continue moving up
Fed will probably stay on hiking path and raise fed funds rate 25bp at June FOMC meeting and finish with 4 hikes for the year. pic.twitter.com/0tzcyPPrmF
- Johnny Bo Jakobsen (@jbjakobsen)May 31, 2018Events in Italy, which saw investors flee from European government bonds and into U.S. Treasuries this week amid concern the new government could seek a 'back door' exit from the single currency, took benchmark 10-year yields to a multi-week low of 2.8% Tuesday and lifted the U.S. dollar index, which tracks the greenback against a basket of six global currencies, to a six-month high of 94.83 earlier this week.
Both moves suggest investors are betting inflation won't accelerate into the second half of the year, despite persistent increases in global crude oil and domestic gas prices, as the European economy slows amid its political gridlock and global trade suffers as a result of newly-imposed tariffs on steel and aluminium from President Donald Trump and "tit-for-tat" retaliatory measures from America's largest trading partners.
"2018 is fast becoming the year of squandered opportunities for world growth," said ING's Chris Turner. "A fully-fledged trade war, major political risks and what looks to be a Federal Reserve wanting to take rates to neutral and beyond will prove substantial headwinds to growth."
However, markets don't appear to be listening to the Fed's message, according to the CME Group's FedWatch tool, investors are pricing in only a 27.6% chance of a December rate hike at present, that's down from 30% last week and 40% at the beginning of May.
The subdued outlook has taken benchmark 10-year yields to a multi-week low of 2.86% this morning even as the dollar index holds at 94.05 in early European trading.
Fed Chairman Jerome Powell "may simply be more interested in shaking the sense that the Fed is "pre-committed" to any course of action to allow a more nimble policy response now that we have reached an important inflection point with inflation," said Saxo Bank's head of FX strategy John Hardy. "If this is indeed the case, then the Fed guidance will simply be made less explicit and could mean that each new data release from the US will have a much larger reaction function than we have been accustomed to.
"What that could mean for today's release is that strong data could trigger a larger reaction than somewhat weak data," he noted.