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Societe Generale’s Kenneth Broux reports that weaker US employment data and downward revisions have sharply reduced expectations for a September Fed hike, though one move remains priced for December. He notes the Dollar has extended losses as markets reassess the Fed’s dual mandate and the implications for bonds and FX. DXY is seen needing to defend its 200-DMA at 99.18 to avoid a deeper decline.
Labour softness pressures Fed expectations
“The dollar carries over losses from Friday and the 2s/10s UST curve maintains bull steepening bias (45bp) after the shock decrease in US July employment and negative downward revisions blew the rate increase in September out of the water.”
“One hike remains on the table though for December but the sudden softening of the labour market invites a revaluation of the tactical outlook and throws open the wider the debate about the Fed’s dual mandate.”
“After months of obsessing about above target CPI and PCE inflation, and levelling accusations of being behind the curve, the employment situation put the Fed outlook in a different daylight and raises questions for the direction of the bond and FX markets in 2H.”
“The pricing for a hike in September has been whittled back to less than 50% vs 72% at the end of July.”
“The DXY must now defend the 200dma at 99.18 to avert a deeper drop.”
