US: NFP to remain in focus ahead of Fed - Westpac

Sean Callow, Research Analyst at Westpac, points out that on Friday we see the US May employment report and hear the last of the Fed speakers before their media blackout period heading into the 13-14 June FOMC meeting.

Key Quotes

“Pricing for the Fed to raise the funds rate to 1.0-1.25% is around 90% so any further yield support for US dollar will need to be driven by expectations beyond June.”

“At this point, such support is not strong. While Westpac’s base case is another rate hike in December 2017 and another in March 2018, markets don’t fully price a follow-up move to this month until around June 2018. Further along the curve, the 10 year Treasury note yield is probing 2.20%, compared to about 2.60% when the Fed last hiked rates in March. This implies a subdued growth and inflation profile in years to come – though as the chart shows, its yield is still considerably higher since the US election.”

“One factor weghing on US yields and thus USD is politics. The quiet US data calendar post-NFP only heightens market interest in a possible Senate appearance by former FBI director James Comey. Recall that the largest daily fall in the S&P 500 since the election was in response to the report that Comey had written a memo claiming that President Trump asked Comey to drop the investigation into fired national security adviser Mike Flynn.”

“This appearance could unsettle markets which are already showing emerging unease (though not panic). Risk barometer AUD/JPY is the weakest G10 pair over the past week, while on equity flows, previous global investor favourites India and South Korea have seen outflows this week. This could be a fresh headwind for AUD/USD which is already trading poorly as Australia’s Q1 GDP (Wed) is shaping up as quite soft.”

“Meanwhile in Europe, a week from now we see both the ECB decision and the UK election. Volatility seems assured.”