US equity markets rally despite the hot data, leading risk assets higher. US 10-yr yield closes above 4.40%, logs second strongest week, year-to-date. US CPI this week's headliner; ECB, RBNZ, BoC all expected to remain on-hold

By Stuart Talman, XE currency strategist

It was a perplexing end to a lively week.

If one had been privy to the US jobs data prior to its release, one would have expected US treasury yields and the dollar to rocket higher as the three major US equity markets were crunched significantly lower.

For the seventh month in the past eight, non-farm payrolls again exceeded consensus estimates, the 303K new jobs (vs 200K, expected) in March surpassed even the loftiest of analyst forecasts.

Whilst US yields capped off a strong week on the front foot, the yield on the benchmark 10-year note logging a weekly close above 4.40% for the first time since November, the dollar could not capitalise on early US session gains, trading within a +/- two-tenths band against all its major peers aside from the Canadian dollar. The S&P500 and Nasdaq gained over 1% whilst the Dow advanced 0.80%, US equities reversing much of the previous day’s Iran-Israel, geopolitical induced losses.

In addition to the strong upside beat in headline jobs growth, the unemployment rate fell from 3.9% to 3.8% despite the participation rate climbing. Average hourly earnings printed in-line with expectations, wage inflation climbing from 0.2% to 0.3% in March.  

The immediate reaction from the market - the dollar moved higher as US yields leapt, the dollar index (DXY) marking highs just shy of 104.70. A weighted measure of the dollar against six major currencies with the euro the heaviest weighted at circa 58%, the DXY has rebounded close to 3% from early March as the market has stripped out a number of Fed cuts for 2024.

The DXY's upside had been capped around 105.00, early last week, as it was in mid-February, tentatively signalling the formation of a double top. Should this reversal pattern be invalidated via the DXY springboarding through 105.00 in the short to medium term, the New Zealand dollar would fail to maintain a foothold above 60 US cents.

Having rebounded from 0.5940 earlier in the week, NZD/USD was catapulted higher during the early hours of Thursday morning on a weaker than expected ISM services PMI, the pair adding over 80 pips to mark the week's highs in the 0.6040's, early Friday morning.

The Kiwi suffered along with other risk sensitive assets late in Thursday's US session on increasing concerns of an escalation of Iran/Israel tensions.

Falling from above 0.6040 to the low 0.6000's through the Asian afternoon, the Kiwi entered offshore trade looking susceptible to another dip into sub-0.60 levels.

Immediately following the release of the US jobs numbers, NZD/USD spiked lower, falling through 0.5990, appearing destined to end the week in the mid to high 0.59's.

However, US equity markets lead risk assets higher through US trade, market participants shrugging off the blockbuster non-farm payrolls (NFP) number, despite the data ratcheting up expectations for fewer Fed rate cuts in 2024.

Improving to log an intraday loss of less than two-tenths-of-a-percent, the New Zealand dollar reclaimed territory north of 60 US cents, ending the week near 0.6010. 

Logging a week-on-week gain of +0.60%, the Kiwi was a top 3 performer on the G10 leaderboard, outpaced only by the Norwegian krone (+0.81%) and the Australian dollar (+0.89%). Clearly it was a good week for commodity linked currencies as the Bloomberg Commodity Index gained close to 3.5%, its largest weekly advance since June. WTI crude traded through US$87/barrel, its highest mark since October, propelled higher by concerns that an Iranian offensive would spark a broader Middle East conflict.

So, why did the large NFP beat fail to induce a sustained risk-off reaction?

Perhaps it was due to the market's recollection of Jerome Powell's comments at the 20 March FOMC press conference in which the Fed Chair stated that sustained strong labour market data would not be a reason for the Fed to delay commencing its rate cutting cycle.

Powell's view is that given healthy levels of labour supply, evidenced by the strong participation rate, robust jobs growth can occur without reigniting inflation.

The reality is elevated inflation remains too far above the Fed's 2% target whilst the economy continues to perform admirably under a 5.25% - 5.50% target rate.

As such the odds of a June rate cut continue to diminish. What appeared to be a sure thing a few weeks back is now a 50/50 proposition. Furthermore, rates markets now price in circa 65 bps of cumulative Fed easing for 2024. At its peak, in early January, market pricing was around 170 bps, or 7-8 25 x bps cuts.

More Fed speakers reinforced this view on Friday, Bowman (current voter) and Logan (2026 voter) both acknowledging the time was not right to consider lowering the target rate. Bowman, a noted hawk, commented that the disinflation process had stalled and whilst unlikely, the Fed may have to cut again to cool inflation. 

This week's headline event is the March US CPI report - both headline and core inflation projected to print at 0.3%, month-on-month, bringing the annualised rates to 3.4% (up from 3.2%) and 3.7% (down from 3.8%), respectively.

You can bet that unlike an upside NFP surprise, a hot CPI report will send US equity markets into a tailspin as the dollar is catapulted higher, DXY smashing through major resistance around 105.00.

In this scenario the Kiwi would likely drop below major support at 0.5940, increasing the odds of a re-test of the 2023 low near 0.5770 as the market questions the need for the Fed to cut at all in 2024.

The domestic headliner is the RBNZ's interest rate decision, although this could prove a non-event given no new developments since the 28 February meeting in which Governor Orr and his colleagues delivered a dovish hold, modestly lowering the projected OCR track.

Data flow in recent weeks has been a mixed bag whilst inflation pressures remain too elevated for the RBNZ to commence a measured easing cycle. An on-hold decision is universally expected. There will be no accompanying updated forecasts so the statement will be the sole indicator of any change in tone or outlook. 

The other big global event for the week is the ECB's interest rate decision, also expected to maintain current policy settings. Given the recent decline in eurozone inflation, the ECB is expected to be the next major central bank to follow the Swiss National Bank in commencing lowering the policy rate. A dovish hold is the likely outcome as ECB president Lagarde prepares the market for a June cut.

Other events of note include the Bank of Canada's rate decision, CPI for China, the eurozone Bank Lending Survey and Michigan consumer sentiment.

First quarter earnings season commences later in the week with the US banks reporting. Some analysts have opined that US equity markets' lofty valuations may be compromised if earnings reports don’t stack up.

We continue to favour a narrative that stalling disinflation does not provide the Fed with its required confidence to commence cutting in June. An in-line or upside CPI beat expected, and therefore the dollar to outperform, sending the Kiwi back below 60 US cents.

Stuart Talman is Director of Sales at XE. You can contact him here.