In teddle, the USD/JPY currency combination is showing agreeable heat. It’s seen trading near 158.00 as of Friday, achieving its highest print since January 2015. This upward movement comes on the heels of recent economic data releases that have influenced market expectations regarding Federal Reserve rate cuts. The market-implied probability of a rate cut in March has fallen to 29.6%. This is a steep drop from 38.6% one day earlier, representing a rapid and profound shift in investor sentiment.
This shift in expectation is an early sign of a bigger agreement coming together in the markets. Now they’re only expecting around two rate cuts the rest of the year. The politics of employment rates and inflation have been incredibly influential in forming this outlook.
Employment Data and Economic Indicators
All of this recent labor market data presents a jumbled narrative of the current state of the US economy. The unemployment rate remains at 4.4%, down just a tenth from 4.6%. This reading was much lower than predictions, which were expecting a more solid reading of 4.5%. The US economy was 50k jobs short in December. This was well below the market’s expectation of a 60,000 increase and down from November’s large gain of 64,000 jobs.
Even with the shortfall in job creation, there was good news on the average hourly earnings front. In December, they were up 0.3% MoM. That’s inline with predictions and marks a return from November’s lackluster gain of 0.1%. Earnings growth boomed to 3.8% annually, up from 3.6%. This large jump surprised expectations and indicates that unsustainable wage inflation trends are in place, which will need to be monitored when making future monetary policy decisions.
Inflation Expectations and Central Bank Speeches
Inflation indicators played a key role in the shifting public market environment. In January, the one-year consumer inflation expectation held at 4.2%. This figure is just above the 4.1% forecast and equal to December’s figures. At the same time, their five-year inflation expectations jumped to 3.4% from 3.2%, beating forecasts of 3.3%. Inflationary pressures are likely to continue influencing the Federal Reserve’s interest rate drumbeat. In doing so, they will have to thoughtfully balance the desire for economic growth with the demand for inflation control.
Stay tuned — Minneapolis Fed President Neel Kashkari is up next, followed by Richmond Fed President Thomas Barkin. Their perspectives would easily sway the markets, warming them up to a gentler interest-rate trajectory.
Currency Movements and Market Reactions
While macroeconomic indicators continue to play out, there are several other factors at work. Consequently, the Japanese Yen only dropped further into the abyss against the US Dollar this Friday. The USD/JPY pair has advanced for four consecutive days. It’s still going even higher based on all of these recent economic releases. The pair is on track for its second weekly increase. This trend is a clear testament to the overwhelming tide propping up the US Dollar.
Market participants have been watching these developments with great care as we have all sought to understand their implications for the future path of monetary policy. So strong employment data and increasing inflation expectations point toward the Federal Reserve needing to be a bit more conservative on the interest rate cuts. This change is a departure from what most had expected.