US Dollar: Softer labor data supports downside – BNY
BNY’s Geoff Yu and David Tam note that weaker United States (US) labor data have lowered real-rate expectations and extended the Dollar decline, creating a more supportive environment for risk assets and duration.
BNY analysts Geoff Yu and David Tam have observed that weaker U.S. labor data have diminished real-rate expectations, leading to an extended decline in the dollar. This has created a more favorable atmosphere for risk assets and duration. They stress that upcoming U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) releases will be pivotal for Federal Reserve (Fed) interest rate decisions.
Softer inflation would bolster the current easing outlook, whereas stronger figures could accelerate front-end yields. The lower U.S. labor-market signal has diminished real-rate expectations, intensified the dollar's decline, and re-opened a window for duration and risk assets. Following last Friday's weak nonfarm payrolls report, which showed a loss of 23,000 jobs compared to the anticipated 80,000, and the subsequent downward revisions, the chances of a Federal Reserve hike in September decreased to less than 50%.
The importance of Wednesday's CPI data cannot be overstated, as it will indicate whether the disinflationary effect from the recent easing of Iran-related tensions is sustained or if price pressures will escalate. A soft inflation package would bolster the easing in Fed rates and support duration, while an upside surprise could swiftly reintroduce pressure on front-end yields. The environment has become more accommodating, but not more lenient.
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