Strong U.S. job growth figures reported on Friday added to investor concerns that the Federal Reserve (Fed) would maintain elevated interest rates for longer, or possibly even raise them further. This news pushed the dollar higher, casting a shadow over both stocks and bonds.
In September, U.S. non-farm payrolls surged by 336,000 blowing past the consensus estimate of a 170,000 increase. The unemployment rate held steady at 3.8% — an 18-month high.
Following the release of this data, U.S. stock futures turned downward. The dollar index (DXY), buoyed by the robust employment figures, saw a 0.5% increase, closing in on the 107 level. The yield on 10-year U.S. Treasury bonds was also up 2.5%.
The news led to a decline in the value of the Japanese yen (USD/JPY), bringing it closer to 150 yen per dollar. Stock indexes in London and Europe trimmed their gains for the day.
The reading marked a significant shift in the labor market outlook compared to earlier in the week, when the ADP private employment data fell well short of expectations, leading to selling pressure on the U.S. dollar.
San Francisco Fed President Mary Daly's recent statements have also added to the evolving narrative. Daly mentioned that the Fed might not need to implement further interest rate hikes as progress is being made toward achieving the 2% inflation target.
Although Daly adopted a dovish tone in her speech, she hinted at the possibility of a growing inclination to maintain current interest rates. She cited signs of cooling in the labor market and a return to the inflation target as factors supporting this view.
“If financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished,” she said in prepared remarks on Thursday. “If we continue to see a cooling labour market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work.”
If Daly's perspective resonates with other Fed Presidents, there could be a shift in the opinions of the 12 out of 19 members who favored a rate hike by the end of the year at the previous month's meeting.
Conversely, some market analysts believe that the Fed has already implemented sufficient tightening measures, and the market may self-adjust without the need for the central bank to raise interest rates in the near future. Given the confidence provided by the strong U.S. economic environment, the demand for bonds may continue to rise, potentially resulting in more interest rate hikes.
DXY forecast: Dollar headed further up as eyes turn to Fed
In a comment cited by FXStreet, economists at Frankfurt-based Commerzbank wrote that the job figures are a sign of mounting pressure on the Federal Reserve to raise rates once again:
“In September, job growth in the US amounted to 336K, which was significantly more than expected. The continued strong employment growth – which has been revised significantly upward for the previous months – does not suggest that the labor market is moving into a better balance of supply and demand. This raises questions as to whether the easing in wages is permanent. Pressure is mounting on the Fed to hike rates once again.
No further employment report is due before the next FOMC meeting on October 31/November 1, which could make it clearer whether job growth has re-accelerated, against the Fed's wishes. Thus, the inflation figures scheduled for next week could be the deciding factor as to whether the Fed hikes or prefers to wait for more data.”
In their USD forecast, economists at MUFG wrote:
“If today’s NFP data was to reveal an acceleration in payrolls it would certainly push further back the expectations on the timing of a downturn, reinforce the ‘higher for longer’ mantra and fuel renewed UST bond selling and Dollar buying.
An in-line print may be greeted with some relief that extends the correction in yields a little further lower from here which would allow the Dollar to adjust a little further weaker too.
The Fed’s Summary of Economic Projections in September revealed expectations of the labour market being stronger (unemployment rate revised down from 4.1% to 3.8% for Q4 2023 – the current level) which means any disappointment in the data like another jump in the unemployment rate has the potential to influence rate expectations that bit more.”
In a technical overview, Investing.com’s Gunay Caymaz wrote that the DXY could test 108, provided it stays above 106 in the near future:
“Looking at the dollar index technically, it appear that the DXY is looking to test the critical resistance point at 108 after today's report. In the general outlook, we can see that the greenback will likely maintain its upward trend as long as it remains above the 106 band.”
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