Goldilocks job report as the Fed continues to hold rates steady

Economic outlook

Powell’s press conference on Wednesday was short of surprises as the market generally took his remarks in stride. His commentary continued to emphasize the Fed’s commitment to data dependency, although a dash of pessimism on future rate hikes did lead rates to soften slightly after a rise to start the week. This pessimism proved well-founded when the much-anticipated job numbers were released Friday morning. The jobs report came in below expectations, 175,000 new jobs compared to the consensus prediction of 240,000. Unemployment continued its slow march upward as it reached 3.90% but has remained under 4.00% for the past 27 months. This ties the record for the longest consecutive monthly streak set back in the 1960s.

Looking below the headline number, hourly earnings also showed signs of softening, coming in at a 2.80% annual rate over the past three months. This softening may alleviate some concerns after the Employment Cost Index (ECI) data came in hot earlier in the week. Overall, the cooling job market should help quell fears of reacceleration and give the Fed time to focus on inflation. The Fed also announced that they would slow the pace of quantitative tightening (QT), which could support liquidity and provide some relief in the Treasury market. After flirting with 4.70% to start the week, the 10-year Treasury yield closed on Friday at 4.50%.

Asian officials grapple with strong dollar

Last week, Japan likely carried out two rounds of intervention following months of speculation that it may step in to halt the depreciation of the yen. While Japanese officials continued to abstain from directly confirming the intervention, the Vice Minister of Finance for International Affairs, Masato Kanda, reiterated the negative impact that the sharp depreciation has had on the Japanese economy. The interventions were estimated at $35B on Monday followed by an additional $24B on Wednesday based on changes to the Bank of Japan’s (BOJ) projections of commercial bank deposits. Both interventions were timed at low liquidity periods to maximize efficacy.

The beleaguered currency is not without company, as a flurry of other Asian currencies have grappled with a strong dollar. An 18-month low for the Korean won has fueled speculation that Korea could follow Japan’s footstep with a similar intervention. In China, officials have been looking for alternative ways to ease financial conditions as cutting rates would add additional pressure on the yuan. Indonesia recently capitulated to the strong dollar by surprising the market with a rate hike. Meanwhile, Thailand’s Central Bank also indicated they may need to keep rates high due to Baht weakness. With U.S. rates likely to stay elevated, central bankers across Asia will have to continue to weigh currency and monetary priorities.

Oil prices slump as demand concerns grow

Demand concerns and the higher-interest-rate outlook dragged crude to seven-week lows last week. Oil prices stabilized following the U.S. jobs report, but Brent and WTI crude both declined over 5.00% on the week. A perceived fall in geopolitical risks also contributed to the slide as Israel-Hamas consider temporary ceasefire and hold talks with Egyptian and Qatari mediators. WTI Crude for June delivery closed the week at $79.99.

Looking ahead

Richmond Fed President Tom Barkin and New York Fed President John Williams will deliver remarks today, followed by Fed Governor Lisa Cook on Wednesday. The state of the consumer will also be in focus with consumer credit released Tuesday and consumer sentiment on Friday. Finally, the market will keep an eye on Treasury auctions throughout the week to gauge how the market handles continued glut of government debt issuance.