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The US dollar has maintained its robust performance, continuing to trade at stronger levels overnight and extending its advance after the release of a more robust than expected US payrolls report last Friday. This positive momentum propelled the USD/JPY pair back above the 146.00-level during the overnight session, surpassing the low of 141.70 recorded on December 7th. Contributing to this upward movement, the increase in US yields was notable, with the 2-year US Treasury bond yield rising by 16 basis points from Friday's intra-day low, and the 10-year US Treasury bond yield experiencing an uptick of approximately 10 basis points.
The unexpectedly strong US payrolls report has prompted market participants to recalibrate their expectations for Fed rate cuts in 2024. Reflecting this adjustment, the implied yield on the December 2024 Fed fund futures contract has seen a 17-basis point increase since Thursday's closing price, currently indicating around 108 basis points of rate cuts by the end of the upcoming year. However, it is noteworthy that the report has not significantly altered expectations regarding the timing of the first Fed rate cut, which remains fully priced in (26 basis points) by the May 1st FOMC meeting.
A significant upside surprise in the household survey was unveiled, demonstrating a robust rebound in employment by 747k in November, following a decline of -348k in October. The increase in household employment outpaced the growth in the labour force, which also saw a strong increase of 532k. This resulted in a decrease of -215k in the number of unemployed individuals and a 0.2 percentage point drop in the unemployment rate to 3.7%. Despite this, the unemployment rate has experienced a gradual increase throughout the year due to stronger labour supply growth, helping to alleviate upward pressure on wages and providing the Fed with more confidence in the balanced state of the labour market.
In the broader context, the November NFP report, while considered a small setback for the Fed, is likely to make it even more unlikely for them to fully endorse the current scale of rate cut expectations priced into the US rate market when they meet this week. To provide some historical context, at the September FOMC meeting, the median projection among FOMC participants was for 50 basis points of rate cuts next year, with the policy rate expected to peak at a higher rate of 5.6% at the end of this year before falling to 5.1% in 2024.
The breakdown revealed that nine out of nineteen FOMC members expected the policy rate to end next year at 4.875% or lower. Given the recent improvement in US inflation, there is a good chance that the median projection for the end of next year could be lowered, signalling 50 basis points of cuts next year or even 75 basis points.
The upcoming release of the latest US CPI report for November is anticipated to be crucial in determining whether the Fed will signal there is room for more rate cuts next year. Further evidence of slowing core and services inflation will be required. Overall, these developments are expected to continue providing more support for the US dollar in the near term and have made it harder for the US rate market to price in even more aggressive rate cut expectations for now.
In the early European trading session, the yen retraced some of its gains from last week following a report from Bloomberg. The report suggested that the Bank of Japan (BoJ) sees little need to end negative rates in December, as there is yet to be enough evidence of age growth supporting sustainable inflation. This report appears to be a deliberate effort to dampen speculation over an imminent end to negative rates in Japan, which intensified last week following comments from Governor Ueda and Deputy Governor Himino. The report aligns with the view of our analysts in Tokyo, who believe that the first-rate hike in Japan is more likely to be delivered in January.
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