No Surprises There
We had a mixed bag of US data yesterday. The ADP employment change surprised to the upside with private payrolls adding +192k in April, coupled with a substantial upward revision to the previous print. Interestingly, the annual wage gain eased to 5%yoy; the smallest gain since August 2021. Next, the JOLTS job openings missed expectations, released at the lowest level since February 2021. We wonder whether these data points signal the start of a loosening labour market. The ISM manufacturing print followed, falling back into contraction, and the ISM prices paid unexpectedly shot up to 60.9 (exp. 55.4), the highest level since June 2022. The new orders component slipped back below 50, while the employment figure rose marginally, remaining in contraction.
We also heard that the US Treasury kept its issuance of longer-term debt securities steady, according to its latest quarterly announcement released yesterday. This was widely anticipated by market participants. However, the Treasury also unveiled details about its first debt buyback programme in over two decades, set to commence May 29th. The upcoming programme will involve weekly buybacks of up to USD 2bn in nominal coupon securities and USD 500m in inflation-protected securities. The goal is to bolster market liquidity and enhance cash management practices, following an extensive review process spanning more than a year.
However, the event markets were waiting for was Fed Chair Powell’s post-FOMC announcement remarks. Following three consecutive hotter-than-expected inflation reports, the FOMC unanimously voted to hold rates at 5.25%-5.50%, as expected. Powell noted that “so far this year, the data have not given us that greater confidence” on inflation moving sustainably towards the 2% goal. He went on to add that “readings on inflation have come in above expectations” and that “gaining such greater confidence will take longer than previously expected.” He also noted that rate hikes are unlikely as price pressure will likely ease this year. Although he gave no indication on the timing of a rate cut, he appeared to leave a cut this year on the table. Ahead of the meeting, futures markets were pricing between 1-2 cuts this year, with the first reduction likely to come in December. This morning the odds have edged up marginally for a December cut.
Regarding the balance sheet, the Fed said it will slow the pace of run-off, starting June 1st, lowering the monthly redemption cap on Treasuries to USD 25bn, from USD 60bn, while the cap for mortgage-backed securities (MBS) will remain at USD 35bn. Any excess MBS principal payments will be reinvested into Treasuries. All-in-all, the Fed has reduced its holdings by roughly USD 1.5bn to USD 7.5tn.
Markets had quite a lot to chew on overnight; US Treasury yields ticked lower, while stock market action was mixed. We will receive further colour on the health of the labour market on Friday. Currently, expectations are that +240k jobs were created in April; unemployment will remain at 3.8%; and average hourly earnings will have eased to 4.0%yoy in April. The ISM services prints will also garner market focus on Friday.
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