In this week’s market review from ETM Analytics and TreasuryONE, the focus is on U.S. labour market data and its implications for economic policy. TreasuryONE’s currency strategist, André Cilliers, discusses how recent non-farm payroll data suggests an overall trend rather than a one-time anomaly. While the U.S. unemployment rate ticked slightly lower, it is important to note that temporary employment is on the rise, indicating a mixed picture for the labour market. These trends are reinforcing the expectation of a 25 basis point interest rate cut by the Federal Reserve, which has been cautious and data-dependent.
Federal Reserve’s Forward-Looking Stance
Andre highlights the Fed’s dual mandate of controlling inflation and maintaining employment. Inflation, as measured by the Personal Consumption Expenditures (PCE) index, has been on a gradual decline, although still above the Fed’s 2% target. Employment data, on the other hand, suggests rising unemployment, which could exert downward pressure on inflation over time. However, the risk of a harder economic landing remains if unemployment continues to increase significantly. As of now, market expectations lean towards a 25 basis point cut, though nothing is confirmed until the final decision is made.
Market Reactions and Expectations
The U.S. equity market reacted negatively to recent payrolls data, reflecting the high level of uncertainty around economic conditions. With markets anticipating a 25 basis point rate cut, any deviation, particularly in the upcoming CPI release, could fuel further speculation. Inflation is expected to ease to 2.6% year-on-year, but this is still higher than the Fed’s target. The overall sentiment remains cautious, with the probability of a rate cut at around 80%, though it is not guaranteed.
Impact on the South African Rand
Domestically, the South African market has already priced in the 25 basis point cut from the Fed. The rand is expected to remain stable within its current range unless there is a significant surprise, such as a 50 basis point cut, which could cause larger market movements. Additionally, the South African Reserve Bank is likely to follow the Fed’s lead with its own rate cut, keeping interest rate differentials largely unchanged. For now, both local and global markets are expected to remain steady as they await the final decision from the Federal Reserve.