Forexlive Americas FX news wrap 7 Feb: S&P nearly reaches 5000 milestone. Lots of Fedspeak

The US session was focused on a number of Fed officials speaking. We have already heard from Kashkari since the FOMC decision, but Collins from Boston Fed Pres. Collins and Fed Gov. Adriana Kugler, helped to understand their biases. Richard Fed Pres. Barkan also spoke.

All seem to be content with being patient. There is no rush especially given strong jobs markets, and concerns that inflation moving lower is still dependent on some help from wages and service prices moving lower. There also is concerned that goods disinflation will not provide the stimulus it has over the last 6 to 12 months.

Below are the summary of each:

• Minneapolis Fed Pres. Kashkari:

Neel Kashkari of the Federal Reserve shared insights suggesting that the current monetary policy might not be exerting as much pressure on demand reduction as previously believed. He indicated that if the labor market remains robust, the pace of policy rate adjustments could be moderated. Kashkari mentioned that, based on the current economic indicators, 2-3 rate cuts seem appropriate, emphasizing that continued positive inflation data over the next few months would bolster confidence in returning to a 2% inflation target. He noted the commercial real estate sector’s strength, with the exception of the office segment, and highlighted the economy’s remarkable resilience. Kashkari’s comments reflected an optimistic view on the economy’s performance, underlining the need to observe consumer and business behaviors closely, especially regarding spending on goods, as these could have longer-term implications.

• Fed Governor Adriana Kugler:

Fed Governor Kugler expressed satisfaction with the significant progress made on inflation, maintaining an optimistic outlook for its continued improvement. Despite the progress, Kugler emphasized that the Federal Reserve’s work on inflation is ongoing, with a commitment to achieving and maintaining the inflation target at 2%. The stance on monetary policy remains restrictive, balancing the risks to the Fed’s dual mandate and acknowledging that future adjustments, including potential rate cuts, will be contingent on the evolving economic landscape, particularly if disinflationary progress slows or stalls.

Kugler highlighted areas of optimism, such as services inflation and the expectation of moderating wage growth, which are seen as vital contributors to ongoing disinflation efforts. The cooling of labor demand without leading to widespread layoffs was noted as a positive development, alongside the expectation that consumer spending will slow, aiding disinflation. Despite some easing in financial conditions, they are still considered tight, supporting the fight against inflation.

Kugler stressed the importance of wage growth moderation, particularly in the services sector, as crucial for sustaining disinflation. While housing inflation remains persistent, it is expected to decrease. The Governor also mentioned the role of immigration in alleviating sector-specific labor shortages, such as in construction.

Acknowledging the uncertain environment surrounding the neutral interest rate, Kugler stated that policy decisions would be closely tied to inflation’s performance. The possibility of quick shifts in the unemployment rate and the monitoring of potential financial stress sources, like commercial real estate and regional bank exposures, were also noted. Kugler concluded by underscoring the uncertainty around goods prices due to global shipping risks, affirming that every upcoming meeting would be pivotal in shaping policy direction.

• Boston Fed President Susan Collins

Boston Fed President Susan Collins outlined a cautious but adaptive stance on monetary policy, indicating the possibility of rate cuts later this year if the economy aligns with expectations. She emphasizes that monetary policy is currently well-suited to the economic outlook, though she anticipates a potentially uneven journey back to 2% inflation. Collins advocates for gradual and methodical rate adjustments when they begin, underscoring the need for more data to support any decision to cut rates. Her perspective is informed by recent strong job data and the overall economic resilience, suggesting a careful approach to ensure that inflation steadily moves towards the target without precipitating undue economic slowdown. Collins also highlighted the importance of moderating wage gains and noted the mixed impact of supply chain improvements on inflation. While acknowledging the uncertain terrain of the neutral interest rate, she suggests that future rates could exceed pre-pandemic levels, reflecting a shift in economic conditions and a lower likelihood of deflation risks compared to the period before the pandemic.

• Richmond Fed President Barkin

Richmond Fed President Barkin emphasized the importance of patience regarding potential rate cuts amid the current economic uncertainty. Highlighting that inflation has shown a promising decline over the past seven months, Barkin remains cautious, expressing concern that the recent decrease in goods prices might be temporary and could reverse. Without committing to a specific rate path, his focus remains squarely on the economy’s performance, particularly the broadening of disinflation across various categories as a signal for considering rate reductions. Despite a still tight labor market, challenges persist with services and rent inflation remaining elevated, indicating ongoing inflationary pressures. Barkin stressed the need for a broad-based disinflation before making policy adjustments, noting his surprise at the strength of the recent jobs report and underscoring a non-urgent stance on altering the policy rate, favoring a careful approach to ensure inflation targets are sustainably met.

Both Fed Gov. Kugler and Collins highlighted specifically the importance of moderating wage gains. Later in the day, the Atlanta Fed wage growth tracker came in a 5% which was below the 5.2% last month. However, if you look back to before the pandemic inflation spike, the wage growth tracker was more between 3% and 4%. The 5% level is still well above that target needed to keep inflation closer to the 2% target (see the chart below).

In other news/developements in the US session:

• Israel’s Netanyahu said that the goals and strategy of the conflict in Gaza remain focused on achieving a total victory, as emphasized by the commitment to not seeking alternatives until the objectives are met. This includes the decisive defeat of Hamas, the return of all abductees, and a clear indication that the conflict, while not expected to extend for years, is anticipated to last for months. The decision-making process for the war involves a two-tier approach, starting with a mini-ministerial council before moving to a broader war council, underscoring a structured and hierarchical approach to strategic decisions in the conflict. Crude oil is a trading up $0.69 at $74.01.
• US stocks continued their run to the upside with both the Dow Industrial Average and the S&P index closing at all-time record high levels. The S&P index reached a high of 4999.89 just 0.11 short of the magical 5000 level. The NASDAQ index is closing up 0.95% and the Dow Industrial Average is closing up 0.40%. Nvidia cost above the $700 level for the first time ever with a gain of 2.75% on the day. Meta surged by 3.27%, and Microsoft rose 2.13%.
• In the US debt market, yields were higher despite strong demand at the 10-year note auction (-1.2 basis point tail led by stellar demand from international buyers. 2-year yield is at 4.428% up 2.1 basis points in the 10-year yield is up 2.3 basis point at 4.115%. The U.S. Treasury will complete their coupon auctions for the week with the sale of 30-year bonds tomorrow. It’s yield is currently at 4.320% up 2.5 basis points.

In the forex market today, the CAD, GBP, NZD and EUR were all within shouting distance of being the strongest of the major currencies.The CHF was the weakest of the major currencies today.

For the USD, it was mixed/little changed (it was the weakest of the majors yesterday). The USD was stronger by 0.54% vs the CHF, but fell by -0.21% vs both the GBP and the NZD. It was also down -0.19% vs the CAD, and -0.17% vs the EUR.