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MARKETS

U.S. stocks tiptoed higher Tuesday after softer-than-expected labour market data reignited hopes for a Federal Reserve interest rate cut.

Tuesday's data revealed that U.S. job openings in April fell to their lowest level over three years, signalling a loosening labour market that bolstered expectations of a Fed rate cut this year. In response, U.S. Treasury yields slipped.

This week, equities have been weighing the weaker growth environment and decided that the promise of rate cuts outweighs the economic gloom. Thanks to the weaker run of economic data, It's as if investors are starting to get over their higher for longer star gazing Fed anxieties for now.

Despite some skepticism about how much more disinflation can be squeezed out of the JOLTS headline, progress is progress. Fewer job openings should theoretically reduce wage pressures as the competition for workers eases. Cooler wage growth is expected to lead to cooler consumer price growth—at least, that's the story the market is sticking to. Job openings have been down by 830,000 since December, a hefty 4.12 million from their peak.

Interestingly, quits rose in April to 3.5 million from 3.3 million in the previous month. The quit rate held steady at 2.2%, with March's rate revised upwards, reflecting an overall increase in quits for that month.

Despite the steady quit rate, the renewed decline in job openings will likely overshadow it in the eyes of market participants and Fed officials, especially since the quit rate has already returned to pre-pandemic levels. Plugging the latest JOLTS data into the openings-to-unemployed ratio gives a reading of 1.24, the best( lowest)  disinflation reading of this metric since June 2021.

We’ve been beating this drum for over a month now: the Fed must start cutting rates soon. Real-time data is waving red flags everywhere, suggesting a slowdown. It’ll be fascinating to see if Friday’s payroll data aligns with this narrative—the cyclical effects of fading fiscal policy stimulus and the normalization post-pandemic all point in the same direction. Growth is slowing. We're not calling a recession yet, but if the FOMC keeps rates at current levels for much longer, that’s where we’re headed.

It’s high time for Powell to step up and lead from the front rather than relying on backward-looking, "data-dependent" modes. The current economic signals are clear—it's time for proactive leadership.

FOREX MARKETS

The US dollar continues to drift lower, driven by softer economic data and slowing growth. Just a week ago, the notion of US 10-year yields dropping by nearly 30 basis points seemed unthinkable. Yet here we are, with yields now at 4.32%. This is a clear and digestible reason for the dollar's weakness. The US economy, once the unstoppable energizer bunny, is starting to fizzle.

The path to a dollar plunge runs through this week’s Non-Farm Payroll report. A headline figure near 150,000 with modest average hourly wage growth could push EUR/USD above 1.1000.

As US yields have corrected modestly lower, USD/JPY's upward momentum has evaporated, dropping over 400 pips as investors quickly exited their long USD positions that were inspired by the "higher for longer" Fed mantra.

Lower US yields are providing critical support for the JPY. However, after several unsuccessful interventions, there’s mounting pressure on the Bank of Japan (BoJ) to strengthen the yen. The government urges the BoJ to accelerate policy tightening, which could involve increasing rate hikes or slowing down the pace of JGB purchases. We anticipate that the BoJ will adopt a dual approach with a rate hike in July and continuous quantitative tightening (QT), potentially driving USD/JPY to 150 ahead of the BoJ's July meeting.

OIL MARKETS

Ever sensitive to supply fluctuations, the oil market experienced a continued selloff on Tuesday. Front-month U.S. crude for July delivery dropped by 1.3%, settling at $73.25 a barrel—its lowest finish since February 5. This downward trend was primarily driven by concerns about increased supply, especially after a significant OPEC+ meeting over the weekend, which suggested that voluntary cuts would be rolled back in the future.

Whether good or bad, U.S. economic data is always the primary macro driver for oil prices. The recent streak of weak economic data is exacerbating supply concerns. Oversupply amid waning demand is the ultimate toxic junction for oil markets, creating a perfect storm for falling prices.

Assuming hedge funds aren't excessively short, oil prices could be highly susceptible to a significant pullback even with minor positive news. This vulnerability could trigger a larger-than-expected rebound as short positions are covered.

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