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Hopes of Fed pivot fade ahead of crucial US jobs report

Alex Gluyas
Alex GluyasMarkets reporter

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Risk assets faced renewed pressure after Federal Reserve officials hosed down hopes that it will replicate the Reserve Bank’s dovish pivot, reigniting concerns the US central bank will push the world’s largest economy into recession.

The RBA isolated itself from the global monetary pulse this week by slowing the pace of monetary tightening. This sparked optimism that other global central banks will follow suit, fuelling the Australian and US sharemarkets’ best two-day rally since 2020.

Markets imply a 66 per cent probability that the Federal Reserve will lift rates by 0.75 percentage points in November. AP

However, Wall Street retreated overnight as a trio of Fed officials sounded the alarm that more aggressive rate rises are on the horizon, and traders positioned for hotly anticipated US payrolls data to be released at 11.30pm (AEDT).

The S&P 500 dropped 1 per cent after surging 5.7 per cent earlier this week, the Dow Jones Industrial Average fell 1 per cent and the Nasdaq slipped 0.7 per cent. The US dollar surged nearly 1 per cent and treasury yields climbed across the board.

The S&P/ASX 200 dropped 0.8 per cent to 6762.8 on Friday, and the Australian dollar was trading at US64.07¢.

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Chicago Fed president Charles Evans reiterated that the US benchmark rate will peak at a range of 4.5 per cent to 4.75 per cent, in line with market pricing for a peak of 4.5 per cent by March 2023.

Minneapolis Fed’s Neel Kashkari said the central bank is “quite a way away” from pausing its campaign of rate increases and Cleveland Fed chief Loretta Mester noted the US is in an unacceptably high inflation environment.

“Ongoing hawkish comments by Fed officials [are] a clear pushback on the ‘Fed will pivot’ narrative that has supported risk assets since the beginning of the week,” said Tapas Strickland, head of market economics at National Australia Bank.

Bank of Canada governor Tiff Macklem sent a similarly hawkish message, saying that further tightening is needed to ensure price pressures don’t become entrenched in the economy.

“Simply put, there is more to be done,” Macklem told the Halifax Chamber of Commerce. Inflation will “not fade away by itself.”

Canada’s two-year bond yields jumped to the highest level since 2007 on his remarks, rising more than 7 basis points to nearly 4 per cent.

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“This puts the Bank of Canada firmly in the camp of the hawkish Reserve Bank of New Zealand and US Federal Reserve and leaves the Reserve Bank’s downshift as a potential outlier,” Mr Strickland said.

Fears of central banks tightening too much intensified after the International Monetary Fund warned that countries accounting for about a third of the global economy will experience a recession, or at least two consecutive quarters of contraction, this year or next.

The IMF signalled that it will downgrade its global growth forecasts for the fourth consecutive quarter next week. The lender projects economic growth of just 3.2 per cent in 2022 and 2.9 per cent in 2023.

Nervous wait

Markets will closely watch the release of US labour data tonight which is expected to show that employers added another 250,000 jobs last month, marking the smallest increase so far in 2022.

The unemployment rate is projected to hold at a near five-decade low of 3.7 per cent.

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“A surprise on the tighter side will only reinforce expectations that the Fed is indeed a way from target,” ANZ economists said.

The US Labor Department reported on Thursday that initial claims for jobless benefits came in at 219,000 for the week ended October 1, higher than economists’ expectations of 203,000.

Oil prices extended their advance after the OPEC+ alliance announced its largest production cut since 2020, adding to anxiety about stubborn inflationary pressures.

West Texas Intermediate topped $US88 a barrel after jumping 10 per cent over the previous three sessions, and Brent crude traded near $US95 barrel.

ANZ said it sees crude oil pushing back towards $US100 a barrel in the near term, and reiterated its short-term forecast of $US115 a barrel.

“OPEC’s move to cut oil production could be a turning point for the market,” said Daniel Hynes, senior commodity strategist at ANZ. “Market sentiment was already bearish in anticipation of a weakening global economy, and this decision should further tighten the market.”

Alex Gluyas is a markets reporter based in our Melbourne newsroom. Connect with Alex on Twitter. Email Alex at alex.gluyas@afr.com

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