Nomura on US - FJElite

Kevin Warsh, who gave a speech at yesterday's ECB Forum, was more dovish overall than the market and this author's expectations. His remarks softened the strong hawkish impression he gave at the press conference following his first FOMC meeting as chair.

His answers were dovish on two key points: (1) whether concerns about inflation had eased in light of lower oil prices following the Middle East peace agreement; and (2) whether he sees AI adoption as more likely to accelerate or suppress inflation. On the first, he explicitly stated that inflation expectations and inflation risks had declined since he became chair. On the second, he noted a balance between Al’s short-term inflationary effects and its medium-term disinflationary effects. Warsh refused to answer all questions related to forward guidance, such as the possibility of a rate hike at the next meeting or room for balance sheet reduction, showing considerable caution about revealing his policy stance.

The US bond market's reaction to yesterday's developments was intriguing. The yield curve bull steepened in response to dovish statements from Warsh and weaker-than- expected economic data, but this did not last, and the yield curve bear steepened for a second day. This likely reflected: (1) the absence of Fed forward guidance, making market rate expectations more sensitive to economic data; (2) both ISM manufacturing and ADP payrolls data suggesting solid economic activity, despite the data undershooting market expectations; and (3) positioning ahead of today's US jobs report. This third point was consistent with USD's firmness throughout the session, suggesting that the market made substantial position adjustments ahead of the report's release. This time around, views on monetary policy are likely to shift significantly not only based on the data's strength or weakness, but also on how the divergence between payroll growth and the unemployment rate, which has persisted for the past three months, resolves. The flipside of this is that the pain trade could occur if the substance is weak.