• Fed minutes corroborate hawkish Fed view
• ADP jobs report and ISM non-mfg PMI in focus
• Dollar/yen pulls back after pause near 145.00
• Wall Street takes a breather ahead of key data

There was almost nil market reaction at the release, perhaps as the minutes did not offer any game-changing information. The dollar was already in a recovery mode and the minutes’ release confirming the Fed’s hawkish narrative likely allowed the currency to keep marching higher and close the day stronger against most of its major counterparts.

The little to no impact of the minutes on investors’ mood can also be confirmed by the fact that US Treasury yields remained unresponsive upon the release, while market expectations about the Fed’s future course of action were also barely affected. Investors continue to price in slightly more than 30bps worth of additional Fed hikes before this tightening crusade ends, and they are seeing a series of rate cuts through 2024, mainly during the second half of the year.

Traders likely want to pay more attention to incoming data before adjusting their bets and thus, following the disappointing ISM manufacturing PMI for June, they may thoroughly examine the ADP employment report and the ISM non-manufacturing PMI today. The former is expected to show that the private sector gained less jobs than it did in May, but the latter is forecast to have increased to 51.0 from 50.3 and its employment sub-index is set to rise to 49.9 from 49.2.

However, the prices-charged sub-index is expected to have declined to 53.3 from 56.2 and considering the miss in the survey concerning the manufacturing sector, a downside surprise in the employment sub-index cannot be ruled out either.

Therefore, more data confirming that inflation is coming down faster than expected and that employment is softening could prompt investors to bring forth their Fed cut expectations, which could prove negative for the dollar. The opposite may be true if the data suggests otherwise.

Today, the dollar is back under pressure against its Japanese counterpart, with dollar/yen erasing yesterday’s gains and sliding even more. Although some suggest that this may have been the result of risk aversion due to growth concerns stemming from central bank tightening, that may not be the case as a hawkish Fed and a dovish BoJ are nothing but a positive blend for dollar/yen. Actually, this divergence kept the pair in uptrend mode even when equity indices were falling in 2022 on fears that higher rates could result in a global recession.

Perhaps the pullback in dollar yen was just some further profit taking near the psychological 145.00 zone due to fears that a break higher could trigger intervention. That said, with Japanese authorities clearly saying that they are monitoring the pace of the yen’s decline rather than an actual level, even if the bulls jump back into the action and push the rate above 145.00, as long as they do it slowly, an intervention may be temporarily avoided. And as long as the BoJ is not providing crystal-clear signals about potential tightening steps, traders may stay tempted to sell the yen again soon.

Wall Street indices closed in the red yesterday, with the Nasdaq failing to break above the high of June 16 and go for a higher high. That said, the slide is far from suggesting that the trend is nearing its end, and although the futures market points to a lower open today, a disappointing ADP and ISM non-mfg PMI may be enough to encourage investors of high-growth tech stocks to jump back into the action.

After all, most high-growth firms are valued by discounting expected cash flows for the quarters and years ahead and with growth expected to accelerate, expectations of more bps worth of rate cuts next year could keep any losses in the stock market limited, despite most tech stocks being already expensive in terms of valuations.

Yes, US-Sino tensions could weigh on sentiment if they further escalate, but the stock market does not seem to care, at least for now.