Fed unlikely to resume hikes in July as US payrolls and inflation slow: Jefferies

Reserve Bank of Australia’s recent moves

“The Reserve Bank of Australia (RBA) and the market had anticipated a pause in rate hikes after the increase in March. However, defying expectations, the RBA surprised the market with an additional 25 basis point hike at its May meeting,” the financial services company said.

This decision was followed by another hike in June of 25 basis points which took the benchmark interest rate in Australia to 4.1 percent, underscoring the notion that pauses in rate hikes are dependent on prevailing data.

One basis point is one-hundredth of a percentage point.

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Speaking at the Morgan Stanley Australia Summit, RBA governor Phillip Lowe attributed these subsequent hikes to “sudden changes in financial conditions, robust household spending, inflation expectations, and rising unit labour costs”.

Bank of Canada in the thick of action 

Similarly, the Bank of Canada (BoC) initially announced a "conditional pause" in its hiking cycle to assess the state of the economy. However, both economic activity and inflation proved stronger than anticipated in January, leading the BoC to surprise the market by resuming its rate hikes at its June meeting. The BoC concluded that the existing monetary policy was not sufficiently restrictive, necessitating further tightening.

The Fed looking at two more hikes in 2023

Against this backdrop, the US Federal Reserve held its meeting on June 14 amid market expectations of a "skip" in rate hikes. Although the Fed refrained from raising rates, its "dot plot" indicated the possibility of two additional hikes later in the year.

“The idea of a ‘skip’ as the base case was subsequently corrected by Chair (Jerome) Powell. Nevertheless, the experiences of the RBA and the BoC serve as a reminder not to dismiss the potential resumption of hikes, even when the data does not align with expectations. This is what we refer to as the ‘Beyoncé effect,’ urging us to remain vigilant rather than complacent,” Jefferies said.

“Our US team forecasts a significant deceleration in both payrolls and inflation leading up to the July meeting. If our projections for the Consumer Price Index (CPI) materialize, it is likely that the Fed's inflation forecast will be revised downward.

"As a result, Chair Powell's emphasis on the "live" nature of the July meeting may lose significance. Consequently, a resumption of hikes is not our base case. However, it is worth reiterating a point made in the past—the Fed may be pausing for now, only to resume hikes at a later stage. Drawing from historical context, we recall that in 1996, after a brief pause in a rapid hiking cycle, the Fed maintained a steady policy for a year before ultimately returning to a tightening stance.”

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Core inflation cooling in euro area

The situation in the euro area presents a slightly different scenario. Inflation remains elevated, with the inflation forecasts from the recent meeting supporting European Central Bank president Christine Lagarde's indication of further rate hikes.

“Nevertheless, we believe that the latest inflation reading marks a decisive downward trend in core inflation. By the time the European Central Bank (ECB) concludes its hiking cycle, we anticipate that this downward trend will become apparent. This contrasts with the situation facing the Fed, where the current inflection point presents two-way risk,” the Jefferies report said.