Fed Funds Futures Suggest Negative US Rates Ahead of the NFPs

JFD Brokers
8 min readMay 8, 2020


Equities rebounded yesterday, while safe havens came under selling interest as worries with regards to the US-China trade relationship eased. What’s more, interest rates implied by the Fed funds futures turned negative, providing another reason to investors for increasing their risk exposures. As for today, market participants may lock their gaze on the US employment report, which is expected to show that NFPs tumbled 22mn in April.

Fed Funds Yields Turn Negative, US and Canada Jobs Reports Under the Radar

The dollar reversed and traded lower against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It gained only against JPY, while it underperformed the most versus AUD, NZD, and CAD in that order. The currencies that gained the least versus the greenback were EUR and CHF.

The strengthening of the risk-linked currencies and the weakness of the safe havens suggest that risk appetite improved yesterday. Indeed, major EU indices were a sea of green, perhaps due to the much-better-than-expected trade data from China as well as due to reports suggesting that US and China representatives will hold talks on implementing the Phase 1 trade deal.

Wall Street also traded north, with Nasdaq erasing losses for 2020, overlooking another surge in initial jobless claims, perhaps following a string of upbeat earnings reports led by PayPal. The fact that interest rates implied by the Fed funds futures turned negative may have also helped. It seems that although the Fed has never been in favor of the “negative rates” regime, some investors believe that the Committee could make an exception due to the damages caused by the fast spreading of the coronavirus. Specifically, the first Fed funds yield that turned negative was that of December this year, with the overall curve assigning a 62% chance for a 25bps cut by the summer of 2021.

The upbeat investor morale rolled over into the Asian session today as well after US and China trade representatives had a phone call, agreeing to remain in communication and to strengthen cooperation.

The recovery in the broader market sentiment is in line with our latest broader view. Remember yesterday morning, despite Wednesday’s risk off trading, we said that with governments around the globe easing their lockdown measures, and with a potential vaccine perhaps being ready for distribution soon, we stick to our guns that risk sentiment could rebound again, and this is what happened yesterday and during the Asian day today.

As for later today, focus is likely to turn to the US employment report for April. Expectations are for non-farm payrolls to have fallen 22mn after sliding 701k in March, while the unemployment rate is expected to have surged to 16.0% from 4.4%. Average hourly earnings are expected to have risen 0.4% mom, the same pace as in March, which — barring any deviations to the prior monthly prints — could drive the yoy rate up to 3.3% from 3.1%.

At its latest meeting, the Fed kept interest rates unchanged at the 0–0.25% range, and hinted that more stimulus may be delivered if judged necessary. “We will continue to use powers proactively until we’re confident that the US is solidly on the road to recovery”, Fed Chair Powell noted. He also added that economic activity will likely drop at an “unprecedented pace” in Q2, which suggests that they are more likely to act again than not. Thus, a very bad employment report could mean that the labor-market wounds at the start of the quarter are deeper than previously anticipated and may increase the chances for more easing by the Fed.

Although the initial reaction maybe a risk-off one, meaning lower equities and, paradoxically, a higher dollar, we expect it to stay limited and short-lived. After all, investors have been already digesting the deep wounds from the spreading of the coronavirus, and a collapse in NFPs is more than certain for the financial community, especially after another surge in initial jobless claims and a 20mn jobs loss reported by the ADP. This, combined with a higher probability of further easing by the Fed, could push Fed funds yields further into negative waters, which could result in another rebound in equities and risk linked assets, as well as another round of selling in safe-haven assets.

Apart from the US employment report, we get jobs data for April from Canada as well. The unemployment rate is forecast to have surged to 18.0% from 7.8% in March, while the net change in employment is anticipated to show that the economy has lost 4.0mn jobs after losing 1.01mn the month before.

At its latest gathering, the BoC announced an expansion of its QE purchases, while the latest CPI data revealed that the headline rate tumbled to +0.9% yoy from 2.2%, but the core one just slid to +1.6% yoy from +1.8%. This suggests that the fall in the headline print was mainly due to the tumble in oil prices, and may not necessarily prompt the Bank to add more stimulus as soon as at its upcoming gathering. Even if the employment report disappoints, policymakers may prefer to wait for a while before they consider further action, as they would like to see whether the latest easing efforts are having the desired effects on the economy.

The Canadian dollar may slide initially on the bad numbers, but a potential rebound in the broader market sentiment, and thereby higher oil prices, may bring the currency back under buying interest. Taking also into account that the US dollar may come under additional selling interest soon, we would expect USD/CAD to continue drifting south for a while more, even if it rebounds after the US and Canadian employment reports.

DJIA — Technical Outlook

As we can see from our 4-hour chart, the Dow Jones Industrial Average cash index continues to slowly grind higher, while balancing above a short-term tentative upside support line taken from the low of April 22 nd. In addition to the slight positivity, which we are seeing this morning, the price managed to form a new high for this week, breaking above the 24170 barrier. We will take a bullish approach, at least for the near term.

A further push north could bring DJIA to the 24550 zone, which is the high of April 28 th. The price may receive a hold-up around there, or even correct a bit lower. That said, if the index remains above the 24170 territory, there might be another chance for the buyers to step in. If they use that opportunity, DJIA could move higher again. If this time the index manages to overcome the 24550 obstacle, that may lead the price towards the highest point of April, at 24902.

Alternatively, in order to get comfortable with the downside scenario, we would like to see a break of the aforementioned upside line and a price-drop below the 23525 hurdle, which is the low of this week. DJIA could then travel to the 23321 obstacle, a break of which might set the stage for a further slide to the 22942 level, marked by the low of April 21 st.

USD/CAD — Technical Outlook

Yesterday, after finding resistance near the 1.4173 barrier, USD/CAD moved sharply to the downside, falling below the psychological 1.4000 zone. This morning, the slide temporarily got held near the 1.3925 area. Given that USD/CAD had declined quickly in a short period of time, we may see a small retracement back up before another leg of selling. For now, we will stay somewhat bearish.

If the rate manages to recover some of its losses made recently, the pair may re-visit the area around the psychological 1.4000 mark, which is near the low May 5 th. However, if USD/CAD-bulls find it too difficult to lift the rate above that mark, the bears may take control again. If so, the pair could slide back to the 1.3925 obstacle, a break of which might send the rate to the lower bound of the wide range, where USD/CAD is currently trading in. That range is roughly between the 1.3855 and 1.4265 levels.

On the other hand, if the pair is able to drag its recovery back above the 1.4077 hurdle, which is the inside swing high of May 6 th, this could spook the bears from the field temporarily. USD/CAD might then push further north, possibly overcoming the 1.4115 obstacle and aiming for the current high of this week, at 1.4173, where the rate could receive a hold-up. That said, if the buyers are still feeling more comfortable, a break of that 1.4173 barrier may open the door for a further uprise, potentially bringing USD/CAD to the 1.4198 zone, a break of which may lead towards the upper bound of the range, at 1.4265.

As for the Rest of Today’s Events

Besides the US and Canadian employment data, we also have Canada’s housing starts and building permits for April and March, respectively. Housing starts are expected to have declined to 110.0k from 195.2k previously, while building permits are forecast to have tumbled 20.0% mom after sliding 7.3%.


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Originally published at https://www.jfdbank.com on May 8, 2020.



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