Fed credibility, Yen intervention, and the countdown to NFP

Preview text: Warsh's silence rattles markets, yen jumps on intervention, and all eyes turn to Friday's jobs report.

Fed credibility issue?

On the policy front, we had updates from the Fed, the BoE, and the BoJ, all of which left their overnight rates unchanged. But by far, the Fed was the highlight in this circle, with attention centred on Fed Chairman Kevin Warsh’s words, or lack thereof.

Cast your mind back to what the market was expecting heading into the event. First, a hold decision (albeit a couple of players were calling for a hike), which we got. Second, a thin rate statement, which we also got (in fact, the only change to the statement was the addition of the three dissenters – Logan, Hammack and Kashkari – who, you may recall, were the same three who voted to remove the easing bias at the April meeting). Third, no forward guidance from Warsh, which also materialised.

Unless I am missing something, markets got exactly what they expected. However, the lack of communication from Warsh about the reaction function raised credibility concerns, with the curve steepening and the USD chalking up a leg lower in response. The market is essentially calling Warsh’s bluff, concerned about the Fed’s inability to deliver on its pledge to provide price stability. 

That said, Warsh’s comments about the recent rise in nominal and real yields, which have tightened financial conditions, caught the markets’ attention. That does appear to be creating some leeway for the Fed to remain on hold for now. It will be interesting to see what the other Fed Governors say in the next few weeks, and it is important to remember that we still have two inflation and jobs reports to come before the September meeting, so a lot can change.

‘Buy Japanese Yen (JPY) US$5-10 bill’

USD/JPY ended last week lower by around a punchy 600 pips, or 4% – with the daily price elbowing beneath its 200-day SMA for the first time since October 2025. The backdrop is that, in coordination with the US, Japan’s MoF intervened in the FX space at the tail end of last week to cap the slide in the yen, which was at 40-year lows. 

While the usual playbook would involve carry traders simply buying the dip, these joint interventions between the US and Japan – the first since 2011 – could be different. Although yield differentials suggest buying USD/JPY, given that both sides are saying that further intervention is possible, dip-buying may be thin at current levels.

Nevertheless, without the BoJ hiking rates and stepping up to the mark, I do not see this as a major game-changer for the JPY. Two further rate hikes are priced in by March 2027, with about a 40% probability of a rate increase at September’s meeting, up from 20% a week ago.

Market scoreboard this morning

We are presented with an all-too-familiar picture this morning after President Trump called off his planned attack on Iran. Trump said the attack would have been the biggest since World War Two!

Talks between the US and Iran are reportedly set to go ahead today, but I am really not holding my breath. Direct communications between the two sides have been non-existent, and the Strait of Hormuz remains largely closed. If the talks do go ahead, the Strait will be front and centre.

However, with the latest news, we are risk-on this morning, with oil benchmarks – Brent and WTI – slumping at the open, down about 8%. The USD index is modestly on the back foot – with losses more evident against the JPY – and US Treasury yields are lower across the curve. In the equity space, both European and US equity index futures are higher, but Asia-Pac shares took a hit amid losses in South Korean chipmakers.

US jobs week: Preparing for today’s US Manufacturing PMI

This week’s docket is largely centred on US jobs data, with the July headline non-farm payrolls due on Friday. Ahead of that, we have the June JOLTS on Tuesday, the July ADP report on Wednesday, and, of course, the ISM PMI surveys, with the manufacturing component hitting the wires today at 2 pm GMT and the services report on Wednesday. In addition, we have a couple of Fed speakers scheduled to speak this week, including Schmid and Cook on Wednesday and Barkin on Friday, as the Fed’s blackout period officially ended last Friday.

Given what I have seen with the regional surveys, it is no surprise that the median market expectation for today’s ISM manufacturing PMI is 54.0, which would bring the index back above June’s reading of 53.3 to May’s level (the highest point seen since mid-2022). The estimate range is between 57.0 and 52.8.

The new orders and employment indexes (both of which contribute 20% each to the main PMI) will also be closely watched. If they come in strong, this suggests Friday’s NFP could be solid (expected to report at around 83,000, up from 57,000 in June).

Also remember that the June YY CPI, PPI, and PCE data all came in below expectations. If the headline comes in strong, with prices paid and employment higher, this could lift yields and the USD. Still, given what we know about the US and Japan – the possibility of further yen intervention – the best-case scenario for all tier-1 US data, for me, could be a solid miss, perhaps opening the door to shorting opportunities in line with downside sentiment.