Markets are bracing for a softer US monthly jobs report today. The Dow, S&P 500, and Nasdaq Composite Index fell by 1.2%, 1.4%, and 2.3%, respectively. The US Treasury 10Y yield eased 5.4 bps to 3.98%, its first daily close below 4% since February 1. Consensus expects US nonfarm payrolls to drop below 200k to 175k in July from 206k in June, mirroring the decline in ADP employment to 122k from 155k. In the ISM manufacturing survey, the employment index fell to 43.4 in July, its worst level since June 2020. Initial jobless claims increased to 249k for the week ending July 27, its highest level since August 2023. With the seasonally adjusted continuing claims at a 2.5-year high of 1544k for the week ending July 20, we cannot rule out an increase in the unemployment rate from the 4.1% level in June. Consensus sees average hourly earnings extending its decline below 4% to 3.7% YoY in July from 3.9% in June.
Speaking after the US labour report today, Fed Presidents Austan Goolsbee (Chicago) and Thomas Barkin (Richmond) should join Fed Chair Jerome Powell’s post-FOMC narrative for a possible interest rate cut in September. With the futures market pricing in more than a 100% probability for rate cuts at the remaining three FOMC meetings this year, the US Treasury 2Y yield eased another 10.9 bps to 4.15%, within striking distance of this year’s low of 4.14% on January 12.
However, the Fed’s rate cut expectation did not push the DXY Index below the 104 level. The DXY has been consolidating between 103.60 and 104.80 after its decline below 105 due to the softer US CPI inflation last month. The unwinding of JPY carry trades was positive for the JPY but negative for the DXY currencies such as GBP, EUR, and CAD. This week, the Bank of Japan was resolute in normalizing monetary policy by hiking rates and reducing its JGB purchases, while the Bank of England joined the European Central Bank, the Bank of Canada, and the Swiss National Bank in lowering interest rates before the Fed. Like the JPY, the CHF reprised its haven role from US stock market indices coming off their record highs. USD/JPY could resume its decline again on a disappointing US jobs report, especially if the critical trendline support at 148.50 fails to hold.
A return to broad-based USD weakness is still possible this month. A higher US employment rate today and softer CPI inflation data in a fortnight’s time should see the Fed talk up the September cut into its Jackson Hole Symposium on 22-24 August. But the DXY still needs to break below 104 first, especially now that the race to the White House is no longer one-sided in favour of Trump.
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Paul Volcker became the 12th Chairman of the US Federal Reserve in 1979. He was credited for stopping high inflation in the 1980s,
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