Jobs report buys Fed time

USD: Jobs report buys Fed time

The July jobs report gave markets a weak headline, but not a clean macro signal. Payrolls fell by 23,000, and prior months were revised down by 103,000, pointing to a softer hiring trend. Yet the unemployment rate fell to 4.1%, helped by another drop in labor force participation. That makes the report difficult to read. Job creation weakened, but the jobless rate did not send the usual warning signal.

The participation drop is the key wrinkle. A smaller labor force can pull the unemployment rate lower even when employment conditions are softening. That means the decline in unemployment does not fully offset the weakness in payrolls. Some of the softness was also concentrated in noisy areas, including education, retail and leisure-related hiring, so one report is not enough to call a clear turn in the labor cycle.

Because the unemployment rate moved lower, the debate now shifts even more firmly to inflation. For the Fed, the report buys time rather than forcing a decision. Rate expectations have moved lower across the curve, but a cooler CPI print this week would make two soft inflation readings in a row look more credible and strengthen the case for holding. A firmer print would reopen the inflation debate and give the hawkish side of the Committee more ammunition. The FOMC is a 12-member committee, so the three dissenters now have to test their hawkish case against a softer labor print, not just sticky inflation. With Warshspeak offering less explicit guidance, markets will keep doing more of the Fed’s work around each data point, especially the two inflation prints before the September meeting.

Markets reacted as expected to a report that weakened the case for aggressive hikes. Treasury yields fell, stock futures rose, and the curve bull steepened as traders trimmed near-term Fed tightening risk. The dollar also lost support as front-end rate expectations moved lower. From here, CPI will carry more weight than usual, since the labor market is no longer giving the Fed a clear green light to tighten. At the same time, the weak jobs report impact on rate-hike expectations and the broader bond market should add to downside risks for the dollar in the near-term.

EUR: US inflation is next key test

EUR/USD extended its recovery last week, notching another modest weekly gain as a weaker-than-expected US jobs report dragged Treasury yields and the dollar lower. That helped narrow rate differentials in the euro’s favour and allowed the pair to hold comfortably above 1.15.

However, the move continues to look more dollar-driven than euro-driven. While Eurozone growth and inflation data have surprised positively in recent weeks, the euro remains heavily dependent on the USD leg of the equation. Indeed, much of the recent rally reflects markets scaling back expectations of further Fed tightening rather than a fundamental reassessment of the euro area outlook.

Technically, EUR/USD now finds itself at an important juncture. The pair has repeatedly stalled around the 100-day moving average near 1.1570, making it the key level to watch in the week ahead. A sustained break above would suggest the summer recovery has further to run, while another rejection would reinforce the view that the June-July downtrend remains intact.

This week’s focus turns squarely to US CPI. Markets have spent the past fortnight steadily pricing Fed hike risks out of the dollar. A softer inflation print would likely validate that repricing and potentially open the door to a move toward 1.17 into quarter-end. Conversely, a firmer core reading could quickly revive Fed tightening expectations and send EUR/USD back toward the middle of its recent range.

CAD: Canada jobs give CAD a lift

Canada’s July jobs report gave the Loonie a clear relative boost. Employment rose by 75,000, well above expectations for a 20,000 gain, while the unemployment rate fell to 6.4%, its lowest level in two years. The employment rate also edged up to 60.9%, showing that the improvement was not just about a smaller labour force. After several months of softer momentum, this was a stronger report than markets had priced in.

The details also leaned constructive. Job gains were concentrated in the private sector and self-employment, more than offsetting a decline in public-sector jobs. Core-aged workers led the increase, with hiring also spreading across retail, finance and real estate, professional services and construction. Public administration and agriculture were the main weak spots, but the broader sector mix points to a labour market finding better footing.

Wage growth cooled, which gives the Bank of Canada a cleaner mix. Average hourly wages rose 2.8% y/y, down from 3.3% in June, pairing stronger employment with less wage pressure. That supports the view that Canada’s economy is recovering after earlier trade-related weakness, without giving the BoC a reason to sound more hawkish.

The market reaction was amplified by the weak US jobs report. US payrolls fell by 23,000, with large downward revisions, while Canada delivered a strong upside surprise. That relative labour-market swing helped pull USD/CAD from around 1.40 to near 1.3926 on Friday, its lowest level in two months. With Canada’s calendar light this week, July CPI and PPI in the US will decide whether lower US yields keep dragging USD/CAD lower or give the dollar room to stabilize.

What’s happening in markets this week?

The main event is US CPI (Wed), where markets will test whether last week’s softer labor data gives the Fed more room to stay on hold in September. A mild print would support that view, while a hotter reading could quickly rebuild rate-hike expectations and bring yield volatility back into focus, especially with Treasury supply also in the background.

The second half of the week stays busy. US PPI, retail sales, weekly jobless claims and the federal budget are due (Thu), alongside UK GDP, trade, industrial production and services data, plus eurozone industrial production and India inflation. On Friday, attention turns to US housing starts and the University of Michigan sentiment survey, along with eurozone GDP, trade and employment data, Japan trade and PPI, and Brazil inflation and retail sales. Central banks are also on the calendar, with the RBA, Norges Bank and Peru expected to hold rates steady. Through it all, US-Iran tensions remain a key swing factor, as oil markets are still vulnerable to headlines around the Strait of Hormuz.

Market snapshot

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Calendar: August 10 – 14

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.