Fed cut expectations build on weak jobs signals ahead of payrolls

Markets

The US services ISM yesterday for August improved from 50.1 to 52, better than the 51 expected. New orders soared to 56 from 50.3 and prices paid hovered near the highest levels in 2.5 years time. Yet, it’s not what markets are paying attention to since Powell’s dovish pivot at Jackson Hole. The labour market is what moves them. The ISM employment component stabilized near the lowest levels in two years. It also slightly missed estimates, just as did the earlier released private ADP job report (a mere 54k) and the jobless claims (237k). They extended this week’s streak of sub-par labour market-related outcomes, including Tuesday’s employment subseries in the manufacturing ISM and Wednesday’s JOLTS job openings. US yields dropped but with the long end of the curve outperforming. Several factors may have contributed to this, ranging from a further (temporary) easing of fiscally-related risk premia over markets catching up in pricing a growth slowdown to technical elements. The 10-year (-5.6 bps) for example lost support at the July-August summer lows around 4.18% to close at 4.16%. The 2-year tenor forfeited the recent low-points by slipping sub 3.6%. German rates eased between -0.2 and -2.1 bps in a similar bull flattening move. If all of the releases earlier this week are to offer any guidance for the payrolls later today, we’re bound to see further UST outperformance today. The bar of 75k isn’t a particularly high one. So a miss to the downside would be telling. The unemployment rate is expected to creep higher to 4.3%. Payrolls reports nowadays come with the disclaimer of potentially huge revisions though. Either way, a soft report cements the case for an already fully priced in September rate cut and raises bets for consecutive moves at the October and December meeting. There’s currently around 2.5 25 bps cuts for this year discounted. We’re watching the 3.43%-3.5% area seen in the aftermath of Liberation Day serving as the next references in the 2-yr yield. The 10-year maturity finds first support in the 4.1-4.12% region. The dollar should lose ground in response but the limited moves over the past couple of days suggest some resilience, against the likes of the euro at least. EUR/USD yesterday and despite the UST outperformance even finished slightly lower. This could be related to nervousness going into Monday’s confidence vote in France. Unless in case of a material downside payrolls surprise, we assume the July multiyear high at 1.1829 a tough nut to crack today.

News and views

NBP governor Glapinski didn’t completely shut the door for another rate cut at the October policy meeting after the NBP cut its policy rate by 25 bps on Wednesday to 4.75%. During yesterday’s press conference, Glapinski sounded more concerned that the disinflationary process might stall compared to in July with upside risks coming from fiscal policy, economic conditions, the labour market and uncertainty around energy prices. The NBP currently assumes that inflation could rise again above the upper tolerance band (3.5%) around the 2.5% inflation target if the government doesn’t extend its energy price freeze beyond the current end date (end 2025). Should they opt to keep energy prices longer in check, Glapinski expressed a cautious will within the MPC to cut rates again given that they are still high in real terms. The Polish zloty was unmoved by the press conference with EUR/PLN holding within an extremely tight range near 4.25.

Japanese labour cash earnings accelerated from an upwardly revised 3.1% Y/Y in June to a consensus-smashing 4.1% Y/Y in July. Real cash earnings, adjusted for inflation, rose by 0.5% Y/Y (vs -0.6% Y/Y expected and first increase since December 2024). Special cash earnings (summer bonuses) increased by 7.9% Y/Y with base pay climbing by 2.8% Y/Y (from 2.6%). The Bank of Japan’s preferred metric (base salaries for full-time workers in the same-sample) picked up from 2.3% Y/Y to 2.4% with a technical quirk preventing a stronger uptick. Wage date suggest ongoing momentum in Japan which will result in sticky core inflation and keeps the Bank of Japan on track to implement another rate hike this year. Japanese money markets currently discount a 1/3 probability that the BoJ lift s its policy rate from 0.50% to 0.75% at the end of October meeting when the central bank updates its quarterly growth and inflation projections.

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