US Labor Market Cools, Dollar Catches a Chill

• Disappointing US jobs data is weighing on USD and Treasury yields. Other labor market data and the ISM Services index are due today.

• Japan wage growth slows less than expected, supporting the BOJ hawkish stance.

• RBA Governor Michele Bullock continued to argue against near-term policy rate cuts. AUD is range-bound.

USD is consolidating yesterday’s loss triggered by disappointing US jobs data. 2-year Treasury yield fell to near two-year lows and is offering US equity markets some support.

The US July JOLTS data pointed to weaker labor market conditions and reinforced market pricing for 100bps of Fed easing by year-end. Total job openings dipped more than expected to the lowest level since January 2021 and the job opening rate fell 0.2pts to 4.6%, dangerously close to the 4.5% threshold that typically signals a significant rise in the unemployment rate. The details were mixed. The layoff rate rose 0.1pts to 1.1% but the hiring rate increased 0.2pts to 3.5%.

The Fed beige Book also painted a mixed picture of labor market conditions. “Five Districts saw slight or modest increases in overall headcounts, but a few Districts reported that firms reduced shifts and hours, left advertised positions unfilled, or reduced headcounts through attrition—though accounts of layoffs remained rare.”

The Beige Book further noted that more Districts (9 vs. 5 previously) reported flat or declining economic activity than in the prior reporting period. However, “District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months”. Indeed, the Atlanta Fed GDPNow model is now tracking Q3 growth at 2.1% SAAR vs. 2.0% previously.

Today, the US August ISM services index will offer a timely update on the economic outlook (3:00pm London). Headline is projected at 51.4 vs. 51.4 in July. The already released regional Fed services business surveys point to downside risks. Pay attention to the employment sub-component of the index because the Fed is increasingly concerned with downside risk to employment. In July, the Employment Index rose 5.0pts to near a 10-monht high at 51.1.

The other labor market data due today include the August Challenger job cuts (12:30pm London), August ADP employment (1:15pm London), and weekly jobless claims (1:30pm London). ADP private sector jobs estimate is expected at 144k vs. 122k in July. Overall, we are sticking to our soft-landing US labor market view and doubt the Fed will slash rates as aggressively as currently implied by the money market. Friday’s August non-farm payrolls report will be key.

EUR/USD and GBP/USD are range bound near yesterday’s highs. Second-tier Eurozone and UK economic data are released today. Eurozone retail sales volumes is expected to rise 0.2% m/m in July vs. -0.3% in June (10:00am London). The UK construction PMI is forecast to dip 0.9pts to 54.5 and the BOE’s Decision Maker Panel (DMP) survey is expected to show inflation expectations drifting lower (both data at 9:30am London).

USD/JPY is heavy near 143.50. Japan wage gains support market pricing for 25bps of BOJ hikes in the next 12 months. Labor cash earnings growth cooled less than expected to 3.6% y/y in July (consensus: 2.9%) after rising 4.5% in June due to the boost from the annual spring labour-management wage negotiations. The less volatile scheduled pay growth for full-time workers quickened to a series high of 3.0% y/y (consensus: 2.8%) vs. 2.7% in June. Adjusted for inflation, wages unexpectedly increased 0.4% y/y (consensus: -0.6%) vs. 1.1% in June.

Bank of Japan (BOJ) Board Member Hajime Takata reiterated the bank’s hawkish stance. Takata said “it will be necessary to adjust the degree of monetary easing by shifting up another gear”. However, he also warned that “we must closely monitor and examine market developments for the time being” as the effects of the global turmoil in early August persist. The comments suggest the bar for a rate hike at the September 20 meeting remains very high.

AUD/USD traded in a narrow range around 0.6720 overnight. RBA Governor Michele Bullock stuck to the bank’s hawkish guidance. Bullock warned of the cost of high inflation and reiterated that “if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.” Still, RBA cash rate futures continue to price-in high odds (around 85%) of a 25bps cut by December. We agree.

USD/CAD is holding on to yesterday’s loss. Yesterday, the Bank of Canada (BOC) cut the policy rate for a third straight time by 25bps to 4.25% (widely expected). Governor Tiff Macklem pushed back against market pricing for a larger cut noting “there was a strong consensus for a 25bps cut.”

Importantly, the BOC signaled again that more easing was in the pipeline which is a drag for CAD. BOC reiterated “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.” Today, Canada’s Q2 productivity data (1:30pm London) and August composite PMI (2:30pm London) are the focus.

Snap elections in Canada this fall is increasingly likely. Yesterday, New Democratic Party (NDP) Leader Jagmeet Singh scrapped a power-sharing deal he signed with Prime Minister Justin Trudeau in March 2022, which ensured the survival of the minority Liberal government. Soon after, Conservative leader Pierre Poilievre - who’s been leading in the polls over the past year by wide margin of between 15 and 20pts – confirmed he will table a motion of no confidence against the Liberal government perhaps as soon as the week of September 16. The country could be plunged into an election campaign if the motion has majority support in parliament.