American Jobs Turn Negative and the Fed's Hawks Lose Ground
Summary:
The US economy shed jobs in July, missing every forecast on Bloomberg and prompting traders to slash the odds of a Federal Reserve rate rise next month
Downward revisions stripped a further 103,000 jobs from the May and June figures, while wage growth fell to its slowest annual pace since 2021
Sterling reached a three-week high against a weakening dollar, though it remains within the range that has contained it for most of the year
US inflation data on Wednesday is now the decisive release, with several Fed officials having argued in recent days for a September increase
Friday's employment report landed as a genuine shock. Rather than the modest gain economists had penciled in, American payrolls fell by 23,000 in July, a figure below every single estimate submitted to Bloomberg. The revisions were arguably worse, wiping another 103,000 from the prior two months and reframing what had looked like a recovering labour market into something considerably weaker. Traders responded immediately, cutting the probability of a Federal Reserve rate rise in September from better than even to well below it. The dollar fell and Treasury yields dropped sharply.
The dollar heads into the new week on the back foot, having spent much of the previous one near a six-week low. The detail of the jobs report gave little comfort. The unemployment rate did tick down, but only because the labour force shrank, with participation falling to its lowest in more than five years. Average hourly earnings barely moved, taking annual wage growth to its weakest since 2021. Losses were concentrated in local government education and retail, while private hiring held up modestly. The complication is that this arrives alongside inflation still running well above target, with several Fed officials having spent the previous week publicly making the case for tightening in September. Wednesday's inflation figures will settle the argument. A hot reading would revive the hawks despite the labour market cooling, while a soft one would effectively close the door on a September move.
Sterling climbed to a three-week high on Friday as the dollar sold off, though its own story remains quiet. There is little on the domestic calendar this week beyond Thursday's growth figures, which cover both the second quarter and the month of June. The Bank of England is not due to decide again until September, and its most recent meeting left the market pricing just one further increase by year end. That leaves the pound taking its lead almost entirely from events elsewhere, principally the American data. Against the euro, sterling has consolidated after retreating from the one-year highs reached in July, as the gap between British and eurozone yields has narrowed.
The euro has been supported by an improving domestic picture and by expectations that the European Central Bank has further to go. Growth in the second quarter came in at double the forecast, the strongest quarterly expansion since early last year, while inflation accelerated again in July as energy costs pushed higher. Markets are now positioned for two more increases by early 2027, with the first possible when the Governing Council meets on 10 September. That prospect, combined with a Federal Reserve now less likely to tighten, has narrowed the policy gap between the two central banks in the euro's favour.
Events to Watch This Week:
Wednesday 12 August: US CPI (July); German final CPI (July)
Thursday 13 August: UK Q2 GDP and June monthly GDP; US PPI (July)
Friday 14 August: US retail sales (July); University of Michigan consumer sentiment (August)
Wednesday's American inflation report is the week's decisive release. With the labour market clearly softening, the Federal Reserve's September decision now rests almost entirely on whether price pressures are easing or building. Speak to the Orbis dealing team ahead of Wednesday to ensure your upcoming transfers are protected.
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