The US economy added 187k jobs in August, marginally exceeding economist expectations, the signal from earlier big data, and the downwardly revised July figure of 157k.
On an industry basis, only warehousing (-34k) and information sectors (-15k) showed negative employment growth, reflecting the impacts of Yellow Corp’s latest bankruptcy filing. In contrast, health care (+71k) and leisure and hospitality (+40k) added the most jobs. While the net employment figure suggests that the US labour market has yet to cool enough for the Fed to take comfort that monetary policy is correctly calibrated, especially given continued job growth in discretionary spending sectors and signs that the US consumer is yet to fatigue, ultimately this wasn’t the takeaway from today’s release. This was partly due to the downward revisions in the past two net payroll figures, but predominantly because the household survey painted a far weaker picture of the US labour market. Here the unemployment rate ticked up 0.3 percentage points to 3.8%, driven largely by a 736k increase in the labour force, which drove the participation rate to a post-pandemic high of 62.8%. Meanwhile, the suggestion that the labour market is now beyond its peak level of tightness was corroborated by the average hourly earnings data, which fell from 0.4% to 0.2% MoM.
On the whole, today’s household survey data suggests that after drawing down on pent up savings, more workers are now being sucked back into the labour market.
The subsequent supply-side shock is easing hiring difficulties and wage pressures, a development that is consistent with what services firms reported within the flash August PMIs. Overall, should the household survey data not misrepresent overall labour market conditions unlike in previous months, the data is consistent with continued services disinflation even as overall US consumption remains at elevated levels.
This view was shared within markets. Following the payrolls release, the US Treasury curve continued to bull steepen, with 2-year yields falling close to 8 basis points while the back-end remained stable. Meanwhile, expectations of a hike in Q4 were dashed within swap markets, with the probability of a hike by October’s meeting falling 12 percentage points from close to 50% previously.
However, the reaction in FX markets has generally been more muted. After a brief flurry of USD weakness, the risk rally in FX markets has since faded as the labour market data takes the risk of further rate hikes from the Fed this year off the table but doesn’t necessarily resurrect the probability of imminent policy easing in early 2024; an outcome we think is necessary for the dollar to structurally depreciate.
Furthermore, the rally in front-end Treasuries has reduced the pressure on US equities, which once again are set to outperform based on current futures pricing. Overall, we view the current market response to today’s payrolls report as the right one, noting that the dollar reaction supports our view that more substantive downside requires weaker data that would induce more aggressive near-term easing expectations but not imminent recession concerns.
Near-term rate expectations for the Fed drop off a cliff, but the response in the dollar is more muted
Simon Harvey, Head of FX Analysis