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Over the course of July, markets have been flip-flopping between the idea of rapid disinflation in the US leading to an abrupt end to the Fed’s hiking cycle and the risk that stronger growth leads to a further hike in Q4 and an extended period of higher real rates in the US. The result of which has seen the broad dollar whipsaw against expectations of reduced realised volatility.
Today’s release of July’s US payrolls data does little to settle that debate as it contains something for both sides.
On the one hand, the establishment data provides a positive disinflationary signal as it shows job growth, at 187k, continued at a far reduced pace relative to earlier in the year and the entirety of 2022. The weight of this signal increases in importance once factoring that the net employment data has been consistently revised down as of late, evidenced yet again by June’s measure being revised down from 209k to 185k and May’s subject to a further 25k reduction, and recent anecdotal evidence suggests that labour demand is set to continue softening. However, the household survey is telling a different story, and not for the first time this year. Reporting employment gains of 268k and just an 152k increase in the participation rate, the unemployment rate retraced 0.1pp to 3.5%. Meanwhile, and more importantly for markets and the Fed, wage growth defied expectations of a slowdown to print at a stable pace of 0.4% MoM and 4.4% YoY. More specific measures of labour market slack have also tightened. The underemployment rate fell back 0.2pps to 6.7%, while those working part-time for economic reasons also fell 191k.
Seeing as the last time the household and establishment surveys diverged the correction in the data fell in favour of the establishment survey, markets are placing a greater subjective weight on the slowing in the net employment figure.
This has seen front-end Treasury yields fall close to 5bps and the dollar DXY index decline 0.4% as a response. However, unlike in early July, traders are unwilling to go all in on the disinflation trade given the inconsistencies within today’s report and just how quickly the trade unwound last month. Specifically, with average hourly earnings still printing at a level inconsistent with 2% inflation, and early soft data suggesting services inflation ticked back up again in July, there is a risk that any bearish bets on the dollar following today’s data are punished next week from a less constructive supercore inflation reading. Furthermore, traders can still expect one more jobs report ahead of the September 20th meeting, where once again the divergences in the establishment and household data will be closely monitored.
For us, today’s data once again compounds our view that the broad dollar is likely to remain rangebound over the near term until the fog starts to lift over the US economic outlook. While we welcome today’s showdown in net employment given our view that the Fed has now hit its terminal rate, we note that the risk of an extension in the hiking cycle still remains.
The dollar tracks Treasury yields lower as markets place greater weighting on the establishment survey data
Author:
Simon Harvey, Head of FX Analysis