Dollar slumps after US jobs data
Friday’s softer than expected jobs report in the US elicited a sizeable reaction in markets with US bond yields falling sharply, stocks selling off and the dollar weakening across the board. The latter remains close to it post-jobs data lows this morning, trading at around $1.1560 and $1.3290 against the euro and sterling respectively (compared to levels of about $1.14 and $1.3150 before the data). The pound was on the back foot against the euro during Friday’s session ending around three quarters of a penny lower at £0.8725, though it has since recovered to just under £0.87. Looking to the week ahead, the Bank of England announces its latest interest rate decision on Thursday with the market almost fully priced for a 25bps cut (to 4%).
US government bond yields fell sharply following the jobs data as markets ramped up expectations for a rate cut at the Fed’s next meeting in September (there’s about a 75% chance of a 25bps reduction now priced in). Not surprisingly, 2-year yields led the way, ending the best part of 30bps lower on Friday, while 10-year yields finished down around 15bps (they are currently trading near Friday’s closing levels). In equity markets, US and European stocks sold off quite sharply at the end of last week but recovered some ground yesterday, with both ending around 1.5% higher.
The US economy added 73k jobs in July according to Friday’s report, less than the 105k expected. Moreover, there were sizable downward revisions to the May and June data, which were lowered by a cumulative 258k, resulting in very modest job gains over these two months (just16k a month on average). The unemployment rate nudged up to 4.2% and remained within the tight range of 4.0%-4.2% that has prevailed so far this year, though it is being held in check by a decline in the labour force participation rate.
Looking to the day ahead, economic data due includes services PMIs for July (final readings) in the main economies, while the ISM services index is due in the US. The rest of the week is sparse in terms of data, with Euro area retail sales on Wednesday and jobless claims in the US on Friday.