Jobs report in the US today

Relatively dovish comments on inflation by Fed Governor Waller prompted a paring back of US rate hike expectations, contributing to a decline in bond yields, firmer equity markets, and a slightly weaker dollar. The euro and sterling are trading at around $1.1630 and $1.3545 respectively this morning – ahead of the August payrolls report in the US later today – leaving EURGBP hovering just below the £0.86 level. According to the consensus forecast for the payrolls report, the economy is expected to have added 55k jobs last month, following a decline in employment of almost 25k in July, while the unemployment rate is expected to come in at 4.1%, matching July’s year-to-date low.

The market has pared back the chances of a hike in interest rates at this month’s Fed meeting, though they are still seen at around 50/50 (down from circa 70/30 earlier in the week) and, indeed, a 25bps increase by the end of this year is still more than fully priced in. US bond yields edged down – led by 2-year yields which fell by around 4bps – though they ended off their lows for the day following the release of stronger than expected (US) economic data. German yields fell by 3-5bps, while UK bonds outperformed, with yields declining by 8-10bps, helped by comments by the Chief Economist of the Bank of England who said any hike in interest rates should be modest and “need not be the start of a prolonged and aggressive series of increases.” Meanwhile, in equity markets, US indices rallied strongly, with the S&P 500 adding over 1%, while European stocks gained about half a percent.

In his remarks yesterday, Fed Governor Waller said that “while inflation remains meaningfully above the 2% goal, recent data suggest we are finally seeing some signs of disinflation,” adding that if the August CPI inflation data due next week show “continued progress toward 2%, then I am willing to support holding the policy rate at its current level” at this month’s monetary policy meeting (September 15th-16th). He did also warn though that “it may not take much acceleration in inflation to nudge me into supporting tighter policy” (i.e. higher interest rates).

The latest ISM survey of activity in the US services sector was a good deal stronger than expected. Both output and new orders both rose sharply in August, while the “prices paid” index pointed to an acceleration in input cost inflation, rising to its highest level in about four years.

For the day ahead, the focus for markets will be on the US jobs report, while other data due include retail sales (July) in the Euro area and the construction PMI (August) in the UK. The Bank of England Governor, Andrew Bailey, is scheduled to speak later this morning.