Mixed jobs report, volatile markets
Friday’s employment report in the US was a mixed bag – with job gains in August falling shy of expectations but the unemployment rate nudging lower – and hence triggered quite a bit of volatility across bond, equity and currency markets. In FX, the euro and sterling traded within respective ranges of about $1.1065 to $1.1155 and $1.3110 to $1.3240 against the dollar post the data before ending the day at $1.1085 and $1.3130, with both slipping a little this morning (to around $1.1050 and $1.3090 respectively). EURGBP fluctuated between £0.8410 and £0.8450, with the pair trading towards the upper end of this range at the start of play today. The week ahead sees the ECB hold its latest monetary policy meeting on Thursday, with a 25bps cut in the deposit rate (to 3.5%) almost certain, while before that, CPI inflation data are due in the US on Wednesday.
The jobs data, along with some Fed commentary, saw the market pare back the chances of a 50bps cut in interest rates later this month (to about 20%) but price in a bit more in terms of cuts by the end of this year (now almost 110bps), while a reduction in rates of circa 245bps is expected by end-2025, versus 237bps pre the data. This contributed to a notable decline in US 2-year bond yields, which fell by almost 10bps to 2.65%, leaving them below 10-year yields, which dipped by 2bps to 2.71%. German 2- and 10-year yields fell by 7bps and 4bps respectively, while equivalent UK yields were about 4bps and 3bps lower respectively.
The slowdown in employment growth evident in Friday’s data weighed on equity markets. The S&P 500 shed 1.7% to bring its losses over the week to just over 4% (with the Nasdaq down almost 6% on the week as tech stocks underperformed), while European stocks were 1.6% lower on Friday and off almost 4.5% on the week
The US economy added 142k jobs in August, slightly less than the consensus expected (162k), while the July outturn was revised down to 89k (from 114k). Jobs growth in June-August averaged 115k a month, down from 210k a month in March-May and below what would be needed to prevent the unemployment rate from rising over time. The latter nudged down last month to 4.2%, partially reversing July’s increase to 4.3% from 4.1% in June. Hourly earnings growth in August was firmer than expected, coming in at 0.4% on the month and 3.8% on the year. The latter was up from 3.6% in July, though the underlying trend remains one of gradually decelerating wage growth.
In comments on Friday, Fed Governor Waller said the latest data “indicates to me that the labour market is continuing to soften but not deteriorate, and this judgement is important to our upcoming decision on monetary policy”. This observation, together with his view that “if subsequent data show a significant deterioration (we) can act forcefully to adjust monetary policy,” suggests the Fed is likely to kick off what Waller believes will be a “series” of rate cuts with a 25bps reduction this month.
Looking at the week ahead, we expect the ECB to lower the deposit rate to 3.50% from 3.75% at Thursday’s meeting on the back of its updated economic projections – which are likely to show Euro area inflation returning to 2% over the second half of 2025 – but to be non-committal about the timing of any further reduction in rates. Note that, in a technical adjustment to its implementation of monetary policy, the ECB will reduce the spread between the deposit rate and the main refinancing rate from the current 50bps to 15bps via a reduction in the main refinancing rate (so a cut in the deposit rate to 3.50% will see the main refinancing rate lowered from 4.25% to 3.65%; in the very unlikely event that the deposit rate is left unchanged at 3.75%, the main refinancing rate will be lowered to 3.90%).
On the economic data front, as well as Wednesday’s CPI data in the US, labour market and GDP reports (both for July) are due in the UK on Tuesday and Wednesday respectively.