HomeContributorsFundamental AnalysisJuly US Jobs Report Obliterated Even the Most Optimistic Expectations

July US Jobs Report Obliterated Even the Most Optimistic Expectations


Crushed it! The July US jobs report obliterated even the most optimistic expectations. Employment grew by 528k, accelerating from an upwardly revised 398k in June and more than double the 250k consensus. Sectors producing the biggest increases were education & health (+122k), professional business services (+89k) and leisure & hospitality (+96k). After shedding 6k in June, the government again added 57k jobs. The unemployment ticked lower to 3.5%, equaling levels seen before the pandemic which, in turn, were the lowest since the late sixties. The decline came together with an unexpected drop in the participation rate from 62.2% to 62.1%. This is probably the opposite of what the Fed would like to see. Fewer people available on the labour market means employers fishing for people in a smaller pond which puts upward pressure on wages. These grew by 0.5% m/m to be up 5.2% y/y, both surpassing expectations of 0.4% and 4.9% respectively. It’s nothing but a stellar report and it sure doesn’t suggest the US economy is in recession. Money markets were still doubting Fed intentions even after the recent hawkish comments. But after today’s report, they ramp up rate hike bets for the September Fed meeting with the probability of a third straight 75 bps move rising to 75%. Total additional tightening expected for the remainder of the cycle (which markets see running until 2023Q1) jumps from 110 bps to 130 bps, give or take. The US yield curve bear flattens with changes going from 9.1 bps (30y) to 17.5 bps (2y). The 10y yield (2.81%) seeks a weekly close above the 2.72% support level. European yields add to their earlier pre-payrolls report in sympathy. German yield changes vary between 6.4 bps (30y) to 10.2 bps (5y). Swap yields rise even a tad more. BoE Chief Economist Pill had some dovish comments in store today, weighing on Gilt yields. He cautioned against assuming a 50 bps hike in September and was already talking about rates dropping near 2% if inflation drops (it doesn’t and even has yet to peak). But US knock-on effects even bring UK yields in positive territory for the day with advances from 9.6 to 11.7 bps across the curve.

The US dollar obviously didn’t miss the strong report and ditto yield rise. It’s the star performer in the G10 area. On a trade-weighted basis, DXY surges from 105.7 to 106.7. EUR/USD erases yesterday’s gain – which felt unnatural anyway – to be back at 1.016 at the time of writing. There are no technical implications though. USD/JPY is testing the 135 resistance. Sterling remains in the defensive post-BoE. EUR/GBP extends yesterday’s advance to 0.844. We note some spillover effects coming from GBP/USD though. The pair drops to the mid 1.20/1.21

News Headlines

China suspended communication channels with the US military as well as climate talks between the two biggest economies in the world. It does so in response to US House Speaker Pelosi’s visit to Taiwan earlier this week. In addition, The Chinese foreign ministry said Beijing would also no longer co-operate on a range of other legal issues. China said it would take countermeasures but the ones already announced were initially targeted Taiwan directly. These included banning imports and exports of certain products. It has also sent multiple groups of warplanes and warships to operate in the area of the Taiwan Strait.

Canadian employment unexpectedly declined by 30.6k in July, more or less equally distributed between full-time and part-time jobs. The back-to-back decline defied expectations for a 15k increase. In June, the 43.2k drop to a large extent was because of people leaving the labour market. The jury is still out whether this was the case again in July with the participation rate easing to 64.7% from 64.9%, or the effect of monetary tightening kicking in. The unemployment rate stabilized at 4.9%. With at the same time a stellar US jobs report being published, USD/CAD soared to 1.297, up from 1.286.

KBC Bank
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