Contributors Fundamental Analysis Another Day with US Labour Market Data on the Menu

Another Day with US Labour Market Data on the Menu

In focus today

The US ISM Services index is due for release for August in the afternoon. While the index has remained volatile over the past years, most leading services indicators have continued to signal solid growth ahead. ADP private sector employment growth is also due for release for August and could provide some hints on what to expect from tomorrow’s Jobs Report.

Economic and market news

What happened overnight

In Japan, nominal wages rose 3.6% y/y in July compared to 4.5% in June, while real wages rose at a slower pace in July edging up 0.4% y/y compared to 1.1%, marking the second consecutive month of increases driven by pay hikes and summer bonuses. Wage growth is key for the Bank of Japan’s (BoJ) decisions in H2, with BoJ Governor Ueda emphasizing that broad pay increases must accompany rising prices for inflation to sustainably reach the 2% target. BoJ board member Takata echoed this, stating the BoJ could raise rates further if inflation roughly meets forecasts and companies continue to boost spending and wages, adding that recent market turmoil would not derail the bank’s long-term rate hike plan.

What happened yesterday

In the US, July’s JOLTs labour market data was significantly weaker than anticipated. Job openings dropped 7.7m (cons: 8.1m), the lowest level since 2021, while the June figure was revised down by 274k. At the same time, involuntary layoffs climbed higher to 1.8m from 1.6m, nearing pre-pandemic levels. Hires where little changed at 5.5m, whereas total separations increased by 336k to 5.4m.

The ratio of job openings to unemployed is now 1.07, falling below typical 2019 levels for the first time since the pandemic began. This aligns with Fed Chair Powell’s Jackson Hole remarks that labour market conditions are already weaker than before Covid. Similarly, Atlanta Fed President Bostic emphasized maintaining restrictive policy for too long could disrupt the labour market and cause unnecessary hardship. Historically, further declines in labour demand from this point have often also translated into more pronounced upticks in unemployment rate. Markets reacted promptly, now viewing the FOMC’s September meeting as a 50/50 chance between a 25bp or 50bp rate cut – we expect 25bp. However, it must be noted that this was backward-looking data for July. The heavyweight is yet to come, with the August Jobs Report on Friday.

On the political front, Democratic presidential candidate Kamala Harris has proposed to increase the top capital gains tax rate to 28% compared to President Biden’s earlier budget plan to raise it to 39.6%.

In Poland, as widely expected the Monetary Policy Council kept its key policy rate steady at 5.75%.

In Canada, the central bank delivered its third consecutive rate cute, reducing its policy rate by 25bp to 4.25% – as we and markets had priced in – amid continued disinflation and concerns regarding growth prospects and the rising slack in the labour market. Additionally, the written communication also opened for more cuts to come.

In commodities, four OPEC+ sources reported that the cartel is discussing postponing the planned October oil output raise amid the recent slump in oil prices. Weakened demand outlook and potential additional supply from OPEC+, including the resolution of the dispute disrupting Libyan exports, have raised concerns within the group, according to one source.

Equities: Global equities continued to trend lower yesterday, driven by classic risk-off dynamics. Frankly speaking, there was zero percent focus on inflation and 100% focus on demand and the labour market. The JOLT report offered both good and bad news, though the headline number fell far below expectations. Consequently, cyclicals, growth, momentum, and quality sectors underperformed, while defensive minimum volatility sectors performed very well, and the VIX trended higher. In the US yesterday, the Dow closed at +0.1%, the S&P 500 at -0.2%, Nasdaq at -0.3%, and the Russell 2000 at -0.2%. Asian markets are mostly higher this morning, with Japan bucking the trend. Both European and US futures are lower this morning.

FI: Global rates fell further through yesterday’s session as markets continued to discount near-term policy easing across central banks. The US JOLTS report, which showed another significant decline in job openings, added further to expectations of Fed cutting 50bp in September, but much of the decline in long-end rates had already materialized prior to the JOLTS release. The 10Y Bund yield fell 6bp through the day to 2.22%, while EU peripheral sspreads saw renewed tightening. In the US, the 2Y and 10Y UST yields are now trading in line at 3.77%. Brent remained just below USD73/barrel despite rumours that OPEC+ could delay its planned output increases. This allowed long-term EUR inflation swap rates (e.g. 5y5y) to decline further.

FX: EUR/USD rose towards 1.11 due to the relatively large drop in JOLTS job openings. EUR/GBP ended the day close to unchanged after a small upward revision to the final August PMIs. The oil market only received some temporary support from the news that OPEC+ might delay planned output hike that was scheduled to take effect in October.

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