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Summary

United States: July Jobs Report Squashes Current Recession Fears

• Employers added over half a million jobs in July, which squashes arguments that the U.S. economy is currently in recession. While other measures of labor market strength have shown more pronounced signs of slowing, the July jobs report puts further pressure on the Fed to act aggressively in its fight against inflation.
• Next week: Productivity (Tues.), CPI (Wed.)

International: Global Central Banks Deliver Another Round of Rate Hikes

• The Bank of England stepped up the pace of its monetary tightening, raising its policy rate 50 bps to 1.75% this week, and also notified it would likely begin active sales of its government bond holdings shortly after its September announcement. The Reserve Bank of Australia (RBA) also hiked rates 50 bps but hinted at a more flexible approach moving forward. We expect the RBA to revert to 25 bps increments from September. Brazil's Central Bank raised its Selic Rate 50 bps this week, and we now expect one final 25 bps hike to 14.00% at its September monetary policy announcement.
• Next week: Brazil CPI (Tue.), Mexico Overnight Rate (Thu.), U.K. GDP (Fri.)

Credit Market Insights: Household Debt Surges in the Second Quarter

• Total household debt balances rose by $312B in the second quarter of this year, a 2% increase from last quarter. Debt has now surpassed $16T and has increased by over $2T since the start of 2020.

Topic of the Week: Tension in Taiwan

• Speaker of the House Nancy Pelosi's visit to Taiwan made one thing clear: U.S.-China tensions are not going anywhere anytime soon and international trade between the two countries continues to hang in the balance.

Full report here.

U.S. Highlights

• The U.S. economy added a whopping 528k jobs in July, pushing employment above its pre-pandemic level. The unemployment rate also ticked lower, falling back to its pre-pandemic historical low of 3.5%.
• Sentiment indicators also surprised to the upside, with the manufacturing sector faring better than expected and the services sector pointing to plenty of pent-up demand.
• Data out this week support the narrative that the U.S. economy is not currently in a recession, and more monetary tightening will be required from the FOMC to slow inflation and restore balance in the labor market.

Canadian Highlights

• Preliminary data from the regional real estate boards this week showed that home sales and prices in Canada’s major cities continued to ease in July.
• The labour market disappointed expectations for a modest gain, and instead shed 30.6k jobs in July.
• The slowdown in the labour market and broader economic activity suggests that rate hikes are already starting to bite. Sill, with wage growth remaining strong, more tightening will be required to cool current inflationary pressures.

U.S. - More Fuel to the Recession Debate

This week, the debate on whether the Fed will be able to achieve a soft landing intensified. Equities were trading up most of the week as investors bought into the positive economic news with an expectation that a slowdown in economic growth will avoid a severe downturn. In contrast, the bond market took a grimmer view of the future, by pushing the 10Y2Y yield inversion deeper into negative territory, suggesting a recession may be looming on the horizon.

Investors weren’t the only ones arguing about the economic prospects. In academic circles, the debate on whether a soft landing can be achieved was out in the open. At its core is the argument that job vacancies can’t decline by a large amount without the economy falling into recession. This week’s release of June’s Job Openings and Labor Turnover Survey (JOLTS) showed that job openings dipped to 10.7 million while job vacancy rate continued to decline, indicating we have likely already surpassed peak tightness in the labor market. Still, demand for workers continued to outpace supply - a sign of a still strong labor market.

Indeed, anyone in search of more signs that the economy is in fact not in a recession need to look no further than today’s jobs report. July data shows that the economy added a whopping 528k jobs (well above the consensus forecast of 250k), while revisions resulted in additional 28k jobs – enough for the payroll figures to surpass their pre-pandemic level (Chart 1). The unemployment rate declined by a tenth of a percentage point to 3.5%, while the labor force participation rate fell slightly to 62.1%. Furthermore, average hourly earnings accelerated – not quite what the Fed was looking for as this increases the possibility of inflation becoming entrenched.

Meanwhile, sentiment indicators also surprised to the upside. The Institute for Supply Managements’ (ISM) readings for the manufacturing sector slipped modestly but came in above expectation. Demand is clearly slowing with new orders contracting for the second month in a row. Still, this comes with less pressure on suppliers, as supplier delivery times rose at their slowest pace since before the pandemic. Moreover, the inventories subindex continues to show improvement. This corresponds with rising auto inventories, where increased production helped improve market supply to roughly 28 days from February’s low of just 24 days.

The ISM services index pointed to a broad pickup in services activity, proving again that there is still plenty of pent-up demand. The gap between the supplier deliveries time and the rest of the index’s drivers narrowed in July – a month after a similar improvement in the manufacturing sector. This seems to have contributed to a decline in the prices paid component in both sectors of the economy (Chart 2). The sizeable deceleration in the ISM price subindexes may very well be a harbinger of a slowing pace in broader price growth, which we’ll hopefully see in next week’s CPI report.

Still, at the 40-year high price growth is too overwhelming for the Fed to scale back on rate hikes. For now, robust employment growth adds further conviction that the economy remains on a solid footing and suggests the FOMC needs to remain aggressive in tightening rates to help cool inflation and re-anchor inflation expectations.

Canada - Cooling Like It Should

Coming on the heels of the soft GDP print for May and the modest flash reading for June, this week brought further signs that the Canadian economy is slowing. Nowhere has this been more evident than the housing market. Under the weight of soaring borrowing costs and still elevated home prices, the Canadian housing market continued to cool in July. Preliminary sales data from the regional real estate boards out this week showed that resale activity and prices across Canada's major cities were all lower.

The most glaring declines came from the GTA, where home sales were down 47% from July 2021, which was more than the 41% year-over-year drop reported in June. Meanwhile, supply continued to increase, with active listings up 58% from year-ago levels. Prices were also down on the month. Across the more expensive detached segment, home prices swung from a modest year-over-year gain to an outright decline in July (Chart 1).

In Vancouver, the slowdown also accelerated, with sales down 43.3% from last year. Unlike in Toronto, detached home prices were still higher - up 11% from year-ago levels - though gains have also ebbed relative to June. The more affordable Calgary market is holding up better than its pricier peers, with sales down just 2.5% from last year. Falling sales across the detached and semi-detached segments were largely offset by gains in the more affordable multifamily segment. Detached prices were still up 14.8% y/y in July.

The theme of a slowdown extended to the labour market. Friday's job report surprised to the downside, with the labour market shedding 30.6k jobs in July. This marked the second consecutive monthly decline, and the loss of hiring momentum is becoming increasingly evident (Chart 2). The underlying details of the report were also on the softer side, with full-time employment falling by 13.1k, while hours worked declined by 0.5% m/m. Perhaps one silver lining is the fact that the labour market is still tight, with the unemployment rate holding at 4.9% - matching its historic low in June. Wage growth also remained strong, with average monthly earnings up 5.2% y/y.

The slowdown in the labour market and broader economic activity suggests that previous rate hikes are already starting to bite. Indeed, this is something that the Bank of Canada is trying to accomplish as it works to rein in inflation. While the Bank will likely find some solace in the nascent signs of weakening demand, the fact that wage growth remains elevated suggests more will be required in terms of monetary tightening to cool current inflationary pressures. To that end, the focus now shifts to the July CPI report which will be released on August 16th, as markets try and gauge just how big of move the BoC has in store in September. Stay tuned!

Can the Fed afford to ease off the brake?

The end of last week was a bit of a reality check for investors that were maybe getting a little carried away with the supposed “dovish pivot” from the Fed and turning a blind eye to the data and what central bank policymakers were saying.

Perhaps the experience of the last 12 months can explain the latter but there’s no ignoring the data that we saw on Friday. The US economy is certainly not behaving like it’s in a recession; rather the labour market is so hot that the Fed may not be able to slow down as hoped.

While the UK is preparing for a long period of stagflation, the US is desperately trying to avoid a hard landing. The inflation data next week may shed further light on whether the Fed can afford to ease off the brake in September or possibly even be forced to slam on harder.

US

It is all about inflation this week.  Now that some Fed members have pushed back on the idea of a Fed pivot, investors will want to see if inflation continues to show signs that inflation has peaked. The US economy might be slowing down and that will lead to some demand destruction for goods.

The July inflation report is expected to show a much slower pace of price pressure, but if it ends up being a hot report, expectations for the September FOMC meeting could swing further to a 75 basis point rate increase.  The month-over-month reading is expected to show a 0.2% increase, down from the 1.3% pace in the prior month.  The headline year-over-year reading is expected to ease from 9.1% to 8.8%.

The other important data set for the week is the preliminary University of Michigan consumer sentiment report, which is expected to stabilize.

Traders will also pay close attention to a few Fed appearances during the week from Evans, Kashkari, and Daly. Leading up to the September policy decision, traders will want to know how many Fed members are positioning themselves for a slower pace of tightening policy.

Election season continues with US primary elections in Connecticut, Minnesota, Vermont, and Wisconsin.

EU 

Next week is looking a little quiet on the European front, with final inflation data the only notable release. Of course, it will attract plenty of attention considering the level of central bank activity at the moment but revisions do tend to be less impactful.

With the winter already in mind, the focus will remain on Russian gas flows as Nord Stream 1 continues to run at 20%.

UK 

GDP data on Friday is the standout next week, especially in light of the bleak BoE forecasts on Thursday. The country may not be in a recession yet but the central bank thinks it will very soon and the slump will be long and painful. If the GDP data on Friday is unexpectedly negative, it will compound the misery facing the country over the next couple of years.

Russia

Inflation and GDP data is released next week with the former seen falling to 15.3%, allowing for further rate cuts from the CBR as it seeks to address the strength of the rouble and support the economy.

South Africa

Only tier three data releases next week, with manufacturing, mining and gold production among them.

Turkey

A selection of economic data is due next week from unemployment to industrial production and the current account. Inflation jumped to 79.6% last month, further highlighting the failure of the monetary policy experiment. We could get more evidence next week but ultimately, it won’t make a difference.

Switzerland

Inflation hit 3.4% last month, further increasing the odds of a 50 basis point hike from the SNB next month. The central bank does like to surprise markets so an inter-meeting move is possible. Next up is unemployment data on Monday.

China

China releases its trade balance data over the weekend, but it should have little market impact on Monday. China CPI will be released on Wednesday with inflation expectations universally benign at 2.50% YoY. The risk is that the inflation story starts to catch up with China, where growth is muted.

The Pelosi/Taiwan visit is not expected to have a long-lasting impact on local markets, which were already pricing it out on Friday. Developments in China’s property developer sector, real estate bad loans, and covid zero continue to present the main headline risk to China.

India

The RBI hiked by 0.50% on Friday, higher than expected, with a hawkish tone to the statement. The INR did not respond positively, nor has it to lower oil prices. A strong jobs report hasn’t helped and a higher inflation number from the US next week could see it test record lows against the US dollar above 80.00. That could also restart foreign investor outflows from the Sensex once again, which has recovered over the past two weeks.

Australia 

AUD/USD remains at the mercy of international investor flows as a global sentiment gauge. AUD has staged a major technical breakout higher but gains have been limited by AUD/JPY due to the USD/JPY collapse.

Consumer and business sentiment on Monday are the only releases of note this week. Australian equities continue to track the Nasdaq and S&P 500.

New Zealand

NZD/USD remains at the mercy of international investor flows as a global sentiment gauge. NZD has staged a major technical breakout higher but gains have been limited by NZD/JPY due to the USD/JPY collapse.

NZ electronic card spending on Tuesday, and business PMI and food inflation on Friday, are closely watched data points for NZ. Higher spending and food inflation will reinforce the view that more aggressive RBNZ tightening is on the way. Could be a short-term negative for local equities and a short-term positive for the currency.

Japan

The USD/JPY collapse extended to 130.50, just shy of 130.00. It is attempting to form a base at these levels but its direction remains entirely dependent on the US/Japan interest rate differential. Hawkish comments from FOMC members over the past week have lifted USD/JPY back to 132.00 while the jobs report gave it another kick higher.

Japan has a heavy week of data releases, but all are tier-2 and unlikely to have a big impact on the markets. The Nikkei continues to closely track the Nasdaq.

Singapore

Singapore retail sales were soft this past week, easing MAS tightening fears in October. That should take the edge off Singapore’s GDP this Thursday and if that data is soft, SGD weakness could well resume. A hawkish MAS has meant SGD has outperformed in the Asia FX space.

Singapore earnings have been firm for Q2 supporting equity prices.

Economic Calendar

Saturday, Aug. 6

Economic Events

• US Secretary of State Blinken visits the Philippines
• Berkshire Hathaway Inc. quarterly earnings are released

Sunday, Aug. 7

Economic Data/Events

• China trade, forex reserves
• US Secretary of State Blinken travels to Africa

Monday, Aug. 8

Economic Data/Events

• Australia foreign reserves
• Singapore foreign reserves
• Japan BoP
• New Zealand 2-yr inflation expectation
• Iran Nuclear Deal talks to continue in Vienna

Tuesday, Aug. 9

Economic Data/Events

• US NFIB small business optimism, nonfarm productivity
• US primary elections are held in Connecticut, Minnesota, Vermont and Wisconsin
• Australia NAB business confidence, household spending
• China aggregate financing, money supply, new yuan loans
• Japan M2 money stock, machine tool orders
• Mexico CPI, international reserves
• New Zealand heavy traffic index, card spending
• Philippines GDP, trade, unemployment
• Thailand consumer confidence
• Parties are vying to fill the 1st District seat left vacant by the death of Republican Representative Jim Hagedorn

Wednesday, Aug. 10

Economic Data/Events

• US July CPI M/M: 0.2%e v 1.3% prior; Y/Y: 8.8%e v 9.1% prior, wholesale inventories
• Germany CPI
• Russia CPI
• Australia consumer confidence
• China PPI
• Japan PPI
• Thailand rate decision
• Chicago Fed President Evans talks about the economy and monetary policy
• Minneapolis Fed President Kashkari speaks on stagflation
• Chinese Ambassador to Australia Xiao Qian speaks at Australia’s National Press Club
• EIA crude oil inventory report

Thursday, Aug. 11

Economic Data/Events

• US PPI, initial jobless claims
• Argentina CPI
• Australia consumer inflation expectations
• China FDI
• Israel trade
• Mexico (Banxico) rate decision: Expected to raise Overnight Rate by 75bps to 8.50%
• Mexico industrial production
• New Zealand home sales, net migration
• Peru rate decision
• Singapore GDP
• South Africa manufacturing production
• South Korea money supply
• Thailand foreign reserves
• Turkey current account
• San Francisco Fed President Daly is interviewed on Bloomberg TV
• UK Tory Party leadership holds hustings in Cheltenham
• Denmark’s government holds Ukraine conference

Friday, Aug. 12

Economic Data/Events

• US University of Michigan consumer sentiment
• Spain CPI
• Poland CPI
• India CPI
• UK GDP
• Russia GDP
• China medium-term lending
• Eurozone industrial production
• France unemployment, CPI
• India industrial production, trade
• Italy trade
• New Zealand food prices, PMI
• Turkey industrial production
• UK GDP industrial production
• EasyJet Plc pilots are set to strike in Spain

Sovereign Rating Updates

• Denmark (Fitch)
• Hungary (S&P)
• Switzerland (S&P)
• Denmark (Moody’s)
• Germany (Moody’s)
• Belgium (DBRS)

U.S. inflation numbers are expected to edge lower next week, dropping to 8.8% in July. The slowdown (the reading was at 9.1% in June) comes after inflation hit record levels following more than a year of persistent supply chain pressures, elevated domestic demand and soaring commodity prices. The dip will likely reflect an easing in gasoline price growth on lower oil prices. By contrast, the year-over-year growth in food prices probably didn’t change much, with core (ex-food & energy) prices edging a bit higher compared to a year ago. Broader measures of price inflation are still very high. Over 70% of items in the consumer basket (excluding shelter) were growing faster than 3% in June.

There are reasons to believe that inflation will continue to slow. Global supply chain pressures have eased more sustainably since late spring, as shipping times and costs fall. Commodity prices, though very high, have also been trending lower. And with high inflation and rising borrowing costs squeezing consumers’ real buying power, there are already early signs of slowing domestic consumer demand. Goods purchases in volume terms have fallen in recent months, to 3% below levels a year ago in June.

Still, spending on services, especially those that are leisure and travel related, will remain strong over the summer. Rent prices having increased more substantially over the past months are also expected to strengthen further. A bigger pullback in consumer demand will likely be necessary to get inflation moving back toward the Federal Reserve’s 2% target rate. Overall, we look for the Fed to hike rates to 3.25% - 3.5% range by end of this year

Another decisive week for global markets lies ahead. The main event will be the latest CPI report from the United States, which will reveal whether inflation has finally started to cool off. That’s what business surveys and commodity prices suggest, setting the stage for a retracement in the almighty dollar. 

Recession blues

Market participants are playing a cat and mouse game, constantly shifting back and forth between worrying about inflation or growth. When incoming data points to a resilient economy, the pendulum swings towards inflation and traders price in faster rate increases. When the data disappoints, recession concerns dominate and Fed tightening gets priced out.

Recession fears were winning this battle until recently. A storm of leading indicators such as business surveys, inventories, housing, consumer confidence, and an inverted yield curve were all warning that a downturn is imminent. This led to a sharp decline in US yields, which helped bring the Japanese yen back from the dead.

But the dollar didn’t really lose its shine, despite the repricing around the Fed. This resilience boils down to safe haven flows and a lack of alternatives. Europe for instance is in even worse shape - it will probably be at the epicenter of any global recession, as the energy crisis bites consumers.

It’s difficult to see this ‘strong dollar’ dynamic changing until the economic outlook for the rest of the world improves and capital starts flowing out of America. The decline in oil prices is a good start, but is not enough. Markets might need to see a ceasefire in Ukraine before the trend can reverse, and that doesn’t seem close.

That being said, we could see a retracement in the dollar’s ferocious rally on Wednesday, if the upcoming dataset confirms that inflation has started to lose its punch. The yearly CPI rate is expected to have declined to 8.9% in July from 9.1% previously, while the monthly rate is forecast at 0.3% from a stunning 1.3% previously.

Adding credence to these forecasts, business surveys like the S&P Global composite PMI showed that companies raised their selling prices at the slowest pace since March last year as demand faltered. Commodity markets agree, with everything from gasoline to food prices rolling over lately.

Money markets are currently pricing in around even odds on whether the Fed will raise rates by 50 or 75 bps in September. A softer than expected inflation print could tip the scales towards 50bps and consequently inflict some damage on the dollar. That said, even if euro/dollar climbs all the way up to 1.0550, some 300 pips away, the downtrend would still be in effect.

Data on producer prices will follow on Thursday, ahead of the University of Michigan’s consumer sentiment survey on Friday.

UK growth eyed

Crossing into the United Kingdom, preliminary GDP growth data for the second quarter will be released on Friday. At its meeting this week, the Bank of England projected a contraction of 0.2% for this quarter, even as it raised interest rates by 50bps.

Despite the rate increase, sterling suffered in the aftermath because the BoE’s overall message was quite gloomy. The economic forecasts were apocalyptic, pointing to five consecutive quarters of negative GDP growth starting in the fourth quarter of this year.

Markets interpreted that as a signal that the tightening cycle might be cut short. If such a prolonged recession materializes, the demand destruction would probably be enough to curtail inflation without the need for much higher rates.

Looking ahead, the most crucial element for the pound might be how global risk sentiment evolves. Traders already have a good idea of what the BoE will do for the rest of the year - raise rates but at a measured pace. What is less certain is how the stock market will fare, a factor that sterling is very sensitive to.

China eyes trade data 

In the world’s second-largest economy, trade data for July will be released over the weekend, ahead of inflation stats on Wednesday. This was a month characterized by looser pandemic restrictions, and that might be reflected in the numbers.

Overall though, it’s difficult to be optimistic about the Chinese economy. The government continues its strict approach of tightening restrictions whenever there is a virus outbreak and the property sector is in freefall, with liquidity drying up and a ‘mortgage revolt’ as homeowners refuse to pay loans on unfinished houses.

It doesn’t take much imagination to envision this crisis spilling over into the banking sector, which is tremendously leveraged at almost 300% of GDP. That’s without even including shadow banking. Consumer confidence is already at record lows, reflecting these troubles.

By extension, it’s difficult to be bullish on the Australian dollar - a nation whose entire economic model relies on China absorbing its commodity exports. Even though the Reserve Bank is raising interest rates, the threat of Chinese commodity demand rolling over is much greater - a risk that has hammered iron ore prices.

Markets

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.

Daily Pivots: (S1) 1.0183; (P) 1.0219; (R1) 1.0282; More...

EUR/USD is still bounded in range and intraday bias remains neutral first. With 1.0095 minor support intact, further rise is still mildly in favor. Rebound from 0.9951 will target 1.0348 support turned resistance. Break there will target channel resistance at 1.0432. On the downside, break of 1.0095 minor support will turn bias back to the downside, and bring retest of 0.9951 low instead.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 1.2080; (P) 1.2146; (R1) 1.2225; More...

GBP/USD's break of 1.2062 suggests that corrective rebound form 1.1759 has completed at 1.2292, after hitting 55 day EMA. Intraday bias is back on the downside for retesting 1.1759 low first. Firm break there will resume medium term down trend. For now, risk will stay on the downside as long as 1.2292 resistance holds, in case of recovery.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.2957).

Daily Pivots: (S1) 0.9522; (P) 0.9572; (R1) 0.9601; More...

Intraday bias in USD/CHF remains neutral at this point. On the upside, break of 0.9650, and sustained trading above 55 day EMA (now at 0.9650) will raise the chance that corrective pattern from 1.0063 has completed. Further rally should then be seen to 0.9884 resistance next. However, decisive break of 0.9471 support will carry larger bearish implication.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. On resumption, next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds. However, firm break of 0.9471 will raise the chance that such up trend is over. Sustained trading below 55 week EMA (now at 0.9424) could bring deeper medium term fall back to 0.9149 support and below.

The U.S. economy added 528k jobs in July, coming in well above the consensus forecast of 250k. Revisions to the prior two months were also positive, adding 28k jobs from previously reported May/June figures. U.S. payrolls have now surpassed their pre-pandemic level.

Employment gains were again widespread, with education & health care (+122k), leisure & hospitality (+96k)  and professional & business services (+89k) leading the charge. Outside of these industries, hiring remained robust in transportation & warehousing (+21k), information (+13k) as well as wholesale (+11k) and retail (+22k) trade. Goods producing industries (+69k) also recorded hefty gains, with construction (+32k), manufacturing (+30k), and mining & logging (+7k) all adding jobs in July. Hiring in across the public sector (+57k) was also higher, after having recorded a modest decline the month prior.

The unemployment rate declined by a tenth of a percentage point to at 3.5% – returning to its pre-pandemic level. Based on the household survey, employment was up 179k, while the labor force fell by 63K. As a result, the participation rate fell by a 0.1pp to 62.1%

Average hourly earnings rose by 0.5% month-on-month to $32.27. On a year-over-year basis, wage growth held steady at 5.2%.

Key Implications

Woah! This morning's reporting should almost certainly assuage any fears that the U.S. economy is in a recession. While payrolls had been showing some signs of slowing in recent months, July data shows a complete reversal in that trend and flies in the face of other labor market metrics (initial jobless claims and job openings), which have suggested that the labor market was cooling.

While we don’t want to sound like a broken record, it's important to emphasize that these gains are not sustainable! The participation rate has moved sideways this year (and even ticked lower in July), implying the lack of labor supply will soon be a binding constraint on hiring.

With the FOMC dropping its forward guidance and moving to a data dependent "meeting-by-meeting assessment", today's report will do nothing to dissuade policymakers from further tightening monetary policy in the months ahead. Indeed, we heard from several Fed speakers over the past week, and all struck a decisively hawkish tone – likely in response to markets misreading Powell's press conference last week as coming across more dovish. In response to the Fed speak and this morning's job numbers, market pricing for more rate hikes by year-end have come up. Moreover, futures markets have sharply sold-off following after the jobs report and we’re seeing a deeper inversion in 10Y2Y spread, now having widened to 40bps.