Shake-Up Ahead
- US August non-farm payrolls set to shake up markets. We see upside risk to job gains.
- Canada’s August labor force survey should give the BOC green light to keep easing.
- A deeper downturn in global manufacturing activity is weighing on the commodity complex.
USD is under broad downside pressure and Treasury yields hit fresh cyclical lows as the aggressive Fed easing narrative continues to dominate. Meanwhile, the deeper downturn in global manufacturing activity is weighing on commodity sensitive currencies and financial market risk sentiment. The global manufacturing PMI dipped to an 8-month low at 49.5 in August vs. 49.7 in July.
The US job data released throughout the week were not good enough to ease concerns over the labor market slowdown. The August ISM Services Employment Index fell to a two-month low at 50.2. The August ISM Manufacturing Employment Index improved to a two-month high at 46.0 but remains in contraction territory. The July JOLTS total job openings dipped more than expected to the lowest level since January 2021. The August Challenger job cut announcements had the biggest monthly increase since March. Finally, ADP private sector job gains undershot expectation in August with the lowest monthly gain since January 2021.
In fact, Chicago Fed President Austan Goolsbee (a 2025 FOMC voter and staunch dove) said overnight he saw more warning signs about the labor market. Goolsbee added “it is pretty clear that the path is not just rate cuts soon…but multiple cuts over the next 12 months.”
New York Fed President John Williams and Fed Governor Christopher Waller will have an opportunity today (1:45pm and 4:00pm London, respectively) to give their take on the extent of the weakness in US labor market conditions. The media blackout goes into effect tomorrow and there will be no Fed speakers until Fed Chair Jay Powell’s post-decision press conference September 18.
We are sticking to our soft-landing US labor market view and doubt the Fed will slash rates as much as currently implied by the money market (>100bps by year-end). First, there is no layoff spiral as the layoff rate has been in a 1% to 1.1% range since April 2023. Second, strong labor force growth is largely behind the rise in the unemployment rate. Third, the hiring rate is near pre-pandemic average suggesting demand for labor is just fine.
Nonetheless, today’s August non-farm payrolls (NFP) report (1:30pm London) is policy-relevant and will help shape the magnitude of the Fed’s September rate cut decision. Non-farm payrolls are expected to rise by 165k following an increase of 114k in June which would be in line with the 3-month average monthly job gains. The unemployment rate is projected to dip a tick to 4.2% on an unchanged participation rate of 62.7%. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.2% in July and rise one tick to 3.7% y/y.
We see upside risk to August non-farm payrolls as some of the temporary factors that contributed to the soft July job report reverse. Fed Governor Michelle Bowman pointed out that “the rise in the unemployment rate in July was largely accounted for by workers who are experiencing a temporary layoff and are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.”
Fed funds futures imply 70% odds of a 50bps cut at the September 18 meeting. A strong August NFP number (above 200k) would skew the probability towards a 25bps reduction and offer USD near-term support. A weak NFP print (below 100k) would reinforce the case for a 50bps cut and drag USD to fresh lows. Anything in between would further cloud the employment outlook and lead to choppy financial market moves.
Canada’s August labor force survey is the other data highlight today (1:30pm London). Consensus sees a 25k rise in jobs vs. -2.8k in July, while the unemployment rate is expected to rise a tick and match the January 2022 high at 6.5%. Overall, Canada’s labor market has cooled significantly leaving plenty of room for the Bank of Canada to keep easing. The swaps market implies almost 175bps of policy rate cuts over the next 12 months which is a drag for CAD.
Crude oil prices are trading heavy near their December 2023 low on a weaker demand outlook. Yesterday’s decision by OPEC+ to extend production cuts until the end of November 2024 failed to offer slumping crude oil prices meaningful support.
The Eurozone final Q2 GDP report is up next (10:00am London). Growth is expected to remain at 0.3% q/q. The eurozone growth outlook is soggy. While the Eurozone composite PMI unexpectedly increased to a 3-month high at 51.2 in August, the boost largely comes from a surge in services activity in France linked to the Olympic Games. Worrisomely, the downturn in Eurozone manufacturing activity deepened to an 8-month low. The ECB is widely expected to slash rates next week.
France has a new prime minister. French President Emmanuel Macron picked Michel Barnier – a member of center-right party and former Brexit negotiator - as the country’s next prime minister. The new government will now have to table and adopt a credible 2025 budget next month to correct the country’s excessive fiscal deficit. Stay tuned. In the meantime, French-German 10-year government bond yield spreads are holding near recent lows at 70bps after peaking at 82bps end-June.
