Will the Real US Labor Market Please Stand Up

August 21, 2024

Will the Real US Labor Market Please Stand Up

  • The extent of the annual benchmark revision to the US non-farm payrolls and the FOMC July meeting minutes are today’s main highlights.
  • Bank of Thailand is expected to keep rates steady at 2.50%.
  • Bank Indonesia is expected to keep rates steady at 6.25%.

USD plunged yesterday to its lowest level since early January. There was no fundamental trigger behind the broad USD undershoot. USD has bounced back from its lows this morning. USD and Treasury yields will be guided later today by the extent of the annual benchmark revision to the non-farm payrolls and the FOMC July meeting minutes.

The US Bureau of Labor Statistics (BLS) preliminary annual benchmark revision to the establishment survey employment series (non-farm payrolls) is the next highlight (3:00pm London). The aim of the annual benchmarking exercise is to bring the non-farm payroll numbers in line with the with the more comprehensive Quarterly Census of Employment and Wages (QCEW) figures.

The latest Q4 QCEW report suggests that job gains have been consistently overstated in the twelve months to March 2024. As a background, the annual benchmark revisions over the last 10 years have averaged +/- 0.1% of total nonfarm employment. And in the last 5 years the biggest revision was +/- 0.3% of total nonfarm employment. Nonfarm employment totaled 158.1 million in March 2024. As such, we can expect a downward adjustment to total nonfarm employment between -158k and -475k. A larger downward adjustment could raise risks that the labor market has not been as strong as the payroll data have been indicating. This can further weigh on US Treasury yields and USD.

The FOMC July 30-31 meeting minutes are released later today (7:00pm London). The minutes will offer more insights into the debate around the start and the path of the Fed’s easing cycle. Remember, Fed Chair Jay Powell pointed out during his post-FOMC meeting press conference that “there was a real discussion back and forth of what the case would be for moving at this meeting”.

Fed Governor Michelle Bowman continues to lean against aggressive market pricing for Fed funds rate cuts. Yesterday, Bowman cautioned again that “in light of upside risks to inflation and uncertainty regarding labor market conditions…I will remain cautious in my approach to considering adjustments to the current stance of policy”. We anticipate Fed Chair Jay Powell to deliver a similar message Friday. Check-out our Jackson Hole Economic Symposium Preview for more details.

EUR/USD is testing important technical resistance at 1.1139, the December 28 2023 high. A break of this level would pave the way for an overshoot to 1.1276, the July 18 2023 high. There are no policy-relevant Eurozone economic data releases today. ECB Governing Council member Fabio Panetta speaks (12:00pm London).

JPY upside momentum is losing traction. The bulk of the juice from the unwinding of the so-called “yen carry trade” (whereby market participants borrow in yen at low interest rates to invest in higher yielding assets denominated in other currencies) has been squeezed out. Speculators in IMM futures are now net long JPY for the first time since March 2021 after accumulating near record net short JPY positions end-June.

USD/CAD is heavy near its 200-day moving average at 1.3595 on USD weakness. But CAD upside is limited as Canada’s July CPI print cemented market pricing for an additional 75bps of Bank of Canada (BOC) policy rate cuts by year-end. In July, core-median CPI eased to 2.4% y/y (consensus: 2.5%), the lowest rate since April 2021 and down from 2.6% in June. Core-trim eased to 2.7% y/y (consensus: 2.8%), the lowest rate since April 2021 and down from 2.8% in June. Headline CPI inflation printed in line with consensus at 2.5% y/y versus 2.7% in June. Overall, core (average of trim and median CPI) and headline inflation are tracking the BOC’s Q3 projection of 2.5% and 2.3%, respectively.

Bank of Thailand (BOT) is expected to keep rates steady at 2.50% (8:00am London). At the last meeting June 12, the bank kept rates at 2.50% but the tone was a less dovish hold compared to previous meetings. Only one MPC member dissented in favor of a 25bps cut vs. two members at the last two meetings in April and February. Furthermore, the statement scrapped the phrase that “uncertainties on the Thai economy remain high.” Of note, Thailand’s new government plans to ditch a controversial $14 billion cash handout program pushed by the previous administration. If so, BOT is likely to tilt more dovish, as it has been very concerned about the inflationary impact of the program. The swaps market is pricing in 64% odds of a 25bps rate cut over the next three months, with 50bps of total easing seen over the next 12 months.

Bank Indonesia is expected to keep rates steady at 6.25% (8:20am London). The policy rate has been unchanged since it was raised to 6.25% in April. But with the rupiah trading at the strongest level since January, we see risks of a dovish surprise. In July, Governor Warjiyo said “the focus of monetary policy in the short-term is directed at strengthening rupiah exchange rate stabilization and attracting foreign portfolio inflows.” He added that “Our inflation is low and our economic growth is good, that’s why I said there is room to lower the interest rate, if there’s no global influence.” Bloomberg consensus sees the first cut coming in Q4.

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