US payrolls
As we anticipated, the August U.S. payrolls report brought unwelcome news, indicating a more pronounced slowdown in the labour market than expected. The latest figures show job gains reached only 142,000, considerably lower than the market forecast of 165,000. Additionally, previous reports were revised downwards, with last month's already weak figure of 114,000 adjusted even further to a mere 89,000. On the other hand, the unemployment rate fell to 4.2%, in line with market expectations.
The weaker jobs report follows the Bureau of Labour Statistics' annual benchmark revision of total non-farm employment, which recently reduced job figures by 818,000.
In response to the report, the bond market reacted favourably, with the yield on the 10-year Treasury note dipping a few basis points from yesterday's 3.73% to 3.68%. This decline highlights a shift in market sentiment regarding the Federal Reserve's interest rate strategy, as investors anticipate potential adjustments to monetary policy in September in light of the weaker labour market.
With U.S. interest rate expectations diminishing, the Japanese yen appreciated in the foreign exchange market, rising from 143.5 to 142.5 against the U.S. dollar. This movement reflects both a flight to safety as investors seek refuge in traditionally stable assets amidst growing economic uncertainty, and longer-term expectations of a U.S. dollar decline as interest rates fall.
The implications of this payroll report are significant. While the disappointing job growth in isolation might suggest a 50 basis point cut, the steady unemployment rate could prompt the Federal Reserve to opt for a more modest 25 basis point reduction. It presents a challenging balancing act for the Fed, weighing the weakening jobs data over recent months against the fact that U.S. inflation has not yet reached its 2% target.
As the markets digest this information, all eyes will be on the Federal Reserve's upcoming September meeting, where officials will need to consider these labour market developments carefully.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.