Swissquote Bank: All eyes on official jobs data
By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank
Sentiment among US equity investors improved yesterday after the ADP report for August came in weaker than expected, showing only 54K new private job additions versus around 73K expected by analysts, while initial jobless claims also printed a higher-than-expected figure.
Separately, the ISM non-manufacturing data hinted at faster-than-expected expansion in services, with softer price pressures but a weakening employment component. Putting the pieces of the US labour data together, the numbers overall point to a weakening jobs market. And that, for those less familiar with financial markets’ logic, boosted appetite for risk assets by fueling dovish Federal Reserve (Fed) expectations and bets for lower rates in the coming months.
As such, the US 2-year yield sank below 3.60% level for the first time since April’s turmoil. The S&P 500 rebounded 0.83% and closed just shy of last week’s all-time high, while the small-cap index jumped 1.26% on the session. The US dollar index remained steady between its 50- and 100-DMAs. The weaker ADP figure also pressured the long end of the curve, sending the US 30-year down to 4.84% this morning. Today, softer-than-expected jobs numbers could weigh further on the US 2-year yield and extend the breather on the long end after weeks of selloff.
So, all eyes are therefore on the official jobs data, and revisions to prior months. Recall that last month’s large revisions already shifted the Fed’s narrative from ‘a healthy jobs market’ to ‘a weakening labour market that requires a policy response.’ That pivot brought forward the possibility of a September rate cut, from no cut previously expected. Investors now look for final confirmation that the weakening trend is entrenched and justifies a Fed cut – or two.
Still, dovish Fed expectations may not slow the selloff in long-dated Treasuries over the medium run. Lower Fed rates today imply higher inflation tomorrow, and the long end must discount that risk. Next week’s inflation data will add more pieces to the puzzle. If tariff-led pressures on input prices start filtering into CPI, long bonds could face renewed selling, as that would imply Fed policy is inflationary. The million-dollar question is how much potential remains above the 5% mark for the 30-year, given that the 20-year breakeven inflation rate is near 2.5%. Beyond inflation and Fed policy, ballooning US debt, rising interest costs and waning foreign appetite for Treasuries could push investors to demand yields well above 5%.
Relief on the US long end echoed globally. The benchmark EU 10-year yield eased, supporting a rebound in the Stoxx 600. Even the problematic French 10-year yield came down and the French-German spread narrowed. Still, with no resolution to France’s political deadlock and the risk that Bayrou’s government collapses by Monday, investors may take risk off the table into the weekend. That would limit EURUSD gains, though the pair’s direction will ultimately depend on the dollar and today’s US jobs numbers. A weak print would revive EURUSD buying, while a stronger print could fuel a USD rebound and keep the pair capped below its 50-DMA.
In Asia, Japanese 20- and 30-year yields also eased, but the Nikkei failed to extend early-session gains despite the bond relief and headlines about a cut in US auto tariffs (to 15% from 27.5%). Toyota briefly tested 3000 before giving back most gains. Appetite faded after data showed nominal wages in Japan rose 4.1%, the highest in seven months, which fuels Bank of Japan (BoJ) hawks and expectations of a rate hike sooner rather than later. The USDJPY remains offered at the 200-DMA, but conviction among yen bulls is still too weak to call a reversal of the post-April uptrend.
In China, the CSI 300 is better bid, though official efforts to prevent a market bubble remind investors that authorities remain close at hand – hardly encouraging.
In commodities, gold consolidates near its all-time high, while US crude failed to hold gains above the $65pb this week as prospects of an OPEC supply increase at Sunday’s meeting encouraged bears to sell into tentative bullish momentum. Geopolitical risks, however, remain elevated, with mounting fears of further Russian attacks on Ukraine. That keeps downside potential in oil limited, likely into the $60–62 range.