Markets took direction from the weaker than expected US payrolls data amid the mixed signals. Their jobless rate dipped to 3.5% and average hourly earnings were stronger than expected. The USD fell sharply as did UST yields

Markets took their direction from the weaker than expected US payrolls data amid the mixed signals provided by the labour market report. The US Dollar fell sharply as did US treasury yields, reversing some of the large moves from earlier in the week. The S&P fell 0.5%, erasing earlier gains and taking losses for the week to 2.3%.

US Nonfarm payrolls increased 187k in July which was close to expectations of a 200k rise.  However, there was a downward revision of 47k for the previous 2 months. Overall, this continues the mild downward trend in payrolls growth from recent months. Most of the recent softening is in services with the supply and demand for workers increasingly balanced after the COVID-induced shortages. Forward-looking indicators for payrolls growth like the hiring index from the NFIB small business survey has stabilised in recent months and is not suggesting a significant trend weakening from here. The unemployment rate dipped to 3.5% and average hourly earnings increased 0.4% from June (4.4% y/y), which was stronger than forecast.

Overall, the weakness in headline payrolls and strength in hourly earnings paint a mixed picture. Consequently, there was little change in near-term Fed rate policy expectations. Pricing for the September meeting remained steady with less than 20% of a 25bps rate hike indicated by futures markets. US CPI data for July, released this week, will be the next major test for the markets expectation that the Fed is likely to leave rates unchanged in September.

US Federal Reserve officials, Bostic and Goolsbee remarked that the US labour market is coming into balance following the slower employment gains and that the Fed’s focus may need to pivot to the length of time required to hold rates at elevated levels. Indicating the range of opinions within the FOMC, Fed Governor Bowman said that additional rate increases will likely be needed to get inflation to the central bank’s target.

After a week of higher long-end yields, which took 10-year bonds back towards the top of the range that has contained price action since October last year, US treasuries rallied strongly across the curve following the payrolls data. The move lower in yields was led by the 10-year sector which closed the week at 4.03% down from session highs near 4.20% ahead of the data. The 30-year maturity lagged the move with the 10/30s curve steepening to 17bps. 2-year treasuries yields closed down 12bps at 4.76%.

Germany reported solid factory orders in June, rising 7% m/m which contributed to bund yields moving higher initially before reversing course in line with US treasuries. 10-year bunds closed down 4bps at 2.55%. Interest rate probabilities for the European Central Bank (ECB) are little changed with a 35% chance of a 25bps hike in September. 10-year Japanese Government bond (JGB) yields were steady near 0.65%.

Futures contracts for Brent Oil have extended recent gains to trade above $85 per barrel.  Saudi Arabia’s decision to extend its supply cuts is lending support to crude prices. The $85-90 region has formed the top for Brent on multiple occasions through 2023. Wheat prices were in focus on news that India, the world’s second-biggest producer, may abolish import taxes to reduce domestic prices by making import substitution more attractive. This follows a recent move by India to restrict rice exports which was also aimed at reducing domestic prices.

The US Dollar weakened against developed market currencies following the payrolls data. EUR/USD spiked above 1.10 and USD/JPY slid below 142.00. The only G-10 currency that lost ground against the greenback was the Canadian Dollar following a weaker than expected employment report. Data showed a third straight monthly increase in the unemployment rate, to 5.5%, which is the highest level since January 2022 providing evidence the central bank’s rate hikes may be weighing on growth.

NZD/USD spiked higher to 0.6130 aligned with the weaker US Dollar post data. However, the gains couldn’t be sustained, and NZD/USD drifted back below 0.6100 into the weekly close. NZD/AUD was stable near 0.9280.

NZ government bond yields moved 6-7bps higher in a largely parallel move in the local session on Friday with similar moves across the swap curve. Australian 3-year and 10-year bond futures are close to 10bps lower in yield in from the local close on Friday and coupled with the large move in US treasuries suggest downward pressure on NZ yields to start the week.

There is no economic data of note today either domestically or on the international calendar.