Investor risk sentiment takes a hit from significantly weaker than expected US labour market data. Global equities fell sharply and credit spreads widen. Probability of a Fed rate cut in September increases

There were large moves across global markets into the weekly close. US labour market was weaker than expected, and combined with a soft manufacturing ISM, contributed to weaker risk sentiment and falls across equity markets. Rising geopolitical tensions between US and Russia also impacted risk appetite. US equity futures, which had already fallen close to 1% ahead of the data, extended lower with the cash index closing 1.6% lower. Stocks in Europe and Asia also declined with the Euro Stoxx notably closing nearly 3% lower. The US dollar fell sharply, global rates declined, and oil prices dropped ahead of the OPEC+ meeting.

US nonfarm payrolls increased by 73k in July compared with the 104k consensus. However, there were large downward revisions to previous months totalling 258k. The unemployment rate remained steady at 4.2%. Hourly earnings were in line with expectations, increasing 0.3% in the month, which saw the annual rate increase marginally to 3.9%. After the revisions, job growth has averaged 35k over the past three months and sends a strong signal that the labour market is weakening.

The ISM manufacturing index printed below consensus estimates. The headline index declined to 48.0, which extends the period in contractionary territory below 50, to five straight months. The employment index dropped to its lowest level since June 2020 and the prices paid index declined to 64.8, from 69.7.

US Federal Reserve Governor Adriana Kugler announced her resignation on Friday effective August 8. She was absent from last week’s FOMC. The resignation will enable the Trump administration to make nominations for her replacement to the Fed board, select an official to lend support for lower rates and potentially serve as the next Fed chair.

Markets increased the chance of the Fed restarting its rate cutting cycle at the September FOMC. There is 22bp of easing priced for the meeting, up from 10bp ahead of the data, and a cumulative 58bp of cuts priced by December. The repricing of Fed policy contributed to a large rally across US treasuries led by the front end where 2-year yields declined 28bp to 3.68%. The curve steepened with 10-year yields falling 16bp to 4.22%.

The rally in the treasury market contributed to lower yields in Europe but the moves were modest. 10-year bund yields closed 2bp lower at 2.67%. There was limited reaction to preliminary euro area inflation data for July. Headline CPI remained unchanged at 2.0%. Core inflation was also unchanged at 2.3% while services inflation, which is closely monitored by the ECB, decelerated to 3.1%, from 3.3%.

President Trump has announced a range of new tariffs which included a 10% global minimum and higher duties for countries with trade surpluses with the US. Most of the changes will take effect on 7 August to allow time for US officials to make administrative changes. The tariff on NZ exports will increase to 15% from 10% previously. Officials said there will be an appeal against the higher rate.

OPEC+ met over the weekend and has agreed in to make another large oil production increase. Bloomberg reported supply will increase by 548k barrels a day in September. The adjustment was anticipated by analysts and completely reverses the 2.2-million-barrel reduction made in 2023. Brent crude closed near US$70 on Friday.

The US dollar declined sharply after the weak data, but the breadth of the move was limited, and concentrated in the major currencies. The yen was the standout performer and is almost 2% stronger relative to the NZ close. The euro also made strong gains against the US dollar. However, the Australasian currencies were notable laggards, amid the weak risk sentiment, and made relatively small gains despite the larger moves in the major pairings. NZD/USD closed near 0.5920, 0.6% higher.

NZ fixed income markets were confined to narrow ranges in the local session on Friday. Yields ended the session flat to 1bp higher across the swap and government curves. There was limited reaction to further soft consumer confidence data which continues to raise questions about the prospect for a pickup in household spending. Australian 10-year government bond futures are 10bp lower since the local close on Friday, which suggests lower NZ yields on the open.

There is no domestic or international data of note in the next 24 hours. Looking to the remainder of the week, the key NZ release is Q2 labour market data on Wednesday. The US services ISM index is expected edge higher to 51.5 from 50.8 in June. A 25bp cut is expected from the Bank of England, and is almost fully discounted by market pricing, which would take the base rate to 4.0%.