A large downside surprise in US payrolls reduced expectations for a September Fed rate hike. An initial rally in US Treasuries faded. The data brought a broad-based fall in the US dollar, with the NZD pushing up. Gold prices extended recent gains

An unexpected slowdown in the US labour market saw investors trim Fed rate hike expectations and supported risk sentiment. US equities made further gains, with the S&P closing 0.6% higher and extending last week’s advance to more than 3%. Investors also welcomed reports that the US will lift its blockade of Iranian ports once a deal to restore shipping is announced. That news saw oil prices ease from session highs, with Brent crude closing near US$82 per barrel. Global bond yields fell, the US dollar weakened broadly, and gold prices extended recent gains.

US nonfarm payrolls fell by 23k, well below the 80k consensus, while prior months were revised down by a further 103k. Job losses were concentrated in government, leisure and hospitality, and retail trade. The unemployment rate declined to 4.1%, but this reflected a continued fall in labour force participation rather than labour market strength. Wage growth also softened, with average hourly earnings rising 3.2% y/y, the slowest pace in more than five years.

The weaker labour-market data should leave the Federal Reserve less inclined to raise rates as policymakers weigh still-elevated inflation against rising downside risks to employment. This week’s CPI report will be an important input into the September FOMC decision, although officials will also have August data before the meeting. Markets now price around 11bp of tightening for September, down from 14bp before payrolls. US Treasury yields fell after the release, though the move partly retraced by the weekly close. The 10-year yield touched 4.60% before ending at 4.64%, 4bp lower on the day.

The US dollar fell against G10 currencies, with only limited retracement as rates rebounded from their lows. The Bloomberg Dollar Spot Index fell to its lowest level since the start of June. A stronger-than-expected labour market report in Canada provided support for the Canadian dollar. The NZD and AUD were among the best performers, while the euro and pound lagged at the margin amid the weaker US dollar backdrop. NZD/USD traded above 0.5900, while NZD/EUR and NZD/GBP edged higher.

After several days of steadily unwinding intervention-led gains, the yen also appreciated against the dollar. The latest CFTC futures positioning data, covering the period to last Tuesday, showed a sharp unwind of yen shorts, reducing the total position by around two-thirds. Speculative accounts bought a record US$9b of yen futures over the week, offering some insight into broader FX market positioning changes.

The Financial Times reported that the European Central Bank was only informed about the US sale of euros against the yen after the intervention had been executed. The episode was the first joint Washington-Tokyo intervention in almost 30 years and stood out for its unusual execution. Ordinarily, the US would be expected to use dollars in such an operation, while the limited advance coordination underlined the exceptional nature of the move.

NZ yields moved higher in the local session on Friday, largely reflecting offshore moves, with limited domestic catalysts. The 2-year rate increased 4bp to 3.66%, while the 10-year rate closed 3bp higher at 4.40%. Australian 10-year bond futures are around 3bp lower in yield terms, suggesting a downward bias for NZ rates on the open.

There is little of note on either the NZ or international data calendar today. Attention later in the week will turn to Q3 inflation expectations in the RBNZ’s Survey of Expectations and the manufacturing PMI. Across the Tasman, the RBA is unanimously expected to leave the cash rate unchanged at 4.35%, with updated forecasts in the Statement on Monetary Policy the main focus. In the US, July CPI will be the key release, helping to fine-tune expectations for the September FOMC.

Stuart Ritson is a senior Strategist at BNZ Markets.