These numbers are one of the first indications that Fed’s tightening campaign is having an impact on the economy. Lower job openings and lower quit rates suggest that workers will be less confident in their ability to find new employment at higher wages, so that will reduce the churn in labor market and puts a lid on wage pressures. This also points towards a weaker consumer spending outlook, but markets cheered the fact that this data would bring a prolonged pause in the Fed tightening cycle, and perhaps even an earlier start of the easing cycle. Market pricing for rate hikes later in the year have trimmed, while rate cut expectations have advanced to June 2024 from July earlier. US Treasury yields created with 2-year down 15bps and 10-year down 8bps. This brought a reversal in the US dollar after several weeks of gains, but question now is whether US data is as bad or worse than Europe and who gets a recession first?
Market Takeaway: Data remains in the driving seat, but USD may remain a buy on dips if European economic data is expected to come in worse than the US.
ADP, PCE and NFP: Soft-landing vs. Recession vs. Stagflation Narratives on Test
Focus from here will turn to more key data due this week to shape the sentiment around whether the Fed has achieved the prefect landing or whether there are reasons to start getting concerned about the economy.
Today’s focus will be the second release of US Q2 GDP which is likely to stay strong given it is backward-looking. We also get the ADP employment survey for August, which if again below consensus expectation of 195k (prev. 324k) could bring some further downside in the greenback. The leisure and hospitality sector is still hiring, and July ADP data as well as JOLTS data yesterday showed larger job openings in this sector. If the pace of hiring in leisure continues to offset the slower hirings elsewhere, then a clear weakening in the labor market may still need to wait.
Later in the week, focus turns to jobless claims, July PCE inflation data and August nonfarm payrolls. Headline and core PCE is expected to stay firm at 0.2% MoM in July while the YoY may be slightly higher at 3.3% (prev. 3.0%) and 4.2% (prev. 4.1%) primarily due to base effects. If actual numbers are higher than expectations, concerns about a sticky core inflation may return, spelling a risk-off and bringing the dollar back higher.
Friday’s August NFP jobs report will be the final test of the labor market ahead of the Fed’s September meeting. Given the Fed’s clear focus on labor market tightness now as a driver of further disinflation, markets will likely be on watch too. Headline jobs growth is expected to slow to 170k in August from 187k previously, but unemployment rate is expected to stay steady at the low of 3.5%. Average hourly earnings growth is expected grow by 0.3% MoM and up 4.3% YoY (prev. 4.4%). This degree of wage growth is still uncomfortably high for the Fed, which ideally would love to see this rate closer to 3% to bring inflation back down to 2%. The USD could see more weakness if we see cooler-than-expected prints, and key support is 103, break below which could mean August low of 101.74 could be tested. Stronger numbers will however bring the focus back on higher-for-longer and may increase the possibility of a rate hike later this year.