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US payrolls growth set to slow in June

Jobs report

It’s been yet another choppy week for markets in Europe, as concerns over looming recession risk prompted a sharp sell-off in commodity prices, with copper prices hitting an 18-month low midweek, while oil prices briefly dipped below $100 a barrel.

The rebound in markets yesterday was partly driven by reports out of China that the Ministry of Finance was said to be open to bringing forward stimulus spending from next year, in an attempt to stimulate weak economic activity. While a welcome step, it’s a curious response given that China’s problems are currently self-inflicted. No amount of new spending will solve the problems of constantly shutting down and restarting the economy on the basis of a single case of covid.

US markets also saw a decent session, closing higher for the fourth day in a row, with the Nasdaq posting the strongest gains on the back of a strong performance from chip companies, after a strong set of Q2 numbers from Samsung.

Asia markets also saw decent gains; however, the shooting of former prime minister Shinzo Abe has seen the Nikkei 225 give up some of those gains, with his condition currently unknown. This late in the day weakness is set to translate into a mixed European open. 

Yesterday’s gains came despite a sharp rise in US bond yields on the back of Wednesday’s Fed minutes and continued hawkish talk from the likes of Fed governor Christopher Waller and St. Louis Fed president James Bullard. Both talked down the prospect of a US recession despite the prospect that the US economy could well already be in a technical recession given Q1 GDP contracted by -1.6%.

This week’s minutes showed the determination among Federal Reserve policymakers to focus exclusively on combatting inflation, with numerous mentions of the word inflation, with the prospect of a recession getting none. This means the main focus of US jobs numbers from now on will be on how long before higher rates, and rate expectations, start to feed into lower hiring patterns.

Currently the US labour market has over 11m vacancies, which higher wages seemingly cannot fill. All the while the participation rate continues to stay stubbornly low at 62.3%, despite rising inflation which in turn is pushing up the general cost of living. The unemployment rate currently sits at 3.6% just above the 2019 lows, and is expected to remain steady, while wages growth is holding steady at just above 5%. This raises the question: will the continued rise in prices we are seeing start to pull people back into the labour market, and more importantly will those 11.2m vacancies start to disappear?

With no ADP report earlier this week to benchmark today’s June report, the bigger question is how long will it be before we see negative prints on non-farm payrolls? In the last week or so we’ve seen increasing evidence of US economic weaking in the latest ISM reports from June. In the manufacturing sector the ISM employment component slipped further below 50 to 47.3 and the lowest since August 2020. It was a similar story in the services sector which also saw similar weakness.  

It was notable that ADP slowed to 128,000 in May, the weakest number since December 2020, and with these reports not due to return until August while the calculation is readjusted it’s not immediately clear which jobs report accurately reflects how the US labour market is doing. If the US labour market continues to hold up well, we could well be looking at a Fed funds rate that could double by the end of Q3, however the inflation numbers next week could undermine that narrative.

Weekly jobless claims have been slowly rising over the last few weeks, while the latest June payrolls is expected to see jobs growth slow from 390,000 in May to 265,000, a number that has come down from where it was two weeks ago and remains at a sizable risk of a miss to the downside. We’re also expected to see the latest Canada jobs report ahead of the Bank of Canada rate decision, which is due next week, and where wages growth is expected to jump from 4.5% to 5.4% in June, prompting a 50bps rate hike ahead of the Fed later this month.   

EUR/USD – the break below 1.0340 opens up a move towards parity and longer-term target at 0.9660. Resistance now comes in at 1.0340/50.

GBP/USD – The break below 1.1980 opens up the risk of further losses towards the Covid lows towards the 1.1500 area. We need to see a move back above the 1.2020/30 area to stabilise.

EUR/GBP – having been in an uptrend since April the euro has broken lower this week opening up a move lower with the break below the 0.8480 area opening up a test of the 200-day MA, as well as the 0.8420 level. Resistance comes in at 0.8520/30 area.  

USD/JPY – has slipped back from the 137.00 area, but on course for further gains towards the 140.00 level. Support comes in at the 134.80 area.  

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