US Unemployment Rate Increases Likelihood of September Rate Cut
July’s Non-Farm Payrolls (NFP) report was disappointing, with only 114k jobs added compared to the 175k expected and June’s 179k. Average hourly earnings continued to decline, while the unemployment rate rose to 4.3%. Consequently, the USD and US treasuries have trended lower, while gold has seen a boost.
USD Forecast
The US labor market is showing signs of stress, with the unemployment rate increasing to 4.3% in July. This was above economists’ maximum expectation of 4.2%, causing an immediate decline in the USD. The US job market, previously known for its resilience, is now under threat due to restrictive monetary policies impacting the broader economy.
Indicators before the July NFP, such as the ISM manufacturing survey’s employment sub-index drop from 49.3 to 43.4, hinted at a weaker jobs report. The overall ISM manufacturing index fell to 46.8 from 48.5, marking sub-50 readings for 20 of the past 21 months. The upcoming ISM services data is likely to have more impact, given the sector’s dominance in the US economy.
Long-term signs of labor market weakness include declining job openings, hires, and voluntary quits.
US Dollar Index 5-Minute Daily Price Chart
Source: TradingView, prepared by FX4Today Team
NFP, USD, Yields, and Gold Analysis
Fed’s Response to Disappointing Jobs Data
The weak jobs data aligns with the Fed’s recent focus on the employment aspect of its dual mandate. This has led to speculation of a 50-basis point rate cut next month to kickstart the rate cut cycle. Markets currently see an 80% chance of this outcome, though enthusiasm may wane as the Fed aims to avoid market panic. There is now an expectation of four 25-basis point cuts, or one 50 bps cut and two 25 bps cuts, before year’s end. This contrasts with the Fed’s June dot plot, which anticipated a single rate cut.
Market Reaction: USD, Yields, and Gold
The US dollar has been pressured by easing inflation and rising rate cut expectations, accelerating lower after the NFP release. With multiple rate cuts likely, the dollar’s path is downward, with potential short-term support at 103.00.
US Treasury yields also dropped, with the 10-year yield comfortably below 4% and the 2-year just below the same mark. Gold surged immediately after the data release but has since stabilized. As gold typically moves inversely to US yields, the bearish trend in treasury yields supports gold, which also benefits from increased geopolitical uncertainty following Israel’s targeted attacks in Lebanon and Iran.
NFP, USD, Yields, and Gold Analysis (Continued)
The labor market’s downturn is further emphasized by the declining JOLTs data, which shows reductions in job openings, hires, and voluntary quits. This ongoing trend underscores the challenges faced by the US economy, suggesting that the labor market’s robustness may be waning under the pressure of tighter monetary policies.
Implications for Investors
For investors, the weak NFP report and rising unemployment signal potential volatility in the markets. With the US dollar weakening, assets denominated in USD may face downward pressure. This environment creates opportunities in alternative assets such as gold, which historically performs well in times of economic uncertainty and declining real yields.
Gold’s immediate post-NFP rally, despite its subsequent stabilization, indicates investor sentiment gravitating towards safe-haven assets. The geopolitical tensions involving Israel, Lebanon, and Iran add another layer of uncertainty, further supporting gold prices. Investors should monitor geopolitical developments closely, as they can significantly impact market dynamics.
Fed’s Forward Guidance
Market participants are now keenly awaiting further guidance from the Fed. The possibility of more aggressive rate cuts than previously anticipated could reshape expectations and strategies. A 50-basis point cut, followed by smaller cuts, would signal a significant shift in monetary policy aimed at bolstering economic activity and supporting the labor market.
In summary, the disappointing July NFP report has heightened concerns about the US labor market and economy. The Fed’s response, alongside market reactions, will be crucial in shaping the financial landscape in the coming months. Investors should stay informed and adaptable to navigate these evolving conditions effectively.
