Fed rate hike expectations sensitive to jobs data

USD: Price action highlights potential for turnaround

Since recording a low of 4.73% on 10^th August, the UST 2yr note yield has grinded steadily higher and recorded a high of 5.10% on Monday – a 37bp increase in the 2yr yield in thirteen trading days. And then from that high in two trading sessions two-thirds of the move has reversed. That points to the sensitivity of the markets to data that points to economic weakness, and in particular weakness in the labour market – something the Fed is focused on going forward and may be required for the Fed to avoid hiking one more time. The JOLTS and consumer confidence data yesterday were both weaker than expected and certainly helped to reinforce the prospect of a slowdown in the jobs market going forward. The initial claims data of late has provided little comfort in that view but of course that’s a measure of firing. The JOLTS data is more a measure of the demand for hiring and job openings certainly retreated faster than expected in July – openings were expected to slow modestly to 9,500k but in fact declined to 8827k with the June data revised down. Job openings remain elevated but have now declined to the lowest level since March 2021. The 10-year pre-covid job 

openings average was 4.900k so there remains a long way to go to return to pre-covid job opening levels in the labour market. There were other aspects though that have normalised that will certainly be noted by the Fed. The Quit rate, which measures voluntary departures from employment dropped to 2.3%, the level that prevailed throughout most of 2018 and 2019 before covid. That is at least a level that is more consistent with wage growth reverting further lower from here. Average Hourly Wages were growing at around 3.0% in the 2018-19 period. Fewer job leavers overtime pressures wage growth to the downside as voluntary leavers moving to a new job will more likely than not move to a higher paid job.

The Consumer Confidence report also revealed the Jobs Plentiful minus Jobs Hard to Get index fell to the lowest level since April 2021 when the labour market remained negatively impacted by covid. Excluding covid, the 26.2 reading was the weakest since April 2018.

The sharp drop in US yields has tarnished the favourable technical backdrop for the US dollar. The EUR/USD rate closed below the 200-day moving average on Friday but failed to close below on Monday and again yesterday highlighting the failure to break below the 200-day moving average on a sustained basis. Despite the weak economic data from Europe EUR/USD looks to be finding support at the 1.0800 level. 

QUIT RATE HAS REVERSED TO PRE-COVID LEVELS

Source: Bloomberg, Macrobond & MUFG GMR

EUR: Inflation in focus with ECB decision balanced

The euro has been underperforming in part due to the diminished expectations of additional rate hikes by the ECB. The flow of economic data has been disappointing and has clearly influenced the ECB’s thinking the tone of rhetoric having shifted – even the hawks are no longer committed to further tightening. 15bps of tightening remains priced for the meeting next month.

Still, pricing could quickly shift again given the sole focus of the ECB is price stability. Today, German inflation data will be released that has the potential to alter expectations on ECB action. At the time of writing we have had the release of North Rhine-Westphalia CPI which accelerated on an annual basis and could be a sign of a stronger than expected national reading. North Rhine-Westphalia is the most populous state in Germany and can be a reasonable proxy of the national print. The flash euro-zone CPI data will be released tomorrow.

The ECB at its meeting in September will also have evidence of potential upside energy inflation risks building. The TTF natural gas price has begun to trade more volatile with evidence of greater sensitivity to supply-side developments. A strike at a natural gas facility in Australia and slowing imports into Europe has resulted in some spike in prices. At one stage this month the TTF contract was trading over 80% higher than the close in July. The price has corrected back lower again but prices look to have bottomed with risks turning the other way.

Food price risks have also increased. India announced an export ban of non-basmati rice after heavy rains impacted crop yields while Russia’s withdrawal from the Black Sea grain deal is set to lift prices further. The FT today highlights the potential added risk of El Nino which is forecast to bring extreme heat and impact food supplies further.

The finely balanced ECB policy decision could help explain the quick rebound in EUR/USD – the weak US data cited above was key but the potential for the ECB to shift its rhetoric again and hike is also high. At this juncture we expect the ECB to pause and this will help push EUR/USD further lower over the short-term. However, we will be watching the German and euro-zone inflation data today and tomorrow given the decision from the ECB remains finely balanced.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:00	KOF Leading Indicators	Aug	91.3	92.2	!
IT	09:00	Italian Business Confidence	Aug	98.0	99.3	!
IT	09:00	Italian Consumer Confidence	Aug	105.0	106.7	!
UK	09:30	BoE Consumer Credit	Jul	1.500B	1.661B	!
UK	09:30	M4 Money Supply (MoM)	Jul	-0.1%	-0.1%	!
UK	09:30	Mortgage Approvals	Jul	51.00K	54.66K	!!
UK	09:30	Mortgage Lending	Jul	-0.46B	0.14B	!!
UK	09:30	Net Lending to Individuals	--	1.0B	1.8B	!!
EC	10:00	Business and Consumer Survey	Aug	93.9	94.5	!
EC	10:00	Consumer Confidence	Aug	-16.0	-15.1	!
EC	10:00	Consumer Inflation Expectation	Aug	8.6	4.8	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-4.2%	!
GE	13:00	German HICP (YoY)	Aug	6.2%	6.5%	!!!
GE	13:00	German HICP (MoM)	Aug	0.3%	0.5%	!!!
US	13:15	ADP Nonfarm Employment Change	Aug	195K	324K	!!!
US	13:30	Core PCE Deflator	Q2	3.80%	4.90%	!!!
US	13:30	GDP (QoQ)	Q2	2.4%	2.0%	!!
US	13:30	GDP Price Index (QoQ)	Q2	2.2%	4.1%	!!
US	13:30	Goods Trade Balance	Jul	-89.94B	-88.83B	!
US	13:30	PCE Deflator	Q2	2.6%	4.1%	!!
US	13:30	Real Consumer Spending	Q2	1.6%	4.2%	!!
US	13:30	Wholesale Inventories (MoM)	--	-0.4%	-0.5%	!
US	15:00	Pending Home Sales (MoM)	Jul	-0.1%	0.3%	!
US	15:00	Pending Home Sales Index	Jul	--	76.8	!

Source: Bloomberg