US labour market: Normalisation, not recession

Alexander Kuptsikevich FxPro

Fresh signs of a cooling labour market are boosting confidence in the Fed's policy turnaround but have so far had a mixed effect on the dynamics of major markets.

The labour market is in the spotlight this week as it has the power to decide when and by how much the Fed will cut its key interest rate. The highlight will be the official Nonfarm Payrolls report on Friday, but important pieces of the puzzle will be assembled throughout the week.

Wednesday's data showed that job openings fell to 7.67 million in July, the lowest since early 2021, against expectations for an increase from 7.91 million to 8.09 million. There was a historical peak of 12.2 million in March 2022, followed by a gradual normalisation. While the current readings look like a sharp drop from the peak, they represent a normalisation to the pre-pandemic peak of 7.5 million in early 2019.

ADP estimates released on Thursday showed that the private sector added 99K jobs in August, down from 111K the previous month. That's the lowest level since the recovery began in 2020. US employment numbers have returned to the growth trend of the past fifteen years, climbing out of the hole created by COVID-19. It's a clear slowdown but not necessarily a recession.

Weekly jobless claims also point to a slowdown in the labour market but not a recession. Initial claims fell to 227K last week, continuing a downward trend from a peak in July. Continued claims fell from 1860K to 1838K, against expectations for an increase to 1870K.

Apparently, the ‘most expected US recession’ is about to be renamed the ‘most expected’ recession. The big takeaway from the data is that there is still no need for the Fed to rescue the economy with a double cut in the Fed Funds rate. A 25-point cut in September, followed by a further assessment of the situation, looks like a much more prudent strategy for now. The Powell-led Fed has the chance to pull off a perfect policy reversal by smoothly lowering the rate to a neutral level, estimated at 2.8%.

On the other hand, with current growth rates lower than they were a quarter or a year ago, markets are betting on Fed dovishness with a 45% chance of a 50-point cut in September, up from 24% two weeks ago. Such a move could be a mistake, however, as it would confirm the risks of an overheating economy and lead to higher prices for commodities and services.

Author

Alexander Kuptsikevich

FxPro

Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.