US Payrolls are in focus today – The Dollar story is a nuanced one

Markets

And the summer slide continues. Core bond yields yesterday dropped another 2.7-10.8 bps in the US & 4.9-7.8 bps in Germany. The front outperformed after a series of US economic data disappointed across the board. Weekly jobless claims rose to the highest in 11 months, Q2 unit labor costs eased sharply to 0.9% and the manufacturing ISM hit a YtD low of 46.8 with subseries such as new orders (47.4) and employment (43.4) suggesting little improvement going forward. The numbers came after the Fed on Wednesday paved the way for rate cuts soon (September). With the central bank’s “go”, the front-end of the curve is now adjusting towards the estimated terminal rate. Market expectations are currently around <3.25% by end 2026. That’s a huge shift from just a month ago (>3.75%) but it is a more realistic view assuming the Fed is headed towards neutral (+/- 3%). Long tenors join the trend lower as the recent slew of sub-par eco data makes markets ponder the risks of a sharper economic slowdown than they had expected thus far. That’s also being reflected in stock markets. Both US and European equities are under selling pressure lately. Yesterday’s 2% sell-off meant the lowest close in the EuroStoxx50 since mid-February. The S&P500 and Nasdaq wiped out post-Fed gains to close back around the July lows. European yields suffer from US spillovers while economic data (e.g. PMIs) on the bloc were not very convincing either. Here, too, money markets have come to entertain a more realistic idea of an ECB terminal rate just north of 2% instead of >2.5% one month ago. US payrolls are in focus today. We don’t think they’ll alter current market forces. The US 2-yr yield is currently hovering near the YtD lows of 4.11%. A break looks imminent in case of a further moderating labour market. 3.95-4% is then the next reference to watch. After breaking sub 4.03%, the next technical zone to watch in the US 10-yr is located at 3.78-3.81%. Unless a dramatic payrolls report sparks outright recessionary fears, we don’t assume these levels to appear on the screens today. The dollar story is a nuanced one. UST outperformance yesterday was more than offset by the risk-off on equity markets, pushing EUR/USD eventually below 1.08 again. Similar trading dynamics could play out today. The EUR/USD 1.07 zone acts as first meaningful support. EUR/GBP jumped to 0.847 yesterday. Risk sentiment was yesterday’s main driver of GBP, outplaying the BoE and is probably going to be key for GBP today too.

News and views

The Czech central bank cut policy rates yesterday by 25 bps to 4.5%. In the policy statement published afterwards, it noted that it still sees inflationary pressures in the economy. A restrictive policy stance is still deemed necessary and as such further rate cuts are approached “with great caution”. Headline inflation is expected to average 2.2% this year and 2% in 2025. Core inflation will still be at 2.3% next year. Its policy is working though and the CNB sees the economy below potential amid weak domestic and external demand. Czech GDP is expected to grow by 1.2% this year and accelerate to 2.8% next year on a recovery of household consumption. The forecasts are made on the assumption of a further modest decline in interest rates to around 4% end 2024/early 2025. The Czech crown, which appreciated yesterday from a 2.5 year low in the wake of the decision, is seen around current levels (EUR/CZK 25.3) for the remainder of the year before appreciating gradually through 2025.

South Korean inflation rose 0.3% m/m and picked up on a yearly basis from 2.4% to 2.6% in July, snapping a cooling streak that was in place since February. Core inflation matched June’s 2.2% y/y, defying expectations for a slight easing to 2.1%. While the Bank of Korea blamed temporary factors for the uptick and sees inflation resuming the downtrend this month, it remains wary for easing policy from the current 3.5% level. It is awaiting evidence for inflation to cool as expected (and sustainably to the 2% target) while they are worried that a less restrictive stance would prompt an increase in household debt. The South Korean won slightly gains this morning to USD/KRW 1370.

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