Weak US employment data roils markets

US employment data for July came in worse than expected, adding to downside risks for the US economy after a raft of weaker economic data recently. Only 114k new jobs were added in July, well below the median forecast for 175k jobs, while the June reading was revised lower by -30k to 179k. The unemployment rate rose to 4.3% from 4.1% previously, also worse than forecast, although this was partly due to a higher labour force participation rate as well as an increase in the number of people on temporary layoff. Nevertheless, the unemployment rate is well above the 4.0% the Fed expected it to reach in Q4 2024. Average hourly earnings slowed to 3.6% y/y last month from 3.8% y/y in June.

Separate releases showed US factory orders for June fell by more than forecast at -3.3% m/m while durable goods orders also contracted at the headline level by more than the preliminary figure, which didn’t help sentiment. The market had been focusing on weaker economic data over the last week including further weakness in the ISM manufacturing index for July. The market is now pricing a 76% probability of a 50bp rate cut when the Fed meets in September (25bp is fully priced). Another two rate cuts are priced in the Fed Funds futures (one in November and one in December), which would mean a total of 100bp in easing being delivered by year-end, if the market is right.

The Caixin China services PMI unexpectedly rose in July, to 52.1 from 51.2 in June. This was the highest reading since May and paints a brighter picture than the official services PMI released last week. The softness in the manufacturing sector meant that the Caixin composite PMI slipped to 51.2 last month from 52.8 in June. The Caixin survey focuses on smaller, export-oriented firms.

The focus this week will be on the final July PMI prints for the major economies, as well as the ISM services index for the US. Weekly jobless claims data for the US will also be closely watched after these rose unexpectedly in last week’s release.

Key Economic Data and events

11:00 Turkey CPI (Jul) forecast 3.1% m/m and 62.0% y/y

12:00 Eurozone composite PMI (Jul) forecast 50.1

12:30 UK composite PMI (Jul) forecast 52.7

17:45 US composite PMI (Jul) no forecast

18:00 US ISM services index (Jul) forecast 51.0

Fixed Income

• Treasuries rallied on Friday as the market repriced expectations for more aggressive easing from the Fed, following weaker than anticipated employment data in July. The yield curve flattened as the 2y yield fell -27bp to 3.88% on Friday, the lowest level since April 2023, while the 10y yield fell -19bp on Friday and -38bp w/w to 3.79%.
• Benchmark sovereign bonds rallied across the board last week, with German 10y bunds down -19bp w/w to 2.17% and 10y gilt yields declining -22bp w/w to 3.83%, helped by the Bank of England’s unexpected rate cut last week.

FX

• The dollar index fell -1.1% w/w largely due to the selloff in the USD on Friday, as the prospect of faster monetary policy easing weighed on the greenback. EUR, CHF and JPY all gained against the dollar with the yen being the biggest beneficiary of dollar weakness as it appreciated almost 5% w/w last week to 146.53/USD. GBP weakened 0.5% w/w to USD 1.2801.
• Among the commodity currencies, AUD weakened -0.6% w/w while CAD was -0.3% weaker w/w. NZD gained 1.2% w/w against the dollar.

Equities

• Equities were very much in risk-off mode on Friday as fears of a US recession came to the fore once again. The Nasdaq100 closed down -2.4% while the S&P500 lost -1.8% on Friday. Despite last week’s selloff, the S&P500 is still up 12.1% ytd, while the nasdaq100 is up almost 10% ytd. European stocks also lost ground last week, with the Eurostoxx50 down -4.6% w/w, while the Nikkei 225 declined -4.7% w/w.
• Locally GCC equity markets also closed lower on Friday. The Tadawul ASI declined -3.5% w/w while the DFMGI fell -1% w/w. The ADXGI was broadly unchanged w/w.

Commodities

• Oil prices closed lower on Friday, with weak US economic data seemingly outweighing escalating regional geopolitical tensions. Brent fell -3.4% on Friday to USD 76.81/b and was down -5.3% w/w, while WTI fell -3.7% on Friday to USD 73.52/b and lost -4.7% w/w.
• Bloomberg reports that Libya has started to shutdown production at its largest oil field over the weekend, with output falling by -50k b/d so far.