US labour market cools in June

The June non-farm payrolls report showed more evidence of a cooling US labour market. A total of 206k jobs were added last month while estimates for the May and April prints were substantially revised lower. The headline jobs number was slightly ahead of market expectations of 190k jobs to be added. Looking at a breakdown of growth in the labour market, government employment was up by 70k in June while health care also was a major contributor to growth, with 49k jobs added. There were declines, however, in retail trade and professional and business services.

Average hourly earnings also eased in June, falling to 3.9% y/y from 4.1% a month earlier. On a monthly basis, wage growth cooled to 0.3%. Data from the establishment survey showed a modest increase in the unemployment rate to 4.1%, still low by historic standards but an inexorable rise from the exceptionally low levels of 3.4% hit in early 2023. More encouraging, though, was a modest uptick in the participation rate to 62.6%, a rise of 0.1ppt compared with a drop of 0.2ppt a month earlier.

Overall the June employment report will give more support to a soft landing argument and will maintain the likelihood of the Fed starting its rate cutting cycle as early as September. The conditions in the US jobs market are clearly not dreadful but are nevertheless showing signs of a highly mature business cycle.

German industrial production slumped in May, falling by 2.5% m/m after a modest 0.1% increase in April. Both manufacturing and construction dropped sharply, down 2.9% and 3.3% respectively. On an annual basis, overall industrial production fell by 6.7% y/y, its worse decline since 2020. Germany’s economy has been showing tentative signs of improvement in Q2 with the composite PMI holding above 50 for all three months. However, any expansion in the overall economy will be modest this year as manufacturing remains soft. Elsewhere, industrial production in France also disappointed with a decline of 2.1% m/m in May compared with a 0.5% expansion in April.

Economic Data and Events in the week ahead

• July 10 – China CPI y/y June: forecast 0.4%
• July 10 – Türkiye industrial production m/m May
• July 11 – US CPI y/y June: forecast 3.1%
• July 11 – UK industrial production m/m May

Fixed Income

• Bond markets responded positively to the cooling in the labour market with the 2yr UST yield falling by 10bps on Friday to close at 4.6035%. The 10yr UST yield also pulled back, dropping by 8bps to 4.2784% with likely some resistance in moving as much as the 2yr given some lingering concerns on the inflation environment expected in 2025.
• Market pricing for a September rate cut increased to 75% after the labour market data, up from 70% earlier in the week. Markets are now fully pricing in two 25bps cuts by the end of 2024.
• Among other benchmark bonds, gilts seemed encouraged by the election of the Labour Party to government in the UK with a drop in 10yr yields of 7bps to 4.124%. French bond yields also ended Friday lower, down almost 7bps to 3.207% though the outcome of the parliamentary election will set the next trajectory for French markets.
• High-yield and emerging market bonds also rallied at the end of the week as the prospect of rate cuts from the Fed helped to lift assets generally.

FX

• The US dollar responded negatively to the June non-farm payrolls report, helping to extend gains for peer currencies like the Euro and Sterling. EURUSD had rallied for seven consecutive days as of Friday, closing up 0.26% to settle at 1.084 at the end of the week. Sterling also has had a strong run, rising for seven days in a row and ending Friday up 0.43% at 1.2815. USDJPY also managed to move in favour of the yen, slipping by 0.33% to 160.75.
• Commodity currencies closed mixed on Friday. USDCAD added 0.19% to settle at 1.364 as markets seemed to focus on accelerating wages in Canada’s economy rather than other parts of a relatively weak employment report for June (there was a net loss of jobs of 1.4k while the unemployment rate rose to 6.4% from 6.2%). Both AUDUSD and NZDUSD managed to gain, however. Aussie added 0.34% to 0.6749 while NZDUSD added 0.46% to 0.6145.

Equities

• Equity markets had a mixed close at the end of the week. US markets settled higher: the Dow Jones added 0.17% while the S&P gained 0.54% and the NASDAQ was up by a strong 0.9%. However, European markets fared worse with a drop of 0.16% in the Euro Stoxx while the FTSE 100 fell 0.45%. Asian markets has a weaker session as well, with the Hang Seng down 1.27%.
• Local markets had a positive close with the DFM up 0.1% at the end of the week and the ADX rising by 0.13%. In Saudi Arabia, the Tadawul gained by 0.55%.

Commodities

• Oil markets closed lower on Friday, tempering their weekly gains. Brent futures fell 1% to USD 86.54/b while WTI was off by 0.9% to USD 83.16/b. Constructive stockpile data from the EIA as well as concerns about the impact of Hurricane Beryl helped to support prices generally last week.
• This week oil markets will be focused on projections from OPEC as well as the IEA, in particularly their calls on demand.
• Investors continued to add new net long positions in the Brent market last week with net longs up by 37k thanks to new long positions as well as shorts closing out. Short positions have closed for four weeks running though the pace of closing is easing.