US labour market may be cooling

US non-farm payrolls increased by a smaller-than-expected 187k jobs in July, the first “miss” this year. May and June employment data were also revised lower by a combined 49k, providing further evidence that the labour market may be cooling, despite the drop in the unemployment rate to 3.5% in July from 3.6% in June. However, average hourly earnings increased by 0.4% m/m in July, with annual earnings growth steady at a still-elevated 4.4% y/y.

July inflation data is due for the US on Thursday this week and the median forecast is for a slight rise in headline CPI to 3.3% y/y in July from 3.0% in June, on higher fuel prices, while core CPI is expected to remain unchanged at 4.8% y/y. Over the weekend, Fed Governor Michelle Bowman said that further rate hikes “will likely be needed to get inflation on a path down to the FOMC’s 2% target”. Atlanta Fed President Bostic and Chicago Fed President Goolsbee both indicated that they expected gradual disinflation and an orderly slowdown in the economy.

German factory orders jumped 7.0% m/m in June, well above expectations for a -2.0% contraction. On an annual basis, factory orders rose 3.0% y/y. The data indicates an improvement in industrial demand, although this was likely due to a sharp rise in Airbus aircraft orders in June.

The Qatar Financial Centre PMI rose to 54.0 in July from 53.8 in June, with business activity rising at a faster pace than in June. New order growth was solid, but slightly slower than in June, and employment in the private sector ticked higher.

Today’s Economic Data and Events

10:00 Germany Industrial production (Jun) forecast -0.5% m/m

Fixed Income

• US Treasuries rallied at the end of the week as a miss on the headline non-farm payrolls number could prompt some tempering of expectations for how long the Fed will keep rates at restrictive levels. Yields on the 2yr UST ended the day at 4.7641%, down about 12bps while the 10yr yield fell 14bps to 4.0338%. While there was some unwinding of the curve steepening at the end of the week, the 2s10s curve ended the week at -74bps in inversion, compared with about -93bps a week earlier. Inflation data will set the tone for USTs this week.
• Bond markets in Europe also closed on a stronger footing with bund yields down 4bps to 2.556% while the 10yr gilt yield dropped about 9bps to 4.372%. Emerging market Eurobonds had a strong end to the week with 10yr Turkey USD yields down 11bps to 8.126% while local currency bonds in South Africa, Turkey and India all pulled higher. CDS prices in Egypt pulled in by about 83bps while Turkey 5yr CDS also dropped.
• Among major central banks this week, the RBI will set policy on August 10 with market expectations for a hold at 4.5%.

FX

• The miss on the headline July US non-farm payrolls helped to lift most currencies against the dollar at the end of the week. EURUSD jumped to an intraday high of 1.104 before moderating somewhat to record a gain of 0.5% on the day and close at 1.1006. GBPUSD had a rise of 0.3% to 1.2749 while USDJPY continued to drop, its third day in a row, to 141.76.
• Commodity currencies also received a boost at the end of the week with AUDUSD adding 0.3% to 0.6570 while USDCAD missed out on the gains for the loonie, rising by 0.2% to 133.79.

Equities

• US equity markets closed the week on a softer footing with the S&P 500 down 0.5% on Friday while the Dow Jones fell 0.4% and the NASDAQ dropped the same amount. European equities were uniformly stronger with the FTSE up 0.5% and the Stoxx European index up 0.3%.
• Equity markets in the UAE had a mixed session at the end of the week with the DFM up a strong 0.8% while the ADX closed near unchanged with a negative bias.

Commodities

• Oil prices extended their gains last week with Brent rising 1.3% on Friday to settle at USD 86.24/b and WTI up 1.6% to USD 82.82/b, not far off its year-to-date high of USD 83.26/b recorded in April.
• The OPEC+ monitoring committed advised that no change in production strategy was required while Russia’s deputy prime minister, Alexander Novak, said oil markets were “quite stable” with prices at an “acceptable level.”