FX - The Week Ahead: US rates markets move towards pricing 50bp cuts at some meetings this year following the weak US July jobs report

A weak US July jobs report all round but not the beginning of some great negative turning point for the US economy

• USD: Data released Friday shows US payroll employment up only 114k jobs in July, much softer than consensus expectations for 175k. Private employment rises by just 97k jobs and the unemployment rate is up 0.2pp to 4.25%, just short of 4.28% that would have triggered the so-called “Sahm” rule. Meanwhile, household employment gains are also modest, up just 67k with the labor force participation rate rising to 62.7%. Average hourly earnings also moderate to 0.2%MoM and 3.6%YoY, coming in somewhat below consensus. Average hours worked also decline to 34.2 with the BLS noting there is “no discernable effect” in establishment survey data from Hurricane Beryl.
   
• USD: Details of the July jobs report are weak across the board with the slowing in payroll employment broad based and the unemployment rate rising to 4.25% unrounded, leaves it just short of triggering the so-called “Sahm” rule. The more rapid rise in the unemployment in the last few months, which is now accompanied by a clearer slowing in payroll job growth, is consistent with a labor market reaching a point of further non-linear weakening. With payroll job growth slowing more in line with other labor market indicators, attention will likely remain on the unemployment rate as a more telling signal of labor market slack. Interestingly, about three quarters of the increase in the unemployment rate is due to temporary layoffs. While this would suggest some chance for reversal, consistently weakening labor demand and businesses looking to cut labor costs does not leave an optimistic picture as the duration of unemployment continues to extend as laid-off workers struggle to find new jobs.
   
• USD: Admittedly, just 57% of businesses in the BLS’ sample respond in time for the first estimate, well below the 68% average of the previous 10 Julys, so revisions could be large – but revisions have been biased downwards lately. That said, there’s a recurring pattern of weak markets in the months ahead of US elections as uncertainty most often builds. There’s also a routine pattern of downside economic surprises concentrated in the summer months. This may now be asserting all at the same time with the momentum shift in markets and fresh geopolitical negatives likely keeping the pressure on. While the weak July jobs report (particularly the rapidly rising unemployment rate) will be watched closely in the coming months, this is not the beginning of some great negative turning point for the US economy. Nevertheless, with policy rates well-into restrictive territory and Fed officials increasingly turning their focus to the employment side of the dual mandate, the OCIS team expect the Fed cutting cycle to begin in September with 75bp in cuts to year-end.

US ISM Manufacturing falls further into contraction in July

• USD: In data released earlier in the week, US July ISM Manufacturing is weaker than expected, falling to 46.8 from 48.5. The new orders index declines to 47.4 from 49.3 while the production index falls sharply to 45.9 from 48.5, the lowest level since mid-pandemic. The employment index also drops sharply to 43.4 from 49.3 while the supplier deliveries index jumps to above 50 indicating slower deliveries and the inventory index falls further into contraction. Prices paid however are modestly higher at 52.9 but remain within the range of values in the years prior to the pandemic.
   
• USD: The weakest detail in the ISM Manufacturing report for July is the employment sub-index which falls to the lowest level in many years other than the Covid and the 2008 recessions. Anecdotes in the report mention companies are reducing headcount through layoffs, attrition and hiring freezes. Overall, the decline in ISM Manufacturing in July after the S&P Manufacturing PMI also falls below 50, points to subdued activity in the US manufacturing sector. Anecdotes in the July ISM report sound less upbeat, pointing to little if any upside to manufacturing activity in the near term.

Swiss inflation once again below SNB forecasts

• CHF: Swiss July CPI Inflation released Friday comes in at 1.3% YY, in line with consensus and the prior month’s 1.3% YoY and Swiss core 1 Inflation at 1.1% YY is also in line with consensus and the prior month’s 1.1% YY. Within that, services inflation eases from 2.4% YY to 2.2% YY offset by a small rise in core goods inflation from -1.5% YY to -1.3 YY (Citi -1.5%). Outside core CPI, energy inflation is marginally down from 6.3% YY to 6.2% YY (Citi 6.6%). Inflation of domestic good and services is unchanged at 2.0% YY, while import deflation eases a bit from -1.3% YY to -1.0% YY.
   
• CHF: In June, the SNB was forecasting inflation to average 1.4% in Q2 and rise to 1.5% in Q3. That remains subject to downside risks. Citi Research forecast the SNB to hold the policy rate steady at 1.25% at the next meeting in September but inflation data continues to create dovish risk.

Week Ahead:

US – ISM services in focus this week

• USD: US July ISM Services – Citi: 50.3, median: 51.0, prior: 48.8 - ISM Services was weaker than expected in June falling into contractionary territory with sharp declines in the business activity and new orders indices. The business activity sub-index has been particularly volatile in recent months and some rebound is expected in July after the sharp decline in June. Citi Research expect that the overall ISM Services index will rebound to 50.3, modestly in expansionary territory but with downside risks as the labor market has weakened, and spending could pullback more. Markets will be paying attention to the employment details that have generally been weaker for several months.

Europe, UK – Euro area sentix, UK KPMG-REC jobs and Norway CPI in focus this week

• EUR: Euro Area: Sentix turn-around? — A swift sentiment turn-around after the French elections looks unlikely and Citi Research expect a further deterioration of investor confidence on the Sentix measure for the Euro Area: Sentix Investor Confidence, July – Citi Forecast -9.0, Consensus -5.9, Prior -7.3.
   
• GBP: UK: Jobs report in focus — focus in UK this week turns to July KPMG-RECs job report, and any nascent sign of a stabilization in labor demand. In recent months, stronger growth has translated into a moderation in the speed at which the labor market is loosening. This week ill therefore be particularly focused on the quantity details of this release. Citi Research continue to expect the UK labor market to soften through the second half as activity growth moderates and supply continues to improve.
   
• NOK: Norwegian CPI — after the large CPI undershooting in June (-50bp vs the Norges Bank forecast), Citi Research expect a partial payback in July, with headline CPI up from 2.6% to 3.1% and underlying CPI-ATE stable at 3.4% YY, but both still below the central bank projections in June. This should consolidate the likelihood of a rate cut by year-end. way: Norway CPI Inflation, July – Citi Forecast 3.0% YY, Prior 2.6% YY (Norges Bank 3.1%); CPI-ATE Underlying, July – Citi Forecast 3.4% YY, Prior 3.4% YY (Norges Bank 3.7%).

Japan – Current account in focus this week

• JPY: Current account surplus likely remained largely flat in June — Citi Research expect Japan’s current account balance to generate a ¥1.9870trn surplus before seasonal adjustment and a ¥2.4048trn surplus after adjustment in June (+¥2.8499trn and +¥2.4062trn, respectively in May). The surplus after seasonal adjustment likely remained largely the same in June. The trade deficit probably increased moderately as real exports stagnated while yen depreciation likely boosted the primary income surplus modestly.

Commodity Bloc – RBA meeting, BoC minutes and Canada’s jobs in focus this week

• AUD: Australia RBA August meeting – Citi Forecast 4.35%, Prior 4.35% - following the Q2 downside CPI surprise earlier, Citi Research have jettisoned their view of a rate hike this week. Instead, the RBA is now expected to leave rates unchanged in 2024 at 4.35%. That said, the fundamentals haven’t changed; inflation remains persistent in some categories, labor market remains tight and there is ongoing fiscal stimulus in H2. Therefore, the RBA is likely to maintain its hawkish bias this week and continue to remain vigilant to upside inflation risks. Moreover, Citi Research don’t expect rate cuts this year, and the timing of the first cut will likely be February 2025, with risks, on balance, to a delayed cutting cycle.
   
• CAD: Canada BoC Summary of Deliberations – the summary of deliberations of the July BoC meeting will be released when rates were again cut by 25bp to 4.50% in an all-around dovish decision. The most dovish element of the meeting itself was Governor Macklem’s admission that “downside risks are taking on increased weight in our monetary policy deliberations”. The summary should echo these increasing concerns about downside risks to the outlook. Importantly though, the updated baseline projections in the July MPR do not incorporate an expectation of weaker growth, with officials continuing to expect growth to pick up in the coming quarters. But as downside risks grow, the summer could be particularly useful for communicating the level of conviction officials have in these forecasts. It would be a somewhat dovish if officials note the risk that these forecasts could be lowered again the coming months, particularly as activity in the US slows. The risk remains that BoC officials could cut rates by more than 25bp at some or multiple upcoming meetings.
   
• CAD: Canada Net Change in Employment (Jul) – Citi: 20k, median: 27.5k, prior: -1.4k; Unemployment Rate – Citi: 6.5%, median: 6.5%, prior: 6.4%; Hourly Wage Rate Permanent Employees – Citi: 4.8%, median: 4.9%, prior: 5.6% - following a 1.4k decline in employment in June, Citi Research expect a 20k bounce-back in employment in July with two-sided risks. On the one hand, monthly employment data in the labor force survey can be very volatile and could rebound more than expected after a particularly soft June. On the other hand, the overall trend of labor market data will likely continue to weaken in the coming months alongside a slowing in the US with more substantial job losses realized in July or in the next few months, sending the unemployment rate even higher. Citi Research also expect the unemployment rate to rise further to 6.5% in July with risks of an even larger increase.

Asia EM – China July trade balance, inflation and credit data in focus this week

• CNH: China Exports (%YoY) Jul – Citi Forecast 10.0, Consensus 9.9, Prior 8.6; Imports (%YoY) – Citi Forecast 3.0, Consensus 4.2, Prior -2.3; Trade Balance (USD $bn); China Foreign Reserves (USD $bn) Jul – Citi Forecast 3230, Prior 3222.4 – Citi Forecast 101.4, Consensus 98.8, Prior 99.05 - China’s composite shipping cost index rose 13.4% in July, although BDI weakened materially. Supported by semiconductor sales and base effect, Korea’s first 20D exports posted 18.8%YoY in July, much higher than in the previous month. Citi Research believe China is well positioned to benefit from the ongoing global tech upcycle as well.
   
• CNH: China PPI (%YoY) Jul – Citi Forecast -1.1, Consensus -0.9, Prior -0.8; CPI (%YoY) – Citi Forecast 0.4, Consensus 0.3, Prior 0.2 - summer should be a time for stronger price dynamism, but the momentum this year could be softer. For CPI, the price momentum in pork prices weakened to 2.2%MoM from 16.3%MoM in June, yet other food items showed some recovery, with vegetable prices rising 9.6%MoM. The concern is more on the non-food side, especially with potential soft travel demand during the summer amid soft consumer confidence as indicated by the services PMI. For PPI, the price subindex of the earlier released manufacturing PMI is not boding well for the July number. The commodity prices declines were pronounced on the domestic side, with oil prices up 3.4%MoM but rebar prices down -3.6%MoM.
   
• CNH: China Money Supply (M1, %YoY) Jul – Citi Forecast -5.0, Consensus -5.0, Prior -5.0; Money Supply (M2, %YoY) – Citi Forecast 6.2, Consensus 6.0, Prior 6.2; New Yuan Loans (CNY bn) – Citi Forecast 350, Consensus -72, Prior 2130; Aggregate Financing (CNY bn) – Citi Forecast 800, Prior 3300 - despite the soft data, credit growth as well as monetary base growth could find a tentative trough in July. The focus could be particularly on M1, and its stabilization could mark a conclusion of deposits clean-up since this April. July is a low season for new credit, and this year is no exception amid weak domestic demand. Government bond issuance (RMB673bn this July) and corporate bond issuance (RMB292bn) may not be able to offset weakness in the non-government sector. PBoC’s rate cut in July may not have much impact for this month’s data.