Friday’s US labour market data would have disappointed those investors betting on a 50bp Fed rate cut later this month. Although the rise in payrolls growth was smaller than expected, and downside revisions to past data were significant, the separately-measured unemployment rate ticked lower and earnings growth rose more than expected. It was a bit of a mixed employment report, which offered more support to a 25bp Fed rate cut later this month. Having said that, history suggests that the data are likely to be revised lower in the future, and one also cannot discount that job growth in the US now is of much lower quality than before, made up primarily of part-time growth. Additionally, when digested holistically with other labour market data, such as last week’s soft JOLTS job openings print, it is clear that the US labour market is weakening, and fast.
In this context, the dollar remains somewhat vulnerable, still trading at highly overvalued levels into the turn of the business cycle. The market is looking for a catalyst to reignite a bearish USD trend, and while Friday’s employment data did not suffice, this coming Wednesday’s CPI numbers might. A downside shock would likely be needed for that purpose, however, given that it is now widely accepted that the Fed has inflation under control, with its focus now on the labour market. Another potential catalyst in the week ahead is the ECB’s policy update. Although a rate cut is all but certain, and, consequently, priced in, less-dovish-than-expected forward guidance might provide the euro with some support and weigh on the general attractiveness of the dollar. Suffice it to say that it could be another volatile week for the market, which is to be expected at the end of a business cycle.