Hiring in July Posts Net-Decline

MACRO FRAME

July’s report was unambiguously soft on payrolls and revisions, although the unemployment rate edged down to 4.1%. The key signal is a three-month payroll run rate of only +20,000 per month after revisions, well below the prior 12-month average of +34,000.

STOCK INDEX FUTURES

Equity index futures moved hire following July’s labor report, which saw a surprise -23,000 reading alongside downward revisions to May and June’s report. The fresh data could revive concerns over a soft labor market for policymakers at the Fed and favor an indefinite hold in the policy rate, although the unemployment rate edged down to 4.1%, reinforcing a low-hire, low fire regime. The Dow and S&P 500 heading for their best week since April and the Nasdaq for its strongest since May as a run of positive AI‑related results restores confidence that heavy technology investment is translating into revenue growth. Atlassian is up more than 30% on a strong cloud‑software outlook, Microchip is up nearly 9% on an above‑consensus revenue forecast and Cloudflare is higher after raising full‑year guidance, supporting breadth across semis, software and cybersecurity. With results that highlight spending in the AI space is starting to generate returns, the greatest risks to the revived rally remain a lack of clarity over the Strait and the Fed’s reaction function. That leaves the indexes vulnerable to another breakdown in peace talks and a “surprise” hike from the Fed. Otherwise, strong earnings growth for the indexes as a whole point an outlook supportive of the equities.

On the geopolitical front, the White House imposed price floors and a 15% tariff on products made from polysilicon, the key input used in semiconductors and solar panels and largely produced in China. Crude has maintained a range near $82bbl, reviving some inflation sensitivity though markets have largely welcomed the current levels as less inflationary than at previous levels during the war. Uncertainty and tensions remain high: Houthi forces say they attacked Saudi oil tankers near Yanbu in the Red Sea and in the Gulf of Aden. Iran is reportedly reviewing a bill that would bar US, Israeli, and other “hostile” vessels from Hormuz and fine violations by as much as 20% of cargo value.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting

CURRENCIES

US DOLLAR: The USD index is sharply lower, breaking below the 99.50 level in the wake of nonfarm payrolls. Traders have reduced expectations of a Fed hike at September’s meeting following July’s labor data. Markets are pricing below a 40% chance of a hike next month compared to 70% at the beginning of the week, although a move higher in December is still fully priced in. The low-hire, low-fire regime as evident by the drop in the unemployment rate, is likely to keep expectations of a hike within the next four meetings intact On Wednesday, Fed Governor Lisa Cook made comments that she was open to raising short-term rates, while San Francisco Fed President Daly reiterated her support for the bank to hold on rates. The dollar is likely to lose further near-term support in the form of policy-rate expectations, between the Fed and ECB.

Watch point: With July’s meeting being taken as dovish and a weak hiring report for July, ECB-Fed policy expectations are likely to favor the EUR unless US inflation data shows underlying price pressures remaining firm.

EURO: The euro is 0.47% higher to $1.1578, gaining fresh momentum following the US labor data. Money market are pricing a 75% chance of a hike in September, diverging sharply against September pricing for a hike at the Fed. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction. European spot crude prices are likely to keep bond yields and tightening expectations elevated, unless a credible flow of tanker traffic through the Strait is maintained. In the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated compared to pre-war levels.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is 0.36% higher at $1.3503. Today’s US data is favorable to the Sterling, though its upside is limited compare to the EUR and markets are less confident that the Bank of England will raise rates this year compared to the ECB. The BoE largely awaits further data to assess inflationary pressures and weigh a potential rate hike. Investors are pricing in 23bps of tightening by year-end, with a hike not fully priced until the February 2027 meeting. Tightening expectations have unwound materially over the past month, as Governor Bailey’s comments have suggested a wait-and-see posture from the bank, while economic worries present hurdles to policy tightening.  The Times reports Treasury officials are exploring raising billions of pounds in extra borrowing by using the flexibility created by the revised fiscal rules. Markets have taken this calmly so far, the current framework allows for more borrowing strictly for investment without breaching headline rules. Largely, the market appears to be digesting this as a shift toward growth‑friendly public investment rather than fiscal loosening.

JAPANESE YEN: The yen is 0.80% stronger at 157.15 yen per dollar. While today’s US data is friendly to prices, a shift in fundamentals is needed to fully reverse the weakening trend the country’s large debt overhang and Taikichi’s expansive fiscal policies, including her favoring a weaker yen are structural problems that are unlikely to buck the trend. BoJ policymakers debated mounting price pressures at their meeting in June and the need for higher policy rates according to meeting minutes. The debates highlight a growing focus on inflation inside the board, while most members said the pass-through from higher oil prices had moved at a relatively fast pace for business-to-business transactions, which could spread to consumer prices. The minutes have lifted expectations of a September rate hike from 36% to 51%.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.58% higher to $0.7074. An increase in risk-sentiment across the globe and strong consumer spending data in Australia has lifted the Aussie above the $0.70 level in recent days despite market expectations of a year-end rate hike remaining dull. Meanwhile, today’s US data is proving friendly to prices. Household spending rose 0.8% in June, driven by electric vehicle sales, per the Australian Bureau of Statistics. Spending for Q2 slowed a tick to 0.7% in real terms. While the data does support the Reserve Bank of Australia’s hawkish stance, Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates. Second-quarter inflation in Australia came in below forecasts, the downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see less than a 4% chance of a hike next week, 15% in September, and are pricing the chance of year-end hike just under 50%.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields dropped across the curve as July’s labor report showed hiring was much lower over the past three months than previously believed. Revised May (+63,000), June (+20,000), and now July’s (−23,000) total add just +60,000 jobs over three months. That is a major deceleration from an already subdued +34,000 average monthly gain over the preceding year to land at a rate of +20,000 a month over the preceding three months. Hiring was weak across most sectors, with healthcare being the only bright spot in the report at +22,000, though that rate of hiring is weak. The headline unemployment rate fell to 4.1%, thanks to the participation holding at 61.4%, though it is down 0.7% since January, while the employment-population ratio has fallen 0.5% over the same period. For Treasuries, the report is supportive at the front end as it raises labor-market downside risks for policymakers at the Fed.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while today’s report raises the risk that a slow labor market may be emerging.

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