Soft US jobs data knocks the dollar
June payrolls, published July 2nd, showed just 57k net payroll gains last month, well below consensus estimates, which had forecast a 113k increase.
The remainder of the jobs report proved similarly underwhelming, ignoring a small drop in the unemployment rate, which owes more to a falling participation rate than any underlying economic resilience. Coming after two months that saw solid nonfarm payroll beats recorded, this latest data has helped to dent a growing Fed rate hike narrative, and in turn, the dollar.
Now, admittedly, we have been somewhat sceptical of the strength observed in recent payroll numbers.
But with that in mind, we are not all that surprised to see May payrolls revised sharply down from 172k to 129k, with two-month payroll revisions of -74k all told.
The details are hardly much better, with leisure and hospitality employment recording a notable -61k decline in June, with losses broad-based across sub-categories. If not revised away in the coming months, this would be all the more alarming given the World Cup is currently in progress, an event which might reasonably have been expected to prompt job additions.
Payrolls composition aside, average hourly earnings rose 0.3% MoM in June, unchanged from May, albeit enough for yearly pay growth to rise from 3.4% to 3.5%.
That was, however, as expected by economists. More surprising was a drop in unemployment, with the rate slipping from 4.3% to 4.2% in June. That said, labour force participation dropped three tenths last month, from 61.8% to 61.5%, a level last seen in 2021 during the Covid-19 pandemic. The rate stood a full percentage point higher as recently as last November, and the speed of decline gives us pause for thought. That month, curiously, coincided with the recent peak in unemployment, at 4.5%. Our sense, therefore, is that the labour market might be somewhat looser than indicated by headline unemployment figures, even if this isn’t being captured in official data.
Still, the implications for the Fed are clearly dovish relative to pre-release market pricing. Traders have trimmed rate hike bets, pushing back expectations for a full rate increase from October to December, and cutting July hiking odds to just 20%.
Granted, we think markets still need to go further, given our baseline call for no change in the federal funds rate throughout the remainder of the year.
But if price action is indicative of likely dollar fortunes, this looks ominous, with the DXY index shedding roughly 0.6% in response to these latest figures.