Implications of US jobs data and possible Japan election

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research Global Markets, EMEA and International Securities. It's Friday 9th January 2026 and joining Derek to post some questions on the financial market themes for the week ahead is Sara Mackey, an MUFG graduate analyst. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.

Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Good afternoon, Derek and everyone that is listening in today. Happy Friday.

Indeed. Derek, thank you for joining us today. How are you doing?

I'm very good, Sara. How are you? Doing very well, thanks.

So I thought I would start off today's podcast by mentioning possibly the most important data release of the month, the NFP release. So I thought you can start us off by telling us what your main takeaways are from the recent payrolls report. Yeah, like is often the case, Sara, a bit of a mixed bag.

And when you look at market pricing, just before we came in to have this chat, you know, we haven't had too much of a move. So I think that the net takeaways are that the kind of perceptions of investors in terms of the health of the U.S. labor market has not really been changed by today's data. So you know, the NFP print 50K, definitely on the weaker side of the consensus, certainly if you include in the two month revision of minus 76,000, the print was definitely weak.

The broader sectors, there was a wider number of sectors that reported job losses. The caveat was the unemployment rate dropped and we had a pickup in average hourly earnings, the annual rate picking up to 3.8%. We know from Powell's communications that the Fed focus a lot on the unemployment rate.

There's been this issue in terms of the over-reporting of non-farm payrolls. So that's still an issue. So I think given the drop in the unemployment rate, and you know, it wasn't a dramatic drop, but it dropped from 4.5 to 4.4%, 4.375% to be precise, it was in the right direction.

And in that sense, as I said at the beginning, the takeaway of investors is that the labor market is still relatively weak. The market is pricing for the Fed to cut rates going forward, but certainly there's no urgency to do that. And the pricing at the moment is for the Fed not to cut until June.

We think that's maybe a little bit too late, but there's not enough in this payroll report for the markets to take any kind of alternative view at this point in time. Some releases show stronger performances in the US economy, while others not so much. Why do you think there's a divergence in performance between the economy and the labor market?

So why has this happened? Do you think it's going to continue to happen? Yeah, like I said, I guess there's a number of different points you could make on that.

One obvious one is that the labor market is a lagging indicator. So the activity data that you've referred to, for example, the services, the ISM services certainly picked up, you know, some of the data is suggesting strength. So perhaps we're about to see some improvement in the labor market, given it's a lagging indicator that is certainly possible.

The other idea is, of course, that something is happening in relation to productivity growth. So we have the productivity data yesterday, another quarterly strong growth in productivity. In fact, if you take the Q3 data and the previous quarter of the Q2 data, combined just on those two quarters, it was actually the strongest productivity over a two-quarter period since 2003.

So quite considerable. Probably better to look at the four-quarter average because it is volatile. That's still only at 2%, but the most recent quarters tells us that maybe something is happening in terms of productivity, and in that sense, you could get better data while the labor market is relatively weak.

And supply story as well, obviously, given Trump's policies in terms of immigration, supply disruptions means payroll data is coming in weaker than expected, but all of that should wash out. We should have, I guess, a clearer picture in terms of where we are, certainly by the middle of the year. Yeah, definitely.

So there have been quite a few data releases. You've mentioned them. The ADP release was up 41K.

While it did go up, it was below the market expectation of 50K. And showing a general slowdown in hiring, we had the ISM services employment up 52, signaling the economy returning to expansion, and the initial jobless claims layoffs at 208K. So I was wondering, how would you interpret the resilience of the dollar despite these mixed labor market data releases?

Well, I guess if you look at the dollar from a bigger picture perspective, last year was the worst year for the dollar since 2017. So we had a big drop, just around 9.5%. So we have kind of dropped pretty substantially.

And you do have the kind of dual mandate that you have to consider when the markets are interpreting what the labor market means for monetary policy. Now, of course, the Fed have cut rates, but inflation is still at relatively high levels. So when you look at labor market data, I guess investors can't just purely trade rate expectations based on that.

They've got to incorporate the risks on the inflation side. And of course, we've got the inflation data on Tuesday. So let's see what happens on that.

But certainly if inflation was to start coming down more notably this year, which is a very we think, then that should open up the potential for the Fed to possibly do more than what's priced to the market at the moment. And if that was to materialize, then I think you could certainly get kind of a leg of the dollar dropping again, which again is our view for this year. Okay, great.

We're also waiting to see how the Supreme Court will rule on the Galileo of Trump's tariffs later today. So what are your expectations ahead of this decision and how could that impact the dollar? Yeah, there's lots of, I guess, caveats to it or interpretations.

And I would be honest and say it's not clear cut. On the face of it, I would argue that if the Supreme Court rules against the Trump administration, which looking back at the oral hearings, looking back at the arguments that the Trump legal team made, which partly one legal argument was that the tariffs have nothing to do with tax policy, which obviously sits with Congress, not with the White House, which of course is absurd when you're talking about tariffs all the time and the trillions of dollars that are going to be raised. So the oral hearings would certainly suggest some skepticism and possibly the Supreme Court ruling against Trump administration.

What that would do obviously is create a renewed bags of uncertainty in terms of trade policy. And we know from last year that that hasn't been good for the U.S. dollar. Now, of course, the Trump administration will have Plan B if they do rule against IEPA being used.

I guess to answer your question, how the dollar responds will partly be about how quickly Plan B is implemented and what we know about Plan B. How all-encompassing will it be? I think it'll be less all-encompassing than reciprocal tariffs.

So what you would assume is that the tariff revenue projections will come down. That could steepen the yield curve, especially given a less all-encompassing tariff regime could reinforce expectations of lower inflation, putting downward pressure at the front end of the curve, less tax revenues putting upper pressure at the long end of the curve. If you get a curve steepening momentum, that would certainly coincide usually with dollar depreciation.

The only caveat is that, of course, you could get a perception of it being more growth positive for the U.S. If companies are being taxed less, let's say the Trump administration is less aggressive in introducing a Plan B, then you could get a better, rosier picture in terms of the U.S. economic outlook, and that ultimately could be dollar positive. You know, the truthful answer is there's different ways of interpreting it.

But certainly if you look at last year, the period of trade uncertainty coincided with very notable declines in the dollar. If that kind of link was to be maintained, you would argue that it would be net dollar negative, but certainly far less negative than what it was in 2025. Yeah, well, I guess we'll have to wait and see what happens later today.

Indeed. Well, yeah, it should be today. We don't know 100 percent, but I think they'll definitely give that ruling, but certainly the markets will.

I would like to move on to Japan because we had a bit of breaking news today. So Prime Minister Sanae Takaichi is considering dissolving the House of Representatives and calling for a snap general election likely to take place early to mid-February. So in addition to that, the dollar-yen has been trading close to recent highs.

So do you expect the yen weakness to continue at the start of this year? Yes. Like, I think this could be quite a notable story, certainly if it is confirmed.

The obvious implication is that given the fact that the LDP at the moment, because of the loss of the election last year, have lost their majority in the lower house, a lower house election victory obviously would give Sanae Takaichi the endorsement of the electorate to pursue her policies. Obviously, the market's perception of her policies today is that she's a reflationist, that she's less concerned about inflation, and that would obviously just feed into the risks of the BOJ remaining behind the curve, steepening the yield curve, creating, you know, potentially greater volatility in the JGB market, and ultimately resulting in, I'm sure, the yen weakness. The other difficulty, Sarah, is the fact that, you know, when we get towards 160, you're right, we've just broken the highs from December and November, so we're back trading above 158 levels we haven't seen since the beginning of last year.

So, intervention would normally be, you know, a potential scenario that would notably reverse the yen, but it's going to be very difficult for the MOF and the BOJ to conduct successful intervention in the face of political uncertainty when there's the risk of Takaichi being endorsed by the electorate for pursuing more of the policies that have ultimately been weakening the yen over the last couple of months. So, this could get very interesting. We'll have to wait and see whether this is confirmed, but if it is, I can only see a breach of 160, to be honest.

It may be that the MOF decide not to intervene and wait and hope that the market kind of settles at just modestly higher levels. But, of course, intervention, they may be compelled at some point, but the idea of intervention turning the yen lower in these circumstances, that's very unlikely. Yeah.

And this weakness in yen, while good for Japanese export competitiveness, it's a dangerous game to play when it comes to imported inflation. And as you say, the Japanese bond markets are becoming increasingly vulnerable. So, yeah, you're completely right in saying so.

This increase in spending, and especially if the prime minister wins the support, it could be very risky. Do you think they might even risk a crisis? Should we be watching Japan closely this year?

Yes. Like even before this news broke today, we've done some analysis in terms of JGB spikes in yields and what happens in FX. You know, usually higher rates is supportive for the currency, but we're seeing increasing episodes where moves higher in JGB yields.

We did the analysis specifically on 30-year yields. It results in yen depreciation. So, what we do know is that investors are incorporating a fiscal risk premium into FX, and we know investors are becoming more nervous about, again, the BOJ being behind the curve, negative real rates persisting for longer than expected, and that resulting in further yen depreciation.

The only counter is that, of course, yen weakness, as you said, is a dangerous game because it's so unpopular with the Japanese households, who link, understandably, yen weakness with inflation and the cost of living. So, if we see a dollar yen breaking north of 160 ahead of an election, there's obviously a risk there that that could undermine her support. So, they do need to control what they're trying to do, otherwise it becomes counterproductive and the governments become unpopular.

So, it is a balancing act, but it's definitely a risky game, as you said. Yeah. Well, we have interesting times ahead.

Indeed. Yeah. Thank you so much for being here, and thank you for everyone listening in today.

I hope you all have a lovely weekend. That's great. Thanks, Sarah.

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