Post NFP Call

Hello, and welcome to Global Research Unlocked, the interest rate and effects series. This podcast is based on our weekly client conference call where our strategists, along with guests from other parts of BYA Global Research, discuss the most topical and pressing questions faced by our market. I'm Ralf Preusser, head of Global G10 rates and effects strategy.

Today is Thursday, 2nd of July. I'm joined today by Aditya Bhave, U.S. Chief Economist, Mark Cabana, co-head of Global Rates Research, and Alex Karin from Effects Strategy.

Thank you all for joining. Aditya, let's start with you. A disappointing number, lower than consensus, backward revisions.

What's your first take? Thanks, Ralf. Good morning, everyone.

Thank you for joining, and happy 4th. It was a soft number, payrolls well below expectations with meaningful downward revisions. That said, a lot of the weakness in the number appears to be due to one-offs, both in the May print, which was driven by a 61,000 drop in leisure and hospitality, that's likely due to seasonal factors, and also the revisions, which saw some of the anomalous numbers from last month marked down.

What matters from our perspective is the three-month growth rate of non-farm payrolls is still a very healthy 111,000, well above where we think breakeven is. We think it's at 20,000, even if it's a little bit higher. The case remains that we're well above breakeven.

And then also, the unemployment rate fell. It fell for bad reasons, to be clear. There was a huge markdown in participation, which again appears to be a bit of a one-off.

And so both employment and unemployment in the household survey declined, but they netted out into a drop in the unemployment rate. So in fact, it helps that the unemployment rate fell. Does it help as much given the drop in participation?

No, right? If we had had a 61.8% rate instead of 61.5, and a 4.2% unemployment rate, this would have been much more hawkish. But at the end of the day, the Fed views the unemployment rate as the core measure of balance between supply and demand in the labor market.

It's worth noting that the only labor market measure that the Fed projects in the SEP is the unemployment rate, not payrolls, not participation. And the range of forecasts for year-end 2026 for the unemployment rate is 4.3% to 4.4%. So nobody expected it to fall to 4.2% by the end of the year.

We're already there. Will we stay there? We'll see in coming months.

But I think that offsets some of the dovish read of today's number. Thanks, Aditya. You preempted my question about the unemployment rate, so thank you for the thorough review.

Clearly, with this number, there's no urgency for the Fed to hike in July. There was still some speculation in the market about whether or not a July hike was possible. That seems less likely.

I guess I'll rephrase the question a little bit differently. What gets the Fed over the line to hike in September, which is your view? So I'll say a couple of things on that.

I still think July might be live in the sense that the labor market looks okay. Maybe it doesn't look hot, but I don't think the case for rate hikes was really an accelerating labor market. Would that have strengthened the case?

Sure. But the case was more premised on inflation being somewhat sticky and uncomfortable, and I don't think that story changes. So in a sense, July could get back on the table in terms of market pricing if you've got a strong core PCE.

I wouldn't rule that out. And then in terms of September, it's the same thing, right? Let's say that we're sitting here in September with an unemployment rate of 4.2%, and maybe participation has recovered a little bit by then, and we're still at 4.2.

With the same inflation problems, we know there's going to be a revision to the inflation data, but that revision is only going to address the one-offs that most folks are looking through anyway. So if you're still holding on to an outlook of 3.3% core PCE inflation by the end of the year, which is what the Fed has, with an unemployment rate that's at or below the SEP projection for the end of the year, then I think the case for rate hikes remains. Thanks, Aditya.

Mark, let's come to the rate market reaction. Obviously, we saw the curve fall steep and decently on the release. To what extent do you think this is an overshoot?

And then, I guess, related, how much of that reaction would you explain by positioning going into the number? Sure. Thanks, Ralph.

So in terms of overshoot, at least as I see it right now, the two years down about four basis points and the 10 years about flat. So we have four basis points of a bull steepening. And to me, that doesn't feel like a terrible overshoot.

What I think the market has taken from this data is that now the Fed has more time to assess incoming data. And the case for a July hike has been reduced. Really, the way I've been thinking about it is it's like the wind is just coming out of the sails a little bit for the Fed needs to act soon type of argument.

And that seems very consistent to me with how rates have moved today. July moved from roughly eight basis points of hikes to five. Total hikes moved from about 45 to around 37 over the next one year.

That all seems reasonable to me, given the data that we have. Because at least what I see in the data is that a clear increase in labor momentum is not as strong as, let's say, the last couple of months might have implied due to the data that we got today, as well as the subsequent revisions. Now, as everyone knows, under the hood, there are some sort of funky things going on, especially in the household survey.

Very big drop in labor force, both employed and unemployed as well. That took the unemployment rate lower. And when you see big moves like this, I think it's natural to pick the signals with a grain of salt.

So what I would imagine that the Fed is doing is thinking, labor market is still solid. It doesn't look like it's accelerating quickly. And we do have some time to assess further incoming information.

And I think that's essentially what the market has done. On positioning, we do think that positioning was short the front end from the fast money and the trend following community, so think CTAs. If we were to see a further softening in upcoming U.S. data, especially with ISM services next week, and then we're going to get into some inflation readings towards the middle of the month, if that data turns quite soft, then there is much more of a potential for short covering.

But I don't think that it was a terribly large driver of the moves today, given that the labor data does indeed indicate less urgency for the Fed to respond. Thank you. So what are your core views on the rates market today?

Yeah, so core views is that we still think that the risk of Fed hikes is somewhat underpriced, have less conviction after today's data. But look, when we take a step back and assess the U.S. macroeconomy and work closely with the DTN team on their views, it does seem like the U.S. economy is still in really solid shape. You have a lot of investment.

We all know the tech and AI story there. You have a consumer that seems to be holding up incredibly well. They were robust and resilient through the oil price shock.

They continue to be indicating that they're quite happy to spend, probably a wealth effect story in there, along with the solid labor market story as well. And then when we think about robust spending, healthy labor market, I do think it is natural for one to question, well, how quickly will inflation fall? And will that inflation drop potentially test the patience of the Fed?

So we still think that with the market that's pricing, let's call it 37 or so basis points of hikes from the Fed over the next year, we do think that that can change if you see inflation that remains icky or doesn't fall quickly. And that can also change if you see a labor market that is showing some signs of strengthening beyond the data that we got today. So if you are of the view that the pricing of hikes from the Fed is insufficient, then that would likely indicate that front end rates move higher.

That would indicate a flatter curve. And I would think that we continue to see that play itself out. And globally, I do think that we are still in an environment where the U.S. is expected to be a relative macroeconomic outperformer.

And you are then likely to see that U.S. rates remain more elevated in relation to the rest of the world, especially if you're not seeing as robust growth in other countries. And that I think applies certainly to areas like Europe, and it also applies to areas like Canada and Australia. The Canadian story is exacerbated by ongoing uncertainty around the USMCA trade negotiations.

And this week, we obviously got some information on that front. So those negotiations are going to be drawn out for a longer period of time. And that uncertainty will likely have more of a negative impact on the Canadian economy than it does on the U.S. economy.

Thank you, Mark. Alex, the dollar didn't like the number either. Same question, I guess, to you is to Mark.

How much of that do you think is an overshoot? Do you think the market action is fair? And what role did positioning play?

Yeah, thanks, Ralph. The dollar is down about close to half a percent across the board, give or take. It's consolidated a bit here, just kind of off the lows.

And to your question, I mean, look, I do think positioning is relevant here. The report arguably tilted soft. I wouldn't say it was demonstrably soft.

But I do think on the margin, positioning was playing into it. And just to kind of back that up, I mean, as we noted coming into the report, just looking at least at the spec community as a proxy, we've seen over the last, say, six weeks or so, positioning has really gone from kind of like flat the dollar all the way up to sort of the higher end of net long that we've seen over the past several years or even like beyond the last decade. So we've had a big shift in positioning.

Our sense is that, indeed, this is a bit more of a hedge fund story than a real money one. I think real money is looking a bit more neutral here. I do think it mattered.

But on that, I think the narrative around the labor market coming into today just had been pretty universally positive anyway. So not really surprised that we got the directional pullback on the dollar here, kind of regardless of where positioning was. And at the same time, I don't really see it as sort of a game changer either.

But maybe on the margin, there was some positioning aspect to it. I think similar to Mark. I mean, it's not like we're looking at a massive oversized move in FX either.

Thank you. So what's your dollar view for the remainder of the year and maybe more importantly, what supports the dollar through the summer, given the new forecasts you and the team published last week? Yeah.

So directionally, we do like it higher, at least through the summer. And I really don't see enough here today to really change that view. I agree that there's a strong case to be made for the Fed, if they want to get inflation back to 2%, that there'll be rate hikes to come.

And I don't think this is an objective that Warsh seems to be shying away from. He reiterated this yesterday in Cintra. And I'm fully supportive of our view that we have more Fed hikes to come.

Unless they get lucky on the inflation side and fast, this theme isn't really going to go away. And today's data doesn't really change that. I would expect over the course of, say, the coming months, this to get a bit more priced in both to the rate side and by extension to the FX side.

So even if July is off the table, we will see. We've got more data to come on the inflation side. But I do think that sort of, I guess my base case would be that we kind of gradually see this get priced into the dollar higher.

But events like today maybe just make it a bit less of an abrupt repricing and maybe a bit more of a gradual one. That said, that's sort of the U.S. side. And then on the other side for the dollar, and Mark alluded to this, and I totally agree, I mean, there's much less of a case in many other corners of the G10 for the hikes that are currently priced into those curves, just kind of based on where we see headline inflation coming down as oil comes down, especially for a lot of the importers in the G10.

So I think that case is waning. There's still price in, albeit less so, but still price for hikes in many other economies. So on the other side of the coin, so to speak, that should be dollar supportive as well.

So it also kind of plays into our dollar view for the summer. Just by a point, I mean, would I feel better if positioning was cleaner here? Back to your first question.

I mean, yes. But you know, what can you say? You can't have everything.

But ultimately still, I don't think that's going to be something that stands in the way of a more fundamental move higher. Thanks, Aditya. Thank you, Mark.

Thank you, Alex. Thanks for joining us today. We hope you found this useful and that you'll tune in next week. securities trading research strategic advisory and other investment banking and markets activities are performed globally by affiliates of Bank of America corporation including in the United States B of A securities Inc a registered broker dealer and member of FINRA and SIPC and in other jurisdictions by locally registered entities copyright 2026 Bank of America Corporation all rights reserved