Top of the Morning: July Jobs Report, FOMC takeaways, & the week ahead
The desk interprets the July Jobs Report as a signal of weakening labor market conditions, which may steer the Federal Reserve towards a more dovish stance on monetary policy. According to insights from UBS, the report revealed a disappointing addition of only 73,000 jobs, significantly below the 104,000 expected, coupled with substantial downward revisions totaling 258,000 for prior months. This context raises concerns about future payroll growth and suggests potential implications for interest rates going forward, as weak employment data typically leads to reduced upward pressure on rates and a more cautious approach from the Fed.
What the desk is arguing
The desk views the July Jobs Report as indicative of a slowing economic momentum in the U.S., as reflected in weak job creation and rising unemployment rates. Per the full note from UBS, the unemployment rate increased to 4.2%, signaling headwinds in labor market conditions, particularly as poorly performing sectors outside of healthcare posted stagnant growth.
Additionally, while wage growth slightly exceeded expectations with average hourly earnings showing an uptick, the broader implications of slower job additions may overshadow this positive note. The desk anticipates that the combined effect of tariffs and structural labor supply constraints will further depress payroll growth as the year progresses.
Where it sits in our coverage
Our consensus target for the USD relative to the EUR stands at 1.075, with a range between 1.04 and 1.12. Relevant forecasts include the following: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with the estimates from jpmorgan, who also maintain a cautiously optimistic outlook relative to current realities, while it deviates from bofa, who foresee stronger movements towards the lower bound. The desk is situated closer to the upper limit of the anticipated range, reflecting a nuanced view of the labor market impact on monetary policy shifts.
How other firms see it
Firms like jpmorgan and goldman agree with our finding of potential labor market slowdowns, emphasizing the Fed's dovish future outlook in light of disappointing employment data. Conversely, bofa and citi maintain a more bullish stance, arguing for resilience in economic indicators that contrast with the current jobs narrative.
The implications of this labor market data will reverberate across USD/EUR currency flows, particularly as central bank policies are influenced by economic health signals like job growth and wage inflation.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01July Jobs Report showed only 73,000 jobs added, significantly below expectations.
- 02The unemployment rate rose to 4.2%, indicating deteriorating labor market health.
- 03Wage growth remained a bright spot, but broader economic pressures loom.
- 04Expect a dovish Fed response due to weak payroll growth projections.
Market implications
Traders should monitor the USD/EUR pair closely, particularly as it approaches the 1.075 target level. The implications of the job report could galvanize further discussions around interest rates leading up to the next Fed meeting.
Risks to this view
Should upcoming economic indicators show unexpected strength in the labor market or consumer spending, the current bearish outlook on jobs may be overturned, leading to a tightening of monetary policy and potential upward pressure on the USD.
Hi everyone, Siobhan Chapman here, and welcome to Top of the Morning on the UBS Market Moves podcast channel. It's Friday morning, which means it's time for the Week in Review and Preview conversation, where my guests will recap how markets have performed over the past few sessions and preview what you can expect in the week ahead. Joining us today, I'm glad to welcome asset allocation strategist Danny Kessler.
Danny, welcome. We're happy to have you. Thanks for having me on, Siobhan.
Happy to be here. Happy Friday, everyone. Happy Friday, Danny.
So let's get started. Let's begin with the July employment report. How did the data come in and how would CIO characterize the current health of the U.S. labor market?
Sure, Siobhan. This report was just released only a half hour ago. The data from the report is weak in our view.
The economy added 73,000 jobs in July, which is well below the 104,000 consensus number. The two-month payroll net revisions were also a massive downward revision totaling 258,000. The details within the report, if you dig deeper, are also still weak, with the healthcare industry adding 73,000 jobs alone, meaning that payrolls added from all the other industries sum to zero.
The household survey was weak, with the unemployment rate ticking up to 4.2% despite another decline in the participation rate. So we are expecting slower payroll growth in the second half of the year as tariffs start to have a larger impact on the economy, and this labor report is the first of the year that squarely aligns with this outcome. Slower payroll growth will be supported by the immigration crackdown, which is likely to limit labor supply growth and any increase in the unemployment rate.
Moving to a different aspect of the report, wage growth did remain supported, with average hourly earnings coming in slightly above consensus, and the employment cost index report from the second quarter also okay. So that was the one sort of bright spot from the report. There were also a couple other labor market data releases from earlier this week, including weekly jobless claims yesterday, with initial and continuing jobless claims both coming in slightly below consensus estimates.
That's a welcome sign, but not one that carries much weight given the small size of the difference and how noisy the data can be. The June jolts or job openings and labor turnover survey was also released earlier this week, with job openings, the hiring rate, and the quits rate, which is a key measure of worker confidence, all continuing to fall and coming in below consensus. Layoffs and discharges were little changed, with the rate staying steady at 1%.
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