UBS ON AIR
Loading…
FX BANK FORECAST · COVERAGE
Institutional FX coverage in your inbox
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
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.
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.
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.
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
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%.
While the declines in openings, hiring, and quits are not large, they are beginning to show a pattern of a softening labor market as workers and businesses remain cautious on change amid economic uncertainty. The moderation and demand for workers could lead to slower payroll and wage growth in the coming months, and that's what we started to see in today's labor report, which was, again, squarely weak. Moving outside of jobs data, we had a reading on Q2 GDP.
What did the data reveal about U.S. economic growth? That's right, Siobhan. Yes, Q2 GDP was released on Wednesday, and the number came in above consensus, with headline growth at a surprisingly high 3%.
While this might seem like great news for the economy during tariff worries, the details of the report are less encouraging. The headline number largely reflects swings in imports. Decrease in imports added over 5 percentage points to GDP.
So, details of the reports do indicate a moderation in economic activity. Business investment slowed sharply while residential investment declined further. Consumer spending also registered its weakest consecutive quarters since the pandemic.
The main positive to take away from the details is that tailwind from artificial intelligence is keeping business investment afloat. These details are in line with our base case for U.S. GDP growth to slow to around 1.5% this year as the direct and indirect effects of trade tariffs feed through the economy.
At this point in time, it does not appear that we are headed for a recession, and the one big beautiful bill may be modestly stimulative to help keep us there in that regard. Turning to the Fed, what are the takeaways from this week's meeting, and what is CIO's outlook for monetary policy through year-end? Yes, that was definitely a big event to be watched this week, Siobhan.
The Fed decisions are always watched with close eyes. But the decision and following press conference were largely another non-event as the Federal Open Market Committee held rates steady for a fifth consecutive meeting, defying pressure from the White House to ease monetary policy. Chair Jerome Powell remains noncommittal in his remarks.
The most notable aspect of the meeting was that two governors submitted dissenting votes for the first time since 1993, with both Governors Waller and Bowman voting in favor of a 25-basis point cut. During the press conference, Chair Powell reiterated his view that the labor market is well-balanced and at or near maximum employment, highlighting that the latest readings on both the unemployment rate and job openings are close to levels from a year ago. With inflation remaining stubbornly above target and likely to be pushed higher by tariffs, Chair Powell stated that the Fed's mandates suggest it is appropriate to keep a somewhat restrictive monetary stance for the time being.
The forward guidance that Chair Powell did provide was focused on upcoming data releases, including the labor report today, as he noted that the Fed will get two months of inflation and labor data before the next meeting on the 16th of September. We also see the upcoming data as crucial. CPI will be released on August 12th, and then the Kansas City Fed will host the 2025 Jackson Hole Economic Symposium from August 21st to 23rd, giving Chair Powell another chance to communicate his views after seeing the subsequent data.
So market pricing for the probability of a September Fed rate cut was over 90% in the final days of June, but that number had tumbled to nearly 40% as of yesterday. Following today's weak employment report, the odds have spiked back up over 70%. Given the range of views among FOMC members, it's difficult to say just how weak the upcoming data will have to be to trigger a September rate cut, but today's labor report definitely lends credence to starting rate cuts.
On the labor data, the unemployment rate is likely more important than payroll growth, as the loss of immigrant workers is affecting labor supply, and rising unemployment would be the best indicator that the labor market is falling for maximum employment. The down on revisions to payrolls today is concerning, while the falling participation rate is also a sign of weakness. We will keep a close eye on initial jobless claims and layoff announcements as well.
Within CPI, a further slowdown in core services inflation would make it easier for the Fed to cut, even if a tariff-driven increase in goods prices pushes overall inflation higher. As Powell noted in his comments, it's also crucial that long-term inflation expectations remain well anchored to the Fed's 2% goal. So our base case does remain for 100 basis points of total cuts starting in September.
So we are coming to the end of our conversation, Danny. What is taking place next week that investors should be mindful of? Yeah, so next week is a lighter week as far as economic data goes, with the big release of the week being the ISM Services Index on Tuesday.
Monthly trade data will also be released that day, which may be more scrutinized given the current trade climate. Monday will have a number of production data releases, including factory orders, durable goods, and capital goods orders. Thursday will have the weekly jobless claims data with the labor market and focus for the Fed and for rate cuts.
Outside of economic data, we are in the heart of earnings season, with some big names from consumer, healthcare, and industrials reporting next week. And of course, tariff announcements are always something to keep an eye out for this year. Okay, perfect, Danny.
Thank you so much for joining us. Thanks for having me on, Siobhan. Such as UBS Trending.
You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit ubs.com slash CIO to view the latest research.
UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG, or its affiliate, UBS. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient, and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at UBS.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.
How we cover this story
See how the Federal Reserve outlook moves the USD bank consensus across 30 desks
View Federal Reserve outlook