Weak Jobs Lift Rate Cut Hopes (6 – 10 July)

Global markets ended the week with improving risk sentiment after weaker US employment data reduced expectations for further Federal Reserve rate hikes. The US dollar posted its steepest weekly decline since April as June payrolls missed forecasts by a wide margin, while falling oil prices and the normalization of shipping through the Strait of Hormuz eased inflation concerns. Investors also continued to monitor central bank guidance, with policymakers balancing slowing inflation against resilient economic activity.

The macro backdrop shifted in favor of lower interest rate expectations following signs of cooling in the US labor market. June payrolls increased by just 57,000, well below the expected 110,000, while private payroll weakness and downward revisions to previous months reinforced expectations that the Federal Reserve will remain patient. At the same time, easing energy prices following the US-Iran peace agreement reduced inflation pressures globally, prompting markets to reassess the outlook for monetary policy in both the United States and Europe.

Market Drivers & Catalysts

• Weak US Employment Data: June nonfarm payrolls increased by only 57,000, well below the 110,000 forecast, while April and May payrolls were revised lower by a combined 74,000 jobs.
• Fed Expectations Shift: Weak labor market data reduced expectations for another Fed rate hike. September rate hike odds fell to around 50% from 64% to 66%, while Chair Kevin Warsh reiterated the Fed’s commitment to its 2% inflation target despite easing price pressures.
• US-Iran Peace Agreement: The reopening of the Strait of Hormuz and improving stability in the Middle East eased concerns over energy supplies and helped reduce global inflation expectations.
• Oil Supply Increases: Seven OPEC+ members, led by Saudi Arabia and Russia, approved an output increase of 188,000 barrels per day, while Saudi exports and UAE shipments returned close to pre-conflict levels.
• Central Bank Outlook: Softer Eurozone inflation and dovish comments from ECB President Christine Lagarde reduced expectations for a third ECB rate hike, although markets continue to expect a second increase later this year.

Fixed Income

• US 10-Year Treasury Note Yield: Fell 2 basis points to 4.46% as weaker labor market data reduced expectations for additional Federal Reserve tightening. June payrolls disappointed, unemployment fell to 4.2% due to lower labor force participation, and September rate hike expectations dropped to around 50%.
• UK 10-Year Bond Yield: Remained just below 4.8%. Although weaker US jobs data and the Bank of England’s cautious stance reduced rate hike expectations, gilt yields still increased 6 basis points over the week as investors adjusted positions and tracked higher Japanese government bond yields.
• Japan 10-Year Government Bond Yield: Climbed toward 2.8%, approaching its highest level since October 1996. Weak demand at a government bond auction and concerns over increased fiscal spending, including plans for more than ¥370 trillion ($2.29 trillion) in strategic investment through fiscal 2040, pushed yields higher.
• Germany 10-Year Bund Yield: Rose to 2.93%, gaining nearly 9 basis points during the week and recording its first weekly increase since early June. Rising Japanese yields supported the move, although softer Eurozone inflation and falling crude prices continued to limit upside.

Commodities

Gold climbed to $4,170 per ounce, its highest level since June 23, gaining around 2% for the week after four consecutive weekly declines. The weaker US dollar, reduced Fed rate hike expectations, and continued central bank purchases, totaling 41 tonnes in May, supported prices. Demand softened in India, while Chinese buying improved.

Silver remained above $62 per ounce, extending last week’s gains as weaker US employment data and lower oil prices reduced expectations for additional Federal Reserve tightening. Falling energy prices also eased inflation concerns, supporting precious metals.

Currencies

• U.S. Dollar Index (DXY): Remained below 101, extending losses after June payrolls rose just 57,000, far below expectations of 110,000. The weaker labor report reduced expectations for further Fed tightening and ended the dollar’s two-week rally.
• Euro: Finished the week above $1.14, gaining around 0.5% as weaker US data pressured the dollar. However, gains were limited after Eurozone inflation slowed to 2.8%, core inflation eased to 2.4%, and ECB President Christine Lagarde adopted a more cautious tone on future rate increases.
• British Pound: Held near $1.335, its highest level in two weeks, rising around 1% over the week. Sterling benefited from dollar weakness, although gains were limited by Governor Andrew Bailey’s cautious outlook for the UK economy and inflation.
• Japanese Yen: Strengthened beyond 161 per dollar after Finance Minister Satsuki Katayama repeated that authorities remain ready to intervene if necessary. Weak US jobs data and lower Fed rate hike expectations added further support, while markets noted Japan may no longer provide advance warnings before intervention.

Economic Data Highlights

• US Nonfarm Payrolls (June): Employment increased by 57,000, well below expectations of 110,000 and lower than May’s revised 129,000. Professional and business services added 36,000 jobs, social assistance gained 25,000, and health care increased by 22,000, while leisure and hospitality lost 61,000 jobs. Payrolls for April and May were revised lower by a combined 74,000.
• US Unemployment Rate (June): Fell to 4.2% from 4.3%, although the improvement reflected a shrinking labor force. Employment declined by 507,000, the labor force fell by 720,000 to 169.36 million, and the participation rate dropped to 61.5%, the lowest since March 2021. The broader U-6 unemployment rate eased to 7.9% from 8.1%.
• Eurozone Inflation (June): Annual inflation slowed to 2.8% from 3.2%, below the 3.0% forecast and the lowest level since February. Core inflation eased to 2.4% from 2.6%, while energy inflation slowed to 8.7% from 10.8%. Germany, France, and Italy all recorded slower inflation, while Spain remained unchanged at 3.6%.
• Japan Consumer Confidence (June): Increased to 33.8 from 33.6, marking the highest reading since February, although slightly below the 34.0 forecast. Improvements were recorded in overall livelihood, employment prospects, and willingness to purchase durable goods, while income growth expectations remained unchanged at 40.3.

Macro Calendar Highlights

• Eurozone Retail Sales
• US ISM Services PMI
• FOMC Minutes
• US Existing Home Sales