US bond yields rose sharply on Friday, particularly on the front end of the curve in the wake of the above consensus US July jobs report, which showed a strong 528,000 (consensus 250,000) increase in non-farm payrolls and the unemployment rate dropping to 3.5% (consensus 3.6%). The three-month moving average of US jobs gains now total 437,000. However, the drop in the unemployment rate was due in part to a drop in the participation rate so it wasn’t all good news. Wage growth was firm, with average hourly earnings up 5.2% y/y. Overall the data highlighted a still strong jobs market and markets are now pricing in a greater probability of 75 basis points hike by the Federal Reserve at its September meeting.
The firm US jobs data accompanied hawkish Fed speak over the past week, with various Fed officials pushing back against more dovish rate expectations that had been built into markets over recent weeks. The Fed’s Evans, Kashkari and Daly are scheduled to speak this week and are likely to maintain the run of hawkish Fed comments, pushing back against residual expectation of an early peak in the Fed Funds rate. Despite weaker closes for equities on Friday, stocks still ended higher over the week, but may struggle given the renewed hawkish shift in rate expectations. That said, with the bulk of second quarter earnings out of the way equities have held up well.
The data and Fed speakers also give further reason to be cautious on extrapolating the recent pull back in the US dollar, with the currency bouncing at the end of the week and starting this week on a firm note. The USD index has bounced off trend line support and has bounced off its 50-day moving average level, which has been a good support over recent months. In the near term some consolidation in the USD is likely though this week’s US CPI inflation report is likely to provide more direction. Conversely, while the euro appears to have found a short-term bottom, it’s hard to see a significant bounce in the currency.
Data over the weekend revealed a stronger than expected increase in Chinese exports in July at 18% y/y (cons. 14.1%) and lower imports at 2.3% y/y (cons. 4.0%), resulting in a surge in the trade surplus to $101.26bn (cons. $89.04bn). The weak imports data highlights ongoing pressure on domestic demand while exports will likely struggle to maintain firm momentum amid a likely slowing in external demand. China’s July inflation data this will be in focus (Wed) this week while more reaction by China to last week’s visit by Speaker to Pelosi to Taiwan will also be expected.
In the US, the key data will be the July CPI report (Wed); the consensus expects elevated readings of 8.7%/6.1% y/y for total/core prices. Headline CPI will have moderated from June, but core CPI is likely to have ticked higher. Long term inflation expectations as measured in the University of Michigan August confidence survey (Fri) will also be in focus. On the policy rate front, a 25bp hike from the Bank of Thailand kicks of its tightening cycle (Wed) and a 75bp hike from Mexico’s central bank, Banxico. However, unlike Thailand Banxico is likely nearing the end of its tightening cycle.