US Dollar: Weak payrolls cloud Fed path – ING

ING’s Chief International Economist James Knightley notes that the weak July US jobs report has pushed market pricing away from a September Federal Reserve rate hike, with the Dollar softening and 2-year yields falling. He highlights that upcoming data – another jobs report, two CPI releases and the Jackson Hole Symposium – will be crucial for the Fed’s decision, but ING still expects an extended pause.

Markets scale back Fed hike odds

"The US jobs report for July was surprisingly weak, with payrolls falling 23k while there were 103K of downward revisions to the past two months' data, leaving the 3M average at 20,000. The unemployment rate fell to 4.1% from 4.2%, but not for good reasons. It was primarily because of a further drop in the participation rate – unemployed people leaving the workforce entirely. Average hourly earnings growth slowed to just 3.2% year-on-year from 3.5%."

"Reaction has been significant, with 2Y yields down 8bp and the dollar softening, while Fed funds futures contracts are now only pricing 10bp of a potential 25bp hike on 16 September. Today’s outcome supports our call for a prolonged pause from the Federal Reserve, but remember that ahead of the September FOMC meeting we have a further jobs report, two inflation prints and the Federal Reserve’s Jackson Hole Symposium"

"In terms of jobs, we would tentatively suggest a rebound is possible for August, but the Fed’s decision is more likely to come down to what happens on inflation. We expect next week’s July CPI to show headline prices rising 0.1% month-on-month and core prices rising 0.2%."

"Given we are expecting encouraging news on disinflation, we are consequently expecting the Fed to remain on hold well into 2027."

"Assuming we get a deal to reopen the Strait of Hormuz, that can feed through into lower gasoline prices and keep the disinflation trend in place through to year-end and beyond."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)