NFP Miss, Unemployment Drop Put Fed in a Bind

Friday's US jobs report delivered a split screen. Nonfarm payrolls fell by 23,000 against an expected gain of 80,000, and cumulative revisions for May and June were firmly negative at minus 103,000. The unemployment rate still dropped to 4.1% from 4.2%, with the participation rate slipping to 61.4%, the weakest level since February 2021.

That combination is not as unambiguously dovish as the initial moves in UST yields and USD FX implied, according to Danske Bank. The Fed is left balancing below-expectation job growth against a still-declining unemployment rate. Fed's Barkin offered initial commentary that acknowledged the weakness in the labour market data, while pointing to continued resilient corporate earnings.

The dollar lost ground against the rest of G10 currencies on Friday. EUR/USD rose briefly to 1.1581, the highest level in almost two months, and USD/JPY temporarily fell below 157. Short-term US interest rates dropped along with the USD. The 2Y swap rate fell more than 6bp after the release of the jobs report and ended the day down around 3-4bp. The market now discounts 11bp of hikes from the Federal Reserve at the next meeting in September.

Equities liked the decline in front-end yields and were less focused on potential growth implications. The S&P 500 rose 0.6% on Friday, ending its best week since April with a weekly gain of around 3.6%. The Nasdaq was up 1.2% and the Philadelphia Semiconductor Index rose 3%. The S&P 500 reached a fresh record-high, striking given that the same week had included both AI capex concerns and a memory-chip sell-off. Within equities, both cyclicals and defensives rose, yet the former outperformed the latter by 0.9pp on Friday. Materials, consumer disc and tech were at the top of the table rising about 1.3-1.5%, while Financials and Energy declined.

This week's calendar starts with the Reserve Bank of Australia, expected to maintain its cash rate unchanged at 4.35%, in line with consensus and market pricing. After three rate hikes during the spring, the RBA is unlikely to tighten its policy rate much further in the coming meetings either.

The main event is Thursday's Norges Bank monetary policy meeting. Danske Bank expects core inflation to have risen to 2.9% in July, driven by a partial rebound in information and communication technology, as well as airline tickets. Lower food inflation should pull slightly in the opposite direction. If correct, core inflation would be 0.4pp lower than what Norges Bank assumed in the monetary policy report in June. In that case, Danske would expect Norges Bank to stay on hold on Thursday but retain a tightening bias.

US inflation data arrives Wednesday, followed by UK Q2 GDP estimates on Thursday. The week closes on Friday with the second release of euro area Q2 GDP, including details. The euro area's Sentix Investor Confidence indicator is due today after the index rose sharply in July, marking the third consecutive monthly improvement, driven by rising expectations. Today's release will provide a read on whether momentum continues.

China's July inflation data came in soft. CPI fell to a six-month low of 0.5% y/y against a consensus of 0.8%, and PPI slowed to a three-month low of 3.5% against 3.9%. Lower oil prices and soft domestic demand were the primary drivers. Stronger fiscal spending on infrastructure projects has been pledged by top leaders, though the impact on inflation is likely to be felt with a lag.

In Norway, manufacturing production fell 1.0% m/m in July, pulling the underlying three-month trend down to 0.7%. The slowdown was largely driven by oil-related industries, while mainland industries held more stable. Manufacturing remains a relative bright spot in an economy where rate-sensitive sectors such as retail trade and construction continue to face headwinds.

Scandi currencies were broadly unchanged vis-à-vis the EUR on Friday, with both EUR/SEK and EUR/NOK trading below the 11.00 mark. Short-term NOK interest rates fell slightly on Friday, dragged down by the drop in US rates ahead of the Norges Bank meeting.

Geopolitical risk remains live. There were signs of progress towards an Iran-Oman shipping agreement on reopening the Strait of Hormuz, with Iranian Foreign Minister Araghchi confirming that talks with Oman are in their final stages. He was explicit that a deal would not automatically translate into a reopening of the waterway. Tehran tied a full reopening to further US concessions, including US force withdrawals, war damage compensation and sanctions relief.

Overnight, Asian equities are in green, with US futures mixed. The RBA statement is due early Tuesday morning, and the Norges Bank decision follows on Thursday. For forex market analysis and the latest on EUR/USD and GBP/USD, see the AlphaScala market pages.