Today's Market Outlook US Jobs Report in Focus: Will It Strengthen Expectations for a September Rate Hike?

Today's Market Outlook
US Jobs Report in Focus: Will It Strengthen Expectations for a September Rate Hike?

■ Market Overview

The biggest event of the weekend is the release of the US July employment report.

Together with next week’s US CPI release, this employment report is being closely watched as a key factor that could significantly influence expectations for a rate hike at the September FOMC meeting.

Market expectations call for nonfarm payrolls to increase by 80,000, recovering from the previous increase of 57,000.

The unemployment rate is expected to remain unchanged at 4.2%.

The labor force participation rate is expected to rise slightly to 61.6%, from 61.5% previously.

For wages, average hourly earnings are expected to rise by 0.3% month-on-month and 3.5% year-on-year, broadly in line with the previous readings.

Ahead of the release, USD/JPY is trading in the lower 158 range, continuing its recovery toward yen weakness despite ongoing intervention concerns.

Today’s key focus will be whether the US employment report revives expectations for a September rate hike or causes them to retreat further.

■ September US Rate-Hike Expectations

According to CME FedWatch ahead of the employment report, the probability of the FOMC keeping rates unchanged in September stands at 45.3%, while the probability of a 0.25% rate hike stands at 54.7%.

Rate-hike expectations currently hold a slight advantage, but the gap between the two outcomes has narrowed considerably.

One week ago, the probabilities were 33.0% for no change and 67.0% for a rate hike.

In other words, market expectations for a rate hike have declined significantly over the past week.

Fed Chair Warsh has not provided clear forward guidance and has avoided indicating a specific direction for his own interest-rate outlook.

As a result, markets are increasingly adjusting rate expectations based more on actual economic data than on comments from Fed officials.

How far the probability of a September rate hike moves after this employment report will be important in determining the direction of the dollar.

■ US Employment Report

The main market forecasts are as follows.

Nonfarm Payrolls
Increase of 80,000
Previous: Increase of 57,000

Unemployment Rate
4.2%
Previous: 4.2%

Labor Force Participation Rate
61.6%
Previous: 61.5%

Average Hourly Earnings, Month-on-Month
+0.3%
Previous: +0.3%

Average Hourly Earnings, Year-on-Year
+3.5%
Previous: +3.5%

If nonfarm payrolls significantly exceed expectations and average hourly earnings also come in strong, expectations for a September rate hike are likely to rise again.

In that case, higher US yields and dollar buying could push USD/JPY from the upper 158 range toward 159.

On the other hand, if payrolls fall short of expectations, accompanied by a rise in unemployment and slower wage growth, rate-hike expectations could retreat further.

In that scenario, lower US yields and dollar selling could strengthen, potentially pushing USD/JPY back toward the 157 range.

■ How to Read the Employment Report

This employment report should be assessed comprehensively, rather than focusing on nonfarm payrolls alone.

The following points are particularly important:

・Nonfarm payrolls
・Unemployment rate
・Average hourly earnings
・Labor force participation rate
・Revisions to the previous month’s payrolls

Even if payrolls are strong, slowing wage growth could lead markets to conclude that inflationary pressure remains limited.

Conversely, even if payrolls are slightly weak, stronger-than-expected wage growth could reinforce the Fed’s inflation concerns.

In addition, a substantial downward revision to the previous month’s payrolls could trigger dollar selling even if the current headline number meets market expectations.

It is necessary to assess the combination of each component rather than simply judging whether the headline figure is strong or weak.

■ USD/JPY

During the London midday session, USD/JPY is trading around 158.35.

After falling sharply into the 155 range following last week’s coordinated US-Japan intervention, the pair has gradually recovered this week and moved back above 158.

Yen-selling demand, supported by the US-Japan interest-rate differential and stronger equities, remains firm.

However, concerns over additional intervention are also likely to intensify in the 158 range.

If a strong US employment report causes USD/JPY to rise sharply, attention will be required not only on dollar buying but also on the response from US and Japanese authorities.

In particular, if the pair rises rapidly toward 159 to 160, concerns over rate checks or further intervention could increase quickly.

Conversely, if the employment report is weak, post-intervention yen-strengthening pressure may return to the forefront, with a decline toward the 157 and possibly 156 range also needing to be considered.

■ Dollar Market

EUR/USD is trading around 1.1530 during the London midday session.

The broader market is waiting for the US employment report, leaving price action range-bound.

If the employment report is strong, broad dollar strength could emerge alongside rising US yields, with EUR/USD potentially testing below 1.15.

On the other hand, weak data could push back September rate-hike expectations and make it easier for EUR/USD to test the upside.

Today, monitoring not only USD/JPY but also the response in EUR/USD and the dollar index will help clarify the overall direction of the dollar.

■ Next Week’s US CPI

If the employment report does not deviate significantly from market expectations, attention is likely to shift quickly to next week’s US CPI release.

For the Fed, inflation trends are just as important as labor-market conditions.

Even if the employment report is strong, confirmation of easing inflation in next week’s CPI could again weaken expectations for a September rate hike.

Conversely, if both the employment report and CPI are strong, the likelihood of a September rate hike could rise substantially.

Therefore, today’s employment report alone will not completely determine the direction of the September FOMC meeting.

If the result falls within market expectations, price action may settle over the weekend and the market may shift into a wait-and-see stance ahead of next week’s CPI.

■ Canadian Employment Report

Canada will also release its employment report at the same time as the United States today.

Market forecasts call for employment to increase by 20,000, slightly above the previous increase of 18,200.

The unemployment rate is expected to remain unchanged at 6.5%.

If employment growth is close to market expectations, the composition of employment will be important.

In particular, the Canadian dollar may react differently depending on the extent to which full-time employment rises rather than part-time employment.

As the Canadian and US employment reports are released simultaneously, USD/CAD may experience greater-than-usual volatility.

■ Today’s Key Economic Indicators

The main economic indicators due later today are as follows:

・US employment report
・Mexico consumer price index
・Canadian employment report
・Canada Ivey Purchasing Managers Index

The US employment report is overwhelmingly the main event today.

The release is scheduled for 9:30 p.m. Japan time.

Immediately after the release, USD/JPY, EUR/USD, and US yields could all move sharply at the same time, requiring caution.

■ Speaking Events

Speaking events are relatively limited.

Richmond Fed President Barkin is scheduled to attend a meeting of the National Association for Business Economics.

Following the market reaction to the employment report, attention will focus on his assessment of the US labor market, inflation, and future monetary policy.

However, as this is the summer holiday season, the overall number of scheduled events remains limited.

■ Middle East Developments

While the market awaits the US employment report, it remains sensitive to new developments in the Middle East.

If geopolitical risks rise again, oil prices and safe-haven dollar buying could strengthen.

If Middle East conditions remain stable, the dollar market is likely to respond more directly to US economic data and US yield movements.

If major Middle East-related headlines emerge around the employment report, market conditions could become more complex than usual.

■ Key Points for the London and New York Sessions

① Whether nonfarm payrolls exceed 80,000
② Whether the unemployment rate remains at 4.2%
③ Whether average hourly earnings exceed expectations
④ Whether the previous month’s payrolls receive substantial revisions
⑤ How significantly the 54.7% probability of a September rate hike changes
⑥ Whether USD/JPY can hold above 158
⑦ Intervention concerns if strong employment data pushes USD/JPY toward 159
⑧ Whether weak employment data leads to a test below 157
⑨ Whether an in-line result shifts attention to next week’s US CPI

■ Summary

Today’s most important event is the release of the US July employment report.

Markets expect nonfarm payrolls to increase by 80,000, recovering from the previous increase of 57,000.

The unemployment rate is expected to remain at 4.2%, while average hourly earnings are forecast to rise by 3.5% year-on-year, both in line with the previous figures.

Ahead of the release, the probability of a September FOMC rate hike stands at 54.7%, compared with a 45.3% probability of rates remaining unchanged, giving rate-hike expectations a narrow lead.

However, this is a significant decline from the 67.0% rate-hike probability seen one week ago.

A strong employment report could revive September rate-hike expectations, potentially pushing USD/JPY from the upper 158 range toward 159.

Conversely, a weak result could further reduce rate-hike expectations and push USD/JPY toward the 157 range.

However, USD/JPY is in a unique environment following coordinated US-Japan intervention. Even if strong dollar buying emerges, intervention concerns are likely to intensify if the pair approaches the 159 to 160 range.

If the result does not differ significantly from market expectations, the market may stabilize relatively quickly and shift its attention to next week’s US CPI.

Today, it will be important to monitor not only the employment data itself, but also how expectations for a September rate hike change after the release.