Further signs of weakness in the US labour market in the August nonfarm payrolls report sees markets now discounting as much as 100bps of Fed rate cuts over the next 6 months - with speculation of a potential 50bps cut at the September meeting. US yields fell across the curve, an impulse that has reverberated globally - reversing an upward climb in longer-end yields that was the focus of markets earlier in the week. The US dollar (dxy basis) was near unchanged on the week, while equities were patchy across the board. US CPI data is a key focus next week.
Payrolls disappoint again
US nonfarm payrolls rose by just 22k in August, well short of the 75k consensus, while the prior two months were revised down by a combined 21k. Those revisions saw June adjusted from a 14k gain to a 13k fall - the first decline for monthly employment since the pandemic - though the July figure lifted from 73k to 79k. Known issues around data quality and sizeable revisions have made monthly payrolls highly volatile; however, a slowing trend has become clear. The 3-month average for payrolls is now just 29k, its weakest momentum in the post-Covid cycle. This pushed the unemployment rate up to 4.3% in August and the broader underemployment rate to 8.1%, leaving both measures at their highest since late 2021. Resulting downward pressure on wages growth sees average hourly earnings tracking at a 13-month low (3.7%yr), despite labour force participation (62.3%) that is now 0.5ppt below cycle highs.
ECB set to remain on hold...
The ECB goes into next week's meeting maintaining that policy is 'in a good place', but a new set of economic forecasts may leave the door ajar for a further rate cut by year-end. The Governing Council is set to leave the key depo rate (2.0%) unchanged, with recent commentary from ECB officials broadly reiterating a cautious approach moving forward. The ECB's Schnabel said she saw no need to adjust rates - in either direction - and that it was not possible in any case to use rates to 'fine-tune' inflation outcomes to the 2% target.
Euro area inflation currently stands a touch above target, printing this week at 2.1%yr on a headline basis in August (up from 2.0%) while the core rate was steady at 2.3%yr. New forecasts from ECB staff next week could awaken markets to the prospect of the easing cycle being restarted if the outlook for growth and inflation is lowered. Those downgrades are possible due to the strength of the euro - especially amid impending Fed rate cuts - as well as uncertainty around US-EU trade.
... as the BoE considers QT
In the UK, BoE Governor Bailey told the Treasury Committee that market pricing for future rate cuts had adjusted accordingly to the central bank's 'gradual and careful' approach. Markets have reduced pricing for a rate cut by year-end to just a 33% chance, with a 25bps cut to 3.75% not fully discounted until April next year. Also of note, Governor Bailey said the pace of quantitative tightening - running since 2023 at a 12-month pace of ₤100bn - was an 'open decision' for the September meeting. The BoE has been under pressure to slow or halt QT amid rising gilt yields, with the 30-year maturity this week touching its highest since 1998. Governor Bailey said QT was not the cause of higher long-end yields but that the BoE would examine those interactions in its decision.
Australian consumers drive June quarter growth
Signs of a long-awaited revival in household consumption drove the Australian economy to stronger-than-expected growth of 0.6% in the June quarter. Annual growth lifted from 1.4% to 1.8%, tracking ahead of the RBA's expectation for 1.6% and 2.1% by year-end. A household consumption-led (0.9%) pick-up in growth has tightened expectations for the path of the RBA's easing cycle into a further two rate cuts, down from a possible three pre-release. The pressures households have faced from the cost of living and higher interest rates haven't gone away, but they appear to be easing. The effects of inflation returning to the (2-3%) target band, RBA rate cuts and the earlier Stage 3 tax cuts have combined to drive real disposable incomes up by 4.2% over the past year, the fastest increase in 4 years.
The improved dynamics around real incomes as well as the continuation of a robust labour market are working to lift confidence. This is reflected in a greater willingness of households to spend rather than save, with the household saving ratio falling from 5.2% to 4.2%. All these factors helped drive household consumption to its strongest rise since the final quarter of 2022, up 0.9% in Q2 to be up by 2% through the year. Consumption growth was driven by discretionary purchases (1.4%) - reflective of improved confidence - on gains across recreational events (2%), transport (incl travel) (1.7%), and hotels, cafes and restaurants (0.7%).
The strength of consumption growth is, however, not without caveats. Consumption may have been boosted by a quirk in the calendar that saw Easter and ANZAC Day falling in unusually close proximity, creating a holiday period in late April. That said, the household spending indicator rose by 0.5% in July (5.1%yr), indicating demand was holding up early in Q3 (see here). For more on the June quarter National Accounts please see my feature In Review article here. Also in Australia this week, dwelling approvals pulled back (-8.2%) in July (see here); meanwhile, the 90-day pause by Trump on his liberation day tariffs saw exports to the US surge, driving the trade surplus to $7.3bn in July - its widest since early 2024 (see here).
