• The US economy added 315k (vs 298k expected) jobs in August according to the payrolls report. A 107k downward revision to the previous two months’ data takes some shine off the headline figure. The unemployment rate rose from 3.5% to 3.7%, but because of the “good reason”; the labor force participation rate showed an unusually large increase from 62.1% to 62.4%, matching the highest level since March 2020. Wage growth stabilized at 5.2% Y/Y. The payrolls report adds to this month’s decent to good US eco data and means that the Fed in September can continue to focus (solely) on tackling inflation. This suggests a likely 3rd consecutive rate hike by 75 bps (to 3%-3.25%). The market reaction was muted. Core bonds tested the recent sell-off lows, but a break didn’t occur. The rejected test generated return action higher. The US curve steepens with yield changes ranging between -6.9 bps (2-yr) and +1.2 bps (30-yr). The German yield curve steepens as well with yields falling 7.9 bps at the front end and rising 1.0 bp at the very long end. Stock markets recovered from their recent beating with main European indices gaining over 1%. Gas prices extend their correction lower, parting ways with oil prices. The latter could be due to some sell-the-rumour, buy-the-fact as G7 finance ministers agreed a price cap on Russian oil exports. Monday’s OPEC+ meeting is also expected to deliver lower future supply from the cartel. The euro profits from risk sentiment and weaker gas prices, returning towards parity against the dollar despite good payrolls.
• Next week will be a busy one. On Monday we’ll know who becomes UK PM Johnson’s successor. Liz Truss leads Rishi Sunak in the polls which is likely one of the reasons of the UK currency’s recent underperformance. She advocates more fiscal stimulus especially targeting lower taxes which implies a significant deterioration of the UK’s long term public finances. Sunak is more fiscally conservative. EUR/GBP trades near 0.8650 compared with a YTD high of 0.8721. Governor Bailey’s appearance before the Treasury Committee (along with BoE Pill, Mann and Tenreyro) serves as a wildcard on Wednesday. Central bank action obviously centers around Thursday’s ECB meeting. European central bank governors hijacked last week’s Jackson Hole symposium, preparing the market for a 75 bps rate hike. New inflation forecasts will likely show new upward revisions compared to June, when the central bank penciled in 6.8% for this year, 3.5% for next year and 2.1% for 2024. After September, we lean to an additional 75 bps move in October. Talk about a potential balance sheet roll-off is probably premature. Apart from the ECB, the Reserve Bank of Australia, National Bank of Poland and Bank of Canada gather. The RBA is expected to extend its monthly 50 bps rate hike pace which is place since June (1.85% to 2.35%). This week’s Polish inflation acceleration (16.1% Y/Y in August) suggests that NBP governor Glapinski’s call to potentially end the rate hike cycle comes to soon. The NBP is expected to proceed with smaller, 25 bps, steps though (6.5% to 6.75). The Bank of Canada is one of the developed frontrunners in the tightening cycle with an almost unmatched 100 bps rate hike in July. The BoC signaled that neutral rates could be higher than previously envisioned, giving it more leeway to tighten policy further. A 75 bps move would lift the policy rate to 3.25% from 2.5%.
• The ECB’s July consumer expectations survey showed consumer expectations for inflation over the next 12 months unchanged at 5.0%. However, EMU citizens raised expectations for inflation three years ahead from 2.8% to 3.0%. European citizens lowered expectations for economic growth in the year ahead to the lowest level since November 2020, from -1.3% to -1.9%. In line with their assessment on lower economic growth, they expect the unemployment rate to jump to 12%. Consumers again slightly lowered their expectations for the growth in price of their homes over the next 12 months to 3.2%. Expectations for mortgage interest rates 12 months ahead continued to drift up to 4.3% and now stand 1.0 percentage points higher than at the beginning of 2022. Both consumers’ perceived access to credit over the previous 12 months and their expectations over the next 12 months tightened again.