Friday’s job data was such a surprise and so crucial to the markets that it could obscure this week’s major market event. Expectations around what the Fed will do in September have shifted radically. Some headlines are even asking whether the FOMC made a serious blunder by not cutting rates last week.
The issue for forex is still around the effects of tariffs, which is why the trade data out tomorrow would otherwise be quite important to the markets. But it seems that officials might have been focusing on the wrong indicator, and so have the markets. Now the question is how the market will react to the new data.
A Large Drop, so Now Recovery?
Following the jobs data on Friday, risk appetite took a significant spill. US stock markets closed significantly lower. But throughout the weekend, investors had a chance to understand the data better. Now, stock markets are pointing upwards, implying that risk appetite is back. For forex traders, the question is whether that trend will be maintained.
The headline NFP figure reported on Friday was below estimates, which would generally be bad. But what shook things up was that the prior two months were revised dramatically lower. That means that it’s not just that the labour market is in a bad state, it’s been that way for a while. This immediately brought back memories from almost exactly a year earlier. In July of 2024, the Fed also kept rates unchanged. And then cut them by 50 bps in September after labour data was revised to show significantly fewer jobs had been added than had been initially reported. This repeat of circumstances has helped fuel expectations that the Fed will cut rates now.
What’s the Real Reason for the Market Move
In his press conference following the FOMC’s rate decision last Wednesday, Fed Chair Jerome Powell specifically addressed the labour market. He was using it as a justification for why the Fed could keep from lowering rates at the moment, saying the job market was stable. The data coming out just two days later contradicted that narrative, and seemingly weakened the argument for a rate hold.
Markets went from pricing in to chances being around 40% of a rate cut in September, to the chances now being at almost 90%. But also last week, US Q2 GDP came in stronger than expected. The unemployment rate ticked up to 4.2%, which is pretty low by historical standards. It’s even arguably below the structural level. So, Powell’s assessment of the labour market isn’t entirely shattered.
What to Look Out For
In the end, what matters is the price dynamics. A weak job market usually means lower wage growth. Less disposable income means people can’t afford higher prices, and this pushes down inflation. Even if tariffs raise prices, if there isn’t demand, then inflation will trend lower. That means the Fed will have to lower rates sooner rather than later.
Meanwhile, US June trade data is expected to show that the deficit increased despite tariffs. The US trade deficit for June is expected to be -$71.5 billion, wider than the $61.4 billion a month earlier. Imports are once again expected to have increased faster than exports, despite a weaker US dollar.
