NFPs see traders gut July easing odds, boosting the dollar

June payrolls smashed expectations, killing off odds of a rate cut later this month by the Fed.

The headline number of nonfarm payroll additions for June rose marginally to 147k, up from 144k the month prior, well above pre-release expectations that anticipated just 106k gains. Accompanied by an eye-opening drop in the unemployment rate, this was an unambiguously robust set of prints that has clearly surprised markets. It also helps to validate our own longstanding macro base case, looking for resilience across both the labour market and inflation to keep the Fed on hold until year end. Admittedly, this is still more hawkish than current swap implied pricing even after today’s data landed.

Nevertheless, the dollar has bounced post-release on pared back Fed easing bets, with the DXY trading around 0.3% stronger as of writing.

In all honesty, even we did not anticipate a set of headline prints quite so strong. Our expectations matched markets this month, looking for a continuation of the recent modest labour market cooling trend. Certainly, the details of today’s report more closely match this view. Job gains were concentrated in government employment (+73k), healthcare (+39k), and social assistance (+19k). More growth sensitive sectors such as retail trade or leisure and hospitality, saw little change in June, taking some of the shine of the robust headline figures.

Similarly, we think a fall in unemployment rate is not quite the hawkish signal that it might initially appear to be. Yes, expectations had been for the rate to rise to 4.3%, up from 4.2% in May, while today’s data showed a surprise 0.1pp fall to come in at just 4.1%, a rate last seen back in February. But this appears to stem largely from a drop in participation, which fell 0.1pp to 62.3%, while hours worked per week also decreased from 34.3 to 34.2 in June. This more nuanced picture was perhaps most obvious when looking at last month’s wage growth figures, with average hourly earnings rising 0.2% MoM.

That is 0.1pp below expectations, enough to see the rate of annual pay increases drop to 3.7%, the lowest reading recorded since a temporary blip in July 2024.

Putting all this together, and we think our macro base case still holds. The labour market remains resilient, even as conditions cool at the margin. This is certainly not a jobs report calling out for rate cuts in our view, with neither solid headlines, nor the slightly softer details, signalling the kind of unwind that warrants Fed concern. With this in mind, we see little reason to revise our base case Fed easing call. That said, we do expect some of the knee-jerk move higher for the dollar to unwind as the relatively softer June details become increasingly clear to traders.

Author: 

Nick Rees, Head of Macro Research

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