The July nonfarm payroll report delivered a juicy plot twist in Wall Street’s Fed pivot playbook. Stubbornly high inflation and a global economic slowdown were expected to drag down the US economy, but after today’s jobs report, that does not seem to be the case. Fed officials were already pushing back on the idea of a Fed pivot, and now it seems they will be debating whether they need to be even more aggressive to tackle inflation given how strong the labor market is performing.
US stocks plunged after robust employment sent Fed rate hike expectations higher. The stock market was too optimistic in feeling confident the Fed only had a full point in rate hikes left in them before they would keep rates steady.
NFP
This nonfarm payroll report was a game-changer for Wall Street. Robust job growth and accelerated wage gains confirm the US economy is not in a recession and paves the way for continued massive rate increases. The labor market is still very tight after nonfarm payrolls surged 528,000 in July, more than doubling economists’ expectations. The unemployment rate ticked lower to 3.5% as labor participation continued to dip. Wages continue to rise, and that will further fuel inflation worries. Employment is back to pre-pandemic levels, and it looks like it will not stop there.
A September Fed pivot is completely off the table, and the risks of a full-point rate hike could grow if the next two inflation reports remain hot.
FX
The reaction to a shockingly impressive payroll report was a surge in Treasury yields that bolstered the dollar. King dollar is here to stay as the debate for higher Fed rate increases will likely be supported by the next round of inflation data. The euro defended parity against the dollar, but it will be hard for that to last as the interest rate differential will continue to widen more to the greenback’s favor and as the global economic slowdown will lead to more safe-haven flows.
Oil
Oil prices are finishing on a strong note after a week filled with global recession fears destroyed the crude demand outlook. A robust nonfarm payroll is welcome news for the US economy—and that is helping oil pare some of this week’s losses. Europe also posted better-than-expected industrial production data from both Germany and France. Despite all the global economic slowdown worries, the oil market is still tight.
A surging dollar and rising risk that the Fed may need to be more aggressive with the tightening of monetary policy are unnerving some energy traders. With Saudi Arabia and the UAE saving their emergency oil capacity, further downward pressure might be limited. The oil market remains tight, and if today’s bounce off major technical support (200-day SMA) lasts, prices could stabilize above the $90 level.
Gold
Gold’s rally might be over now that Wall Street needs to have a reset with their Fed rate hiking expectations. The July nonfarm payroll report was a shocker that has sent Treasury yields soaring, which is kryptonite for non-interest-bearing gold. The next couple of weeks will truly test if gold is a safe haven again. Bullion traders now have two big questions: How much higher will the Fed take rates? Can gold rally alongside a strengthening dollar?
The next inflation report will be key for determining if a 75-basis point rate hike will fully be priced in, but if we see a much hotter-than-expected report, some might argue for a full point at the September FOMC meeting.
Bitcoin
Bitcoin might be ending its correlation with equities. After a robust nonfarm payroll report, Wall Street sent Treasury yields skyrocketing, which sent stocks sharply lower, but not Bitcoin. If we were still in a crypto winter, Bitcoin’s typical reaction would have delivered a steeper drop than what happened with US stocks. If Bitcoin can hold onto the $23,000 level, that could be very promising for the medium-term outlook. Bitcoin has been stabilizing here and could see further bullish momentum on the break of the $25,000 level.