US Dollar: Weak payrolls cloud Fed path – ING

ING’s Chief International Economist James Knightley has pointed out that the disappointing July US jobs report has shifted market expectations away from a September Federal Reserve rate hike. The dollar has weakened and 2-year yields have fallen. Knightley emphasizes that upcoming data – another jobs report, two CPI releases, and the Jackson Hole Symposium – will play a critical role in the Fed’s decision-making process.

Despite the weaker-than-expected job numbers, the unemployment rate dipped to 4.1% from 4.2%, mainly due to a decline in the participation rate. Average hourly earnings growth decelerated to 3.2% year-on-year. Market reaction has been pronounced, with 2Y yields declining by 8 basis points and the dollar weakening, while Fed funds futures now only price a 10 basis point rise in the potential 25 basis point increase on September 16.

ING's outlook supports a prolonged pause from the Federal Reserve, but warns that the decision will hinge on inflation developments. They anticipate a potential rebound in August job numbers but believe the Fed’s decision will primarily depend on inflation. The July CPI is expected to show a 0.1% rise in headline prices and a 0.2% increase in core prices.

Inflation expectations remain favorable, and ING believes the Fed will maintain its hold until 2027. A potential reopening of the Strait of Hormuz may contribute to lower gasoline prices, sustaining the disinflation trend throughout the year.