The U.S. dollar experienced a decline on Friday, indicating that the country’s labor market may be showing signs of cooling off amidst rising interest rates that gradually weaken the economy.
According to Dow Jones market data, the ICE U.S. Dollar Index (DXY) fell to a low of 102.4 on Friday, its lowest level since June 27.
In June, the U.S. government reported the creation of 209,000 new jobs, the smallest increase in over two and a half years. This figure fell short of economists’ expectations, as a Wall Street Journal survey had predicted an increase of 240,000 new jobs.
Furthermore, the employment gains in May and April were revised downward by a total of 110,000.
Despite these developments, hourly pay saw a significant increase of 0.4% in June, surpassing expectations and resulting in a year-on-year increase of 4.4%. Prior to the pandemic, wages were rising at a rate below 3% annually.
Matthew Ryan, head of market strategy at financial services firm Ebury, highlighted the mixed nature of the latest U.S. labor report. While the negatives were emphasized by the markets, Ryan pointed out that there is no evidence of a wage-price spiral just yet. However, he acknowledged that persistently high earnings growth could be a concern for Federal Reserve members, providing a clear rationale for delaying policy rate cuts until at least 2024.
Fed-funds futures traders remain confident in Fed rate hike
Fed-funds futures traders are still overwhelmingly pricing in a greater than 90% probability that the Federal Reserve will raise its key interest rate by 25 basis points to a range of 5.25% to 5.5% later this month. However, expectations for another quarter percentage point move in either September or November have diminished somewhat following the release of payroll data.
US economy shows signs of a slowdown
According to Kit Juckes, a strategist at Societe Generale, recent US data suggests that the economy is gradually decelerating from its previously vigorous growth rate. Juckes notes, “A very tight labor market isn’t showing signs of easing up (the unemployment rate at 3.6% is 2.8% below the 50-year average and just 0.2% above the 50-year low). So perhaps it isn’t surprising that wage growth has stabilized at 4.4%.”
Juckes also commented on the correlation between USD/JPY and 5-year yield differentials, stating that it has broken down recently, and the jobs data has narrowed that gap slightly.
US stock market trends on Friday
On Friday, US stocks traded mostly lower, with the Dow Jones Industrial Average (DJIA) down 0.2% and the S&P 500 down less than 0.1%, according to FactSet data. In contrast, the Nasdaq Composite gained 0.1%.
