The market focus post the US Payrolls turns to political issues

Markets

After a series of mediocre labour market data/subindices published earlier last week, the US payrolls report gave the final go-ahead for the Fed to restart its easing cycle and move the policy rate to a more neutral level. The US economy on August only added 22k of new jobless (75K expected) and releases of the previous two months were slightly downwardly revised. Job growth even declined in several cycle sectors. The jobless rate rose to 4.3% from 4.2%. Average hourly earnings at 0.3% M/M and 3.7% Y/Y were close to expectations but also suggest some mild easing. The soft payrolls release pulled the trigger from markets to prepare for a scenario of the Fed reducing its policy rate by 25 bps at each of the 3 remaining months of the year (+/- 70 bps cumulative discounted). US bond yields declined between 6.4 bps (5-y) and 9.5 bps (30-y). Even as the report wasn’t a reason to amend expectations on ECB policy, Germany yields in lockstep eased between 5.7 bps (10-y) and 3.5 bps (2-y). The dollar softened on losing interest rate support but the damage could have been bigger, probably as other competitors like the euro, sterling and the yen also have to cope with ‘domestic issues’. For now major US cross rates held within the established range as no key support levels were broken (DXY 97.75 from 98.24; EUR/USD 1.1717 from 1.165 & USD/JPY 147.43 from 148.49). US equities opened at record levels for the three main indices (Dow, S&P500 and Nasdaq) but gains could not be sustained (S&P 500 -0.32%).

This morning, the market focus post the US payrolls turns to political issues. There are few important eco data on the calendar in Europe or the US today. In Japan, markets are pondering the (fiscal) consequences of Japanese PM resigning. In Europe, fiscal sustainability also remains on the radar as the French government of PM Bayrou is unlikely to survive a confidence vote. President Macron can try to install a new PM/government or call early elections. However, both options provide little prospect for progress on the highly needed fiscal consolidation. The issue might weigh on intra-EMU risk premia and cap any sustained gains in EUR/USD. Sterling this morning also trades in the defensive (EUR/GBP 0.868) after PMI Starmer end last week reshuffled his government. Question remains whether this will facilitate Fin Min Reeves task of fixing the UK budget. Different indicators published this morning (Incomes Data research, KPMG & Rec) suggest ongoing cooling in the labour market and in wage growth. 

News and views

Fitch lowered Poland’s credit rating outlook to negative from stable. It kept the rating itself at A-. The outlook downgrade reflects the deteriorating public finances and the lack of credible fiscal consolidation as well as increased political challenges to implement it in the future. The rating agency said the next parliamentary elections in 2027 will likely complicate any efforts to do so. Deficits are projected to increase to 6.9% in 2025 and to remain well above 6% at least through 2027. Debt by the end of that horizon is seen rising to 68.3%, to be compared to <50% in 2023. The high credit quality Poland’s A- rating represents is supported by a large, diversified and resilient economy, a record of sound macroeconomic policies, solid external finances and a higher and more stable government revenue base than peers. Fitch said. It expects 3.2% growth in 2025 and 2026 and average inflation of 3.9% and 3.3% respectively.

Japanese prime minister Ishiba announced yesterday that he’ll resign from office. Ishiba pre-empted a vote within his own Liberal Democratic Party scheduled for today whether to bring forward a leadership election. But that increasingly risked turning into a confidence vote in which defeat was near-certain. Ishiba’s position became untenable after suffering major election losses that stripped the LDP from its majority in both chambers of parliament. The LDP is rumoured to hold leadership elections early October. The LDP leader traditionally becomes the new prime minister. Ishiba will remain in post until then. The political uncertainty comes against the backdrop of growing concerns about public finances. Ishiba so far resisted calls for even more fiscal largesse (eg. consumption tax cuts) but his successor might not. The long end of the Japanese yield curve underperforms this morning with the 30-year yield adding almost 3 bps. The Japanese yen lags peers.

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