When July NFP data came out, markets were shocked to see the 2 -month downward revision of 258k more than the headline July no of 73k. Payroll gains for May & June suddenly changed from healthy nos to near zero nos. The main takeaway from the jobs report is that labor demand appears to be falling faster than labor supply – the labor market is not “solid,” as Powell characterized it in his press con post FOMC. Three-month average job growth is now a very weak 35k — below our estimate of the unemployment breakeven of 80k-100k. Further adjusted by what we estimate is an overstatement of 80k per month due to the BLS’ “birth-death” model, underlying monthly job growth may even be negative since President Donald Trump’s April 2 “Liberation Day” tariff. The sharp slowdown in hiring has likely been discouraging labour-force growth, suppressing the UR. The UR ticked up to 4.248% in July, the highest level since the post-pandemic recovery, from 4.117% in June. So, while Fed Chair Powell might see UR stable, it is not going up because LFPR is falling. So, UR is inherently not stable and is actually indicating the stress in the jobs market. Going forward we expect federal government employment will remain a drag, with deferred retirements leading to a more acute drop in the October employment report. The July jobs report has changed the narrative completely. The drastic backward revisions showed job growth close to zero in May and June — and July’s payrolls may also turn out to be flat or negative after subsequent revisions. More importantly, the unemployment rate rose even as the labor force contracted. Fed Governor Christopher Waller is right that labor-market conditions are not solid. Fed made a major policy error in insisting that the inflation spike after Covid was transitory. Inflation began to rise in March 2021 and reached 8.5% by the time the Fed finally started hiking rates in March 2022 from zero. The Trump Administration’s complaint is that, if the Fed did not make assumptions about future fiscal policy and its potential impact on inflation back then, why is it doing so now? If the Fed wants to preserve its independence, it should not behave in ways that suggest political biases. We are not saying that the Fed was indeed political in recent years; we are merely explaining why Trump is upset with this Fed.We don’t think Trump will fire Chair Powell. If the US economy indeed slows as we believe it will, keeping Chair Powell as a punching bag would be politically useful and would avoid tarnishing the next Fed Chair. Fed would start looking bad as the unemployment rate rises to 4.5%. By then, President Trump would be able to say, ‘I told you so.’ The more the Fed resists now as an institution, the more they might get punished as an institution later, if they mismanage the prospective stagflation shock. With the exception of Michelle Bowman and Chris Waller, the other five members were appointed by, or worked for, Joe Biden or Barack Obama, and most of them have long terms ahead of them. July employment data are likely to call US growth exceptionalism back into question. The soft headline NFP number, along with sharp historical revisions, confirms that hiring has slowed significantly over the past three months. With the labour market now far from “solid” (as Fed Chair Powell described it after the 30 July FOMC), the Fed may face heavy criticism for falling behind the curve, even if it cuts in September. We see a reasonable possibility of a larger 50bps move if the labour market weakens further in the coming months. We have been recommending receive 2yr UST & 1yr-1yr US SOFR since last 2 weeks and now the trades are in the money by almost 20-25 bps. We continue to hold on to them for this week. DXY next leg lower towards 95 (CMP 99.14) is now a strong possibility with interest rate cuts coming in play. Long JPY & EUR are best positioned to play this view.
