Friday’s labour market print surprised to the upside, as NFP added 254k jobs versus a survey of 150k survey. Moreover, a look at the tension in the Middle East and France’s budget.
US Economics – Strong labour market
Friday’s labour market print surprised to the upside, as NFP added 254k jobs versus a survey of 150k survey. The unemployment rate fell from 4.2% to 4.1%. Average hourly earnings rose 0.4% MoM, higher than expected. Other data last week showed a steady but weak ISM manufacturing survey, while ISM services were stronger. Jolts job openings were higher, pointing to a stronger labour market, while jobless claims stayed roughly unchanged at 225k. As a reaction to Fridays data, US 2y yields rose 15bp and trimmed chances for faster cuts this year, warranting a more cautious stance on duration. Markets see just about 50bp of cuts by year-end, and 100bp over the next four meetings, 20bp lower than before Fridays release. Next month’s labour market readings will be impacted by Boeing and port strikes, and adverse weather impacts, so this print may have been the last reliable reading ahead of the next Fed meeting.
Middle East – Tension on the rise or something more worrying?
Israel promised to retaliate after Iran struck targets throughout the country, but markets are yet to react fully. Biden said Israel considers attacking Iranian oil fields, but Iran oil supply only makes up ca. 2mn b/d versus 100mn barrels of global daily demand. Oil prices rose 6$ from the lows over the past week, but at $75 are still trading $10 below the June/July highs. Experts think oil may rise to $100 in an extreme scenario, where infrastructure of Saudi Arabia is hit at the Strait of Hormuz is closed. Risk assets moved largely sideways despite the rising tensions, while yields rose on the back of stronger US data and breakeven rose amid the risks of higher inflation.
Europe – ECB accelerates, France stumbles
France’s budget remains centre of attention for European rate markets, as Bund-OAT spreads continue to trade near the highs of 78bp. The 2025 budget will be presented this week, and while the government targets 5% for next year and 3% by 2029, there are risks that next year’s number is closer to 6%. Fiscal tightening should come by reducing expenses, while tax increases may improve revenues, but the government falls short of the majority in the lower house and so no confidence votes may be triggered anytime.
Beyond France, the ECB is pencilling in a rate cut for October and the market pricing has shifted from 5bp to 22bp, following dovish rhetoric by Lagarde and lower Eurozone inflation last week.
Algebris Investments’ Global Credit Team
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