7th September - NFP Changes The Story
In terms of geopolitics, the escalation has resumed and has done so in fairly direct fashion. Iran reportedly fired ballistic missiles towards two US Navy warships, whilst the US responded by striking three Iranian tankers. Brent rose to the high 90's and reached as high as $99.90 today, with renewed concerns around Hormuz supply and shipping disruption. There is no diplomatic process running at the moment, and with oil near $100, the inflation impulse that has driven so much of this year's market remains firmly in place.
The main event entering the weekend was Friday's Non-Farm Payrolls, and it was a considerable surprise. The US economy added 162,000 jobs in August against a consensus of just 53,000, roughly three times what the market expected. The unemployment rate held steady at 4.1%, as forecast. That alone would have been notable, but the revisions are arguably the more important part of this release. June and July were revised up by a combined 55,000, with July moving from -23,000 all the way to +21,000.
The revisions and the hot print for last month comprehensively undercut the cooling labour market narrative that had been building. ADP came in at 38,000 last week and the JOLTS hiring rate hit a seven month low, both of those looked at the time like confirmation that the labour market was rolling over. Both now look like poor guides to the actual hard data. It is worth remembering that ADP and the BLS use entirely different samples and methods, and this is a fairly stark reminder of why ADP should be treated as context rather than as a forecast.
The one caveat, and it is the same tension we have been discussing for weeks, is that the ISM Services employment index was in contraction at 47.8 in August while its prices index rose to 72.6, which is higher even than the 71.1 we saw in manufacturing. So the surveys still point to softening employment and sticky prices. The difference now is that the hard payroll data is considerably stronger than those surveys implied, which removes the labour market as an argument for the Fed to hold. The next key metric for the US Economy comes hot on the heels of the NFP release, with PPI data released on Thursday and CPI on Friday. A hot print in these numbers will be even more significant.
Forex
Here is where it gets genuinely interesting. A payroll print at three times consensus, with positive revisions on top, should have sent the dollar sharply higher. It barely moved. EUR/USD fell just 0.11% to 1.1614 and GBP/USD 0.10% to 1.3511 on the day, with the gains already completely wiped out in today's session. The DXY jumped from 99.05 on Friday morning to a high of 99.40 after NFP, but at close of play today is down at 98.94.
A dollar that cannot sustain a rally on such a hot print is telling you something, and it is the same thing I have been writing about since August. The market has stopped pricing US assets on the strength of the US economy. Part of that is Waller's dovish comments last week keeping a September hike genuinely uncertain despite Warsh's rhetoric, but the bigger part is simply that failing confidence in the US as a destination for capital is where the real story sits at the moment.
The yen continued to be the biggest mover over the past few days. USD/JPY has fallen to 154.37 today, touching a low of 154.05, which is its weakest since February and represents a yen that has strengthened roughly 3.4% in five sessions. The drivers have shifted from pure intervention speculation to something considerably more fundamental. A BoJ hike to 1.25% is now fully priced for the meeting on the 17th and 18th - with Ueda saying policymakers need to pay greater attention to upside price risks, board member Takata raising the possibility of back to back hikes, then most tellingly, Takuji Aida, an economic adviser to the Prime Minister who was previously viewed as opposing tighter policy, saying he now expects a September hike.
We also finally have the numbers on previous interventions. Ministry of Finance data shows Japan spent ¥15.4 trillion, around $98.7 billion, supporting the yen between the 30th of July and the 26th of August. That is its largest single month intervention on record, and it is a far bigger figure than anyone assumed at the time.
There is a tension here worth flagging. Last week's yen strength eased global inflation concerns and pulled US Treasury yields lower, which is what allowed equities and metals to rally. But part of what is driving the yen now is speculation around capital repatriation and a possible shift in the Government Pension Investment Fund's asset allocation, which is the domestic asset plan I flagged back in July. If that becomes genuine repatriation, it means Japanese institutions selling foreign assets to bring money home, and a significant chunk of those foreign assets are US Treasuries. So the same yen strength easing US yields today could push them higher tomorrow, and it would do so into a market where the Treasury is already having to buy its own debt to keep the long end under control. One to watch closely.
Indices
US markets were closed today due to Labor Day, so there has been no official movement since Friday. The reaction to the NFP release on Friday was negative, but fairly modest given the size of the surprise. The Dow fell 0.51% to close at 53,414, the S&P 500 dropped 0.38% to 7,718 and the Nasdaq eased 0.29% to 26,506. Treasury yields jumped on the print, with the 2-year hitting its highest level since January 2025, and the odds of a September hike moved up to around 58%.
The interesting exception was the Russell 2000, which actually rose 0.25%. That is counterintuitive, as small caps are the most rate-sensitive part of the market and should have taken the worst of a hawkish repricing. The explanation may simply be that a good deal of the hike was already priced in, but the more interesting possibility is that small caps are far more domestically focused, so a genuinely strong labour market is good for their revenues in a way that offsets the rate headwind. If that is what happened, it is a "good news is good news" reaction and worth watching for a repeat.
What I take from Friday overall is that the equity reaction was smaller than the data warranted. A payroll number at three times consensus, shifting a September hike from uncertain to probable, produced falls of less than half a percent. The market has effectively deferred its reaction until it sees Friday's CPI print.
Precious Metals
The metals reaction to the NFP is the part I found most instructive. Gold fell 1.40% on Friday and silver 1.41%, and both have stabilised today rather than extending those losses, with gold sitting around $4,400 and silver at $66.00.
A 1.4% fall does not sound like much until you consider what caused it. A payroll print at three times consensus, with upward revisions, removes the labour market as a reason for the Fed to hold and makes a September hike considerably more likely. Under the pure rate instrument framework I ran for most of this year, that combination should have been brutal for both metals. It simply was not, and the fact that they have found a floor today rather than continuing lower reinforces the point.
What that tells me is that the confidence bid is still sitting underneath this market and providing support beneath the rate driven selling. It is the same thing the dollar is telling us. Gold is still comfortably above the $4,350 zone I marked out last week, which continues to hold well, and I would treat that as the level that matters until it does not.
Friday's CPI is now the last significant data point before the FOMC on the 16th, and given the payrolls have removed the dovish case from the labour side, it carries even more weight than it would normally. A hot print and the hike becomes close to a certainty, which would give the metals a genuine test of exactly how strong that confidence bid really is.
This Week's Market Drivers
EUR Interest Rate Decision, Thu 10th Sep - The ECB is expected to raise rates to 2.65%. We will need to look out for any difference from this, as well as any unexpected forward guidance surrounding the release.
USD PPI Data, Thu 10th Sep / USD CPI Data, Fri 11th Sep - Key inflation prints on back-to-back days. Hot or cold prints for both the PPI and CPI releases will be hugely significant. The Fed's next decision has been hovering either side of 50% for a rate hike recently, with the inflation figures likely to be the ones to push the FOMC in one direction or the other. A surprise print could be very consequential.
GBP GDP, Fri 11th Sep - A key data release to gauge the health of the UK economy. It will not affect markets outside of the GBP and FTSE but will be significant for those markets.
Japanese Repatriation Flows - Worth watching whether the speculation turns into visible selling of foreign assets, as that would be a new source of upward pressure on US yields.
Iran - Direct exchanges have resumed, with oil holding close to $100 and no diplomatic process in sight.
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