USD rebounds after jobs data fails to lift rate cut expectations

USD: NFP data not enough to move the dial

A double-NFP data release always had the potential to fuel a spike in volatility and a shift in market pricing into year-end, but alas it was not to be with the data certainly indicating still weak labour market conditions, but just not weak enough to see global investors reconsider the current profile for rate cut expectations in 2026. A March rate cut remains around a 50-50 call following the data with the only top-tier data release remaining the CPI data for November, to be released tomorrow.

The limited market shift in rates expectations was understandable given the very weak NFP print for October (-105k) was entirely down to the government job losses released to voluntary resignations earlier in the year that were realised in October. The 157k drop in government jobs in October masked the fact that there was still a reasonable 52k gain in private sector employment. Then in November the private sector jobs gain picked up to 69k. So the lack of reaction in the markets certainly partly reflects the fact that private sector employment has in fact improved. The 3mth total private sector jobs increase in November was 225k. In the 3mth period prior to that to August, the total gain was 39k. Still, the overall employment picture should be viewed as weak. In the last 6mth period, total NFP recorded negative prints in three months totalling -114k and positive prints in three months totalling 244k. The unemployment rate also continues to drift higher while this is more down to labour force growth (323k over Oct/Nov) than employment growth (96k) it is still disinflationary and points to further downward pressure on wage growth going forward.

The moderate recovery of the dollar also reflected the mixed nature of the other data releases – the Control Group retail sales surged 0.8% m/m, the biggest increase since June. We continue to see a disconnect between the labour market and consumer spending reflecting the K-shaped performance amongst consumers. Lower income earners suffer from the cost of living crisis and see much less benefit from the strong equity market performance in contrast to higher income earners. Job insecurity related to AI fears is also likely higher amongst lower income earners, further reinforcing weak consumer confidence.

We suspect further mixed employment data like we got yesterday will ultimately open up greater conviction over a rate cut in March but that may only come once we have the CPI data released on Thursday. The consensus is for YoY CPI rate to remain at around 3.0% but over the coming months we expect to see signs of disinflation emerge with the tariff-related inflation pick up possibly mostly now through the data given certain import-sensitive sectors of CPI have already shown larger MoM increases.

The lack of dollar selling could also reflect the fact that Kevin Hassett is no longer the definite pick for Fed Chair position and instead both Kevin Warsh and Christopher Waller are back in the running. Polymarket probabilities now have Hassett, Warsh and Waller closer to each other than before. Still, Hassett is again showing as being the favourite so the recent relief for the dollar may quickly fade.

FRONT-END YIELD SPREADS CONTINUE TO POINT TO USD REMAINING UNDER DOWNWARD PRESSURE

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Weak inflation reinforces BoE rate cut prospects

If there was any doubt about a rate cut at the BoE’s MPC meeting tomorrow then those doubts are surely gone now after this morning’s CPI data for November revealed a much weaker than expected set of data. The main CPI readings were all weaker than expected with the annual rate falling 0.4ppt to 3.2%, which was 0.3ppt weaker than the consensus. It was the largest decline in the annual rate since September last year. Food & non-alcoholic beverage prices saw a notable slowing with the annual increase declining from 5.2% to 4.2% which will be a relief to some MPC members who were concerned over the impact of higher food prices on inflation expectations and the potential for feeding into higher wage pressures.

Overall services inflation fell, but by just 0.1ppt to 4.4%. Housing services and actual rents slowed but this was offset by a pick-up in travel and transport. So overall the concerns over ‘sticky’ underlying inflation pressures will still persist within the MPC. Indeed, our own estimate of the BoE’s underlying services measure (excluding certain volatile components) actually picked up from 4.0% to 4.1%.

But overall this will be viewed as a good report and will reduce overall inflation concerns especially with the jobs data showing a continued deterioration in labour demand. Prior to the jobs and inflation data this week, a 5-4 vote favouring a cut with Governor Bailey joining the voters for a cut in November was a plausible outcome. Huw Pill could well now also vote for a cut, possibly along with Clare Lombardelli meaning up to a 7-2 vote favouring a cut is possible. Megan Greene and Catherine Mann could well continue to resist given the evidence of still ‘sticky’ underlying services inflation.  

But ultimately, the BoE has more cutting still to do than most other G10 central banks. The inflation forecasts in February will be lower and another cut then seems likely. That is not priced at the moment and hence we see scope for front-end yields to move lower which will put the pound under increased downward pressure. EUR/GBP moving higher over the coming months is the likely outcome.

UK SERVICES INFLATION CONTINUES A SLOW GRIND LOWER

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com