BofA predicts the July US non-farm payrolls will increase by 60,000, indicating a slower job growth compared to previous months. A reduction in state and local government jobs is expected to contribute to this lower figure after June’s temporary surge.
The unemployment rate is estimated at 4.2%, which may indicate a softening of the labour market. Unfavourable seasonal factors could also affect the headline figure, but immigration policy impacts are not anticipated to appear immediately.
July Report Expectations
The July report may suggest a weakening labour market, but it is not expected to prompt the Federal Reserve to act in September. Any decision by the Fed would likely require accompanying softer inflation data.
We are anticipating a much softer US jobs report for July, with estimates around +60,000 new jobs. This is a sharp drop from the temporary government hiring that boosted the June numbers we saw come in around +250,000. The expected slowdown suggests traders should be cautious about US economic strength.
The unemployment rate is projected to tick up to 4.2%, a level we haven’t seen since late 2023. This reinforces the idea that the labor market is losing steam, which could cause a dip in US Treasury yields as markets price in a higher chance of future rate cuts. Derivative traders might consider positions in SOFR futures that would benefit from the Federal Reserve softening its stance later this year.
Market Implications And Strategies
This anticipated weakness could inject significant volatility into the market. We can prepare for a potential spike in the VIX by considering call options on it, hedging against a sharp market downturn if the jobs number is even weaker than expected. Any surprise in the data will likely cause an outsized move.
For equity markets like the S&P 500, the situation is complex. While a weak economy is bad for company profits, it could accelerate the timeline for interest rate cuts, which would support stock valuations. Options strategies like straddles on the SPY could be effective, allowing traders to profit from a large price swing in either direction following the report.
A weak labor report typically puts pressure on the US dollar. With the market already pricing in a less aggressive Fed, we could see a continued decline in the dollar index (DXY). This might be a good time to look at call options on currencies like the Euro or Japanese Yen against the dollar.
However, this jobs report alone is not enough to force the Fed to cut rates in September. We are still contending with the last core inflation reading from July which came in at a sticky 3.5%, well above the target. The upcoming CPI inflation data will be just as crucial in determining the Fed’s next move.
