Insights 
VT 
In July, Nonfarm Payrolls in the US increased by 73,000, as reported by the US Bureau of Labor Statistics. This was below the expected increase of 110,000 and followed a revised increase of 14,000 in June.
The Unemployment Rate rose to 4.2% from 4.1%, while the Labour Force Participation Rate decreased slightly to 62.2% from 62.3%. Annual wage inflation saw a modest rise, with Average Hourly Earnings increasing to 3.9% from 3.8%.
Revisions for May and June Employment
Revisions for May and June were higher than usual, with May’s employment adjusted downwards by 125,000 and June by 133,000. As a result, employment for these months combined is 258,000 lower than previously reported.
Following the release of the payrolls data, the US Dollar experienced heavy selling pressure, with the USD Index dropping 0.65% to 99.40. The Dollar was weakest against the Japanese Yen, with currency changes also occurring against the Euro, Pound, and other major currencies.
The latest job openings data showed 7.43 million positions available in June, according to the JOLTS report. In contrast, the ADP Employment Change report indicated the private sector added 104,000 new jobs in July, with June’s loss revised to 23,000.
We are seeing clear signs the US job market is losing steam, which changes the outlook for the coming weeks. The July payroll number of 73,000 was a significant miss, but the massive downward revisions of 258,000 for May and June are the real story. This data indicates the economy is much weaker than we previously thought.
Federal Reserve Policy Implications
This softness in the labor market will likely force the Federal Reserve’s hand toward a more dovish policy. With the unemployment rate ticking up to 4.2% and wage growth remaining modest, the pressure to cut interest rates will intensify. Looking at the derivatives market, CME FedWatch Tool probabilities for a September rate cut have now jumped to over 70%, a significant shift from last week.
For our currency positions, we should continue to expect US Dollar weakness. The Dollar Index already broke below 100, and this momentum is likely to carry it lower. We should favor selling the Dollar against the Japanese Yen and the Euro, using futures or options to manage risk.
This points to clear opportunities in interest rate derivatives. We believe going long on 2-year and 10-year Treasury note futures is a prudent move to capitalize on the expected drop in yields. This is reinforced by the latest headline CPI figure for June coming in at 3.1%, giving the Fed more room to ease policy without stoking inflation.
The conflicting signals of a slowing economy versus potential central bank support are creating major uncertainty. We’ve already seen the VIX, the market’s fear gauge, jump from a low of 14 to over 18 on the back of this jobs report. Buying call options on the VIX or index put options could be a valuable hedge against a sharper economic downturn.
This situation is reminiscent of the Fed’s policy pivot back in 2019, when a similar slowdown in the jobs market preceded a series of rate cuts to support the economy. Back then, markets that correctly anticipated the Fed’s dovish turn performed exceptionally well. We are seeing a similar pattern unfold now.
