U.S. currency falters as signs of weakness in the job market fuel predictions of interest rate reductions
The global economy and financial markets have seen a series of significant developments over the past week, with key indicators pointing towards a challenging economic landscape.
The sell-off in global bond markets has been a significant focus this week, with yields on long-end notes across the globe rising due to investor anxiety about the fiscal health of major economies. In particular, the debt-to-GDP ratio in several countries is heading above 100%, a worrying sign of mounting debt levels.
The dovish comments from policymakers have spurred a rally in Treasuries, pushing yields lower. Yet, the yield on the US 30-year bond rose to 4.901% after hitting 5%, the highest in about 1-1/2 months yesterday. Similarly, US 30-year JGB yields slid 4 bps to a session low of 3.24% following an auction of Japanese government bonds.
The Federal Reserve, which has been focusing on the labour market, is closely watching Friday's jobs report, as it will influence the near-term rate outlook. Meanwhile, traders are pricing in about a 97% chance of the Fed cutting interest rates later this month, with the CME FedWatch showing an increase from 89% a week earlier in the pricing for a rate cut.
While layoffs remain relatively low, according to the data from yesterday, job openings fell to a 10-month low in July, suggesting a potential slowdown in the job market. This trend is further reflected in the UK, where sterling was at US$1.343, slightly lower on the day, not far from the four-week lows it hit yesterday. David Forrester, senior strategist at Credit Agricole in Singapore, stated that the sell-off is hurting investor sentiment and weighing on the GBP and JPY.
Uday Patnaik, head of Asia fixed income and global emerging market debt in the asset management division of L&G, noted that the rise in yields reflects poor fiscal conditions in some of the largest advanced economies. "The problem here is not one of these countries are running a primary surplus, which means revenues cannot even cover non-interest spending," said Patnaik.
The euro held onto its overnight gains and last bought $1.165275, showing some resilience amidst the global economic uncertainties. However, the dollar was relatively steady in Asian hours after easing in the previous session.
Friday's jobs report and the Fed's decision on interest rates will be crucial in determining the trajectory of global financial markets in the coming months. As investors navigate these economic challenges, they will continue to closely monitor developments in the labour market and fiscal policies of major economies.
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