After the US Labor Day holiday, markets returned with a defensive stance and risk assets came under pressure. According to ING’s FX strategist Francesco Pesole, there was a return of the textbook risk-off dynamics in the foreign exchange market, with strong safe-havens such as the Japanese yen, Swiss franc, and US dollar, while high-beta currencies like the Australian dollar, New Zealand dollar, and Norwegian krone weakened.
The US ISM Manufacturing report was a mixed bag, with the headline index rebounding slightly less than expected to 47.2. New orders slumped to the lowest level since May 2023, while prices paid were above expectations at 54.0. Despite this, the survey has been in contractionary territory for the majority of the last 21 months. It is crucial for growth momentum to extend into the second half of the year, with an emphasis on the services sector to drive it.
The main event on the US economic calendar is the release of US JOLTS job openings, which are expected to slow from 8,184k to 8,100k in July. This figure is important for determining the ratio of unemployed persons per job opening. With unemployment rising to 7.16 million in July, the ratio is likely to round up to 0.9 unless job openings unexpectedly spike back to 8.42 million. A move to 1.0+ in the coming months would indicate significant strain on the labor market. Another event to watch for is the release of the Fed’s Beige Book.
Warnings have been issued of pockets of US dollar strength, despite markets fully pricing in a 50 basis point cut by the Fed this year. Concerns about a potential US recession may be necessary to push markets more towards a dovish stance. It is predicted that US recessionary bets could impact equities and high-beta currencies more than the US dollar. The yen and Swiss franc are believed to be in a stronger position compared to other G10 currencies.
In conclusion, markets have observed a defensive stance after the US Labor Day holiday, with risk assets facing pressure. The US ISM Manufacturing report showed mixed results, highlighting the importance of the services sector for driving growth momentum. The release of the US JOLTS job openings figures will be crucial in understanding the labor market dynamics, while the Fed’s Beige Book will provide further insights into the US economy. Despite concerns of USD strength, the yen and Swiss franc are expected to be more resilient compared to other major currencies in the current market environment.
