U.S. posts strong hiring numbers, investors weighing recessionary risks

U.S. adds 528,000 jobs in July, policymakers double-down on Fed hawkishness

The U.S. economy far exceeded hiring expectations in July, adding a substantial 528,000 non-farm payrolls and recouping all employment lost to the COVID-19 pandemic. The unemployment rate dropped to 3.5% as corporates continue to hire despite the U.S. posting two consecutive quarters of economic contraction. While job openings remain elevated relative to historic levels, open positions fell to their lowest level in nine months and decreased from the previous month by 600,000. Investors and markets alike will closely monitor the Federal Reserve, which will look to navigate a “soft landing” of the economy as Chairman Powell attempts to tame inflation without significantly raising unemployment.

In response to the strong hiring data, the U.S. 10Y yield jumped to 2.8% on the belief that the Federal Reserve will remain committed to its hawkish stance. Earlier in the week, yields had dipped to six-month lows, retreating to 2.6%, as markets began to flash traditional recessionary warning signs. Investors continue to brace for slowing economic activity and are assessing the risks of a recession amid slowing global demand, systemic economic contraction, and an eye-popping 40bps inversion of the 2Y and 10Y yield curve.

Within the Federal Reserve, key policy makers reassured markets that the Fed remains fully committed to battling inflation, albeit with varying views on the approach. St. Louis Fed President Bullard believes the Fed will need to keep interest rates elevated “higher for longer,” while San Francisco Fed President Daly noted the Fed’s work to control record levels of inflation in the U.S. is “far from done.”

(Related insight: Read the article, "Hedging future fixed-rate debt")

Mild dollar strength persists as global growth slows

U.S. dollar strength continues to persist amid a grim global growth outlook and recessionary fears looming throughout the Eurozone. DXY jumped Friday on the stronger-than-expected jobs report, which strengthened prospects that the Federal Reserve will remain aggressive in the coming months in raising key interest rates.

Euro remained below $1.02 as data continues to warn of an impending European recession. Final PMI data confirmed that private sector activity throughout the Eurozone contracted for the time since Q1 2021. The EU also agreed to limit gas usage throughout the member states by 15% from August 2022 through March 2023 as the continent braces for the potential for a harsh winter and potential supply disruptions from Russia.

Pound Sterling weakened against the dollar last week, falling to $1.205 after the Bank of England raised interest rates to 1.75%. Markets continue to price in additional hikes from London over the coming months as the BOE forecasts peak inflation to surpass 13.3% in October.

(Related insight: Watch the on-demand webinar, "Semiannual Market Update for Corporations")

The week ahead

Investors and consumers alike are awaiting the highly anticipated July consumer price index figures that will be released on Wednesday. Markets anxiously scrutinize the data for signs of whether inflation is truly slowing and whether the Fed will need to continually reaffirm its hawkish stance.