Good morning. Markets are shifting onto a broadly positive footing after Iran said that it had reached a deal with Oman to permit shipping through the Strait of Hormuz. Under the temporary arrangement reported yesterday, tankers would pass without charge for sixty days—though Iran is said to want an eventual toll of 5-7% of cargo value, against the 3% Oman favours. The Trump administration appears content to let this play out: stocks of key munitions are running low, and mid-term elections are looming. Brent crude is steady around $80 a barrel and Treasury yields are holding firm, while equities are seeing only mild turbulence and the dollar is sitting near a six-week low as traders edge back into riskier currencies.
The Canadian dollar, the euro and the British pound are all trading just above key technical levels, helping to unwind oversold conditions that had persisted for weeks. The Japanese yen, by contrast, is edging lower, giving back the intervention-driven gains of the weekend. Traders remain unsure of America’s “reaction function” on the yen: the Treasury’s appetite for further use of its limited currency firepower is unclear, and the explanations offered for its actions so far are unconvincing. There is, as yet, no evidence that Japanese selling has disrupted the US Treasury market: when Tokyo launched its intervention effort earlier this year, other foreign buyers offset its sales; and during last week’s action short-term yields fell rather than rose*. We simply don’t know what might trigger the next round of intervention, how large it might be, and how long it can last.
On the face of it, there is little to suggest that tomorrow’s jobs report will move markets. Fed officials have argued for months that the upside risks to inflation now outweigh the downside risks to the labour market, and recent data have given them little reason to reconsider. Signs of a material softening remain scarce: underlying price pressures are intensifying, private-sector hiring estimates are cooling only gradually, and broader activity gauges are still firm. The Institute for Supply Management’s services index stayed in expansionary territory in July, edging up to 54.1 from 54.0, according to yesterday’s update; business activity, new orders and price pressures all held up, even as the employment sub-index slipped into mild contraction.
But complacency carries a risk of its own, given that markets have been wrongfooted by July payrolls reports several times in recent years. Economists polled by Bloomberg believe payrolls grew by about 80,000 last month, with the unemployment rate holding at 4.2%. With investors putting near coin-toss odds on a September move, the report could tip the balance either way: a materially softer print—especially if combined with downward revisions to previous months—would push expectations for a hike firmly into late autumn, while a strong headline could drive the odds of a September move well above where they stand today.
Please note: Distribution of this note will pause between August 11 and 21 as I attempt to take a vacation**.
*Note that this also coincided with Wishy Warshy’s obfuscation on the Fed’s inflation targets, so we don’t have a clean read on what was driving short-end rates.
**If past history is any indication, however, you will receive a few market wires as markets take the opportunity to melt down. I was in Argentina for two currency devaluations, in Morocco during the ‘taper tantrum’, in Paris for the repo blowup, and in Hawaii for the Covid collapse (and there are others, those are just the highlights). Brace yourselves.