The US job creation engine slowed in June, weighing on expectations for a renewed tightening cycle from the Federal Reserve in the second half of this year. According to the Bureau of Labor Statistics, just 57,000 jobs were added in the month—representing an undershoot relative to the 110,000 median consensus forecast—while the previous two months were revised down by a total 74,000 positions, lowering the three-month average pace of job creation to 111,000, from 188,000 ahead of the update. The unemployment rate ticked down to 4.2% from 4.3% in May, driven by employment gains that outpaced labour force additions. After an immigration crackdown, economists think the ⁠economy needs to create between zero and 50,000 jobs a month on average to keep up with growth in the working-age population.

Continuing a long-standing theme, the bulk of the net job creation happened outside the private sector, with gains in healthcare, education, and government outweighing those seen in other sectors. 61,000 positions were lost in the leisure and hospitality sector—defying expectations for a jump in hiring ahead of the World Cup. Average hourly earnings climbed 0.3% month-over-month, maintaining the pace set in the prior month, and rising 3.5% year-over-year.

The dollar is retreating against a basket of its peers and Treasury yields are tumbling across the front of the curve as traders lower expectations for more monetary tightening from the Fed in the months ahead. Futures markets are now putting 39% odds on a rate hike by September—essentially halving from the 80% seen ahead of the release—with 29 basis points in tightening expected by year end, down from 36 prior.

The print comes after Kevin Warsh declined to push back against hawkish market pricing for the Fed’s policy path during an appearance yesterday at the European Central Bank’s annual gathering in Sintra. Yields edged lower after he reiterated the committee’s commitment to returning inflation to its 2% target, noted that inflation expectations had fallen over the past four weeks, and emphasised the economy’s resilience—language that offered no comfort to those hoping for a dovish turn.

The Canadian dollar is holding steady after the United States declined to renew the USMCA, opting instead for annual reviews that leave the agreement in force but open the door to years of contentious renegotiation over the rules governing continental supply chains, tariff levels and market access. In theory, the decision adds to the headwinds facing the loonie from a weak economy, falling oil prices and a neutral Bank of Canada—but the move was well telegraphed in advance, and may already be priced in, suggesting the risk profile facing the currency may not be as negative as some have suggested.

Sterling is trading near a one-year high against the euro, bolstered by a substantially weaker-than-expected European inflation print and England’s victory in yesterday’s World Cup match*. Headline inflation across the common currency area slowed to 2.8% in June from 3.2% in May—well below expectations set closer to the 3.0% threshold—as food, energy and services prices all decelerated. The reading weakened the case for further rate hikes from the European Central Bank and has widened rate differentials in the pound’s favour, adding to a modest reduction in political risk premia to propel the currency higher.

The yen is slowly unwinding its gains after abruptly jumping almost 1% in early trading this morning—a move likely prompted by fears of intervention from Japanese authorities. Officials are reportedly preparing to abandon their long-standing practice of telegraphing moves in advance and defending key levels, opting instead to strike without warning when speculative positioning becomes overextended—and traders are growing increasingly nervous about building up short bets against the currency.

With US markets closing early this afternoon for the long weekend, price action could be choppy and difficult to extrapolate into longer-term trends, but we expect today’s “mean reversion” process to continue over the next week or so as market participants reposition for the new quarter. Barring an unexpected shock, a technically-overbought dollar looks vulnerable to a pullback, with high-beta currencies poised for modest gains.