The dollar index (DXY00) today is sharply lower by -0.75% on the weak US unemployment report and the increased expectations for Fed easing through year-end. The dollar was also undercut by the sharp -8 bp decline in the 10-year T-note yield, which undercut the dollar’s interest rate differentials.  The 2-year T-note yield fell by an even larger -12 bp to 3.47%.

Today’s Aug payroll report of +22,000 was weaker than the consensus of +75,000. Over the past three months, payrolls have shown an average monthly rise of only +29,000.  July payrolls were revised slightly higher to +79,000 from +73,000, but June was revised lower to a decline of -13,000.   Aug private payrolls rose by only +38,000 while manufacturing payrolls fell by -12,000. The Aug unemployment rate rose by +0.1 point to a 3.75-year high of 4.3%, up from +4.2% in July, which was in line with market expectations. 

Aug average hourly earnings rose by +0.3% m/m, which was in line with market expectations.  In a positive inflation development, the Aug average hourly earnings report eased to +3.7% y/y from +3.9% in July and was slightly weaker than expectations of +3.8%.

The markets are now pricing in a 14% chance of a 50 bp rate cut at the upcoming FOMC meeting on Sep 16-17, versus the previous expectations of a zero chance of that 50 bp rate cut.  The markets are now discounting a 93% chance of a second -25 bp rate cut at the Oct 28-29 meeting, up from a 54% chance as of late Thursday.  The markets are now pricing in an overall -75 bp rate cut in the federal funds rate by year-end to 3.63% from the current 4.38% rate.

EUR/USD (^EURUSD) is up by +0.72% on dollar weakness.  The euro is also seeing support as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates three times by the end of this year. 

The euro was undercut after July German factory orders fell -2.9% m/m and -3.4% y/y, versus expectations of +0.5% m/m and -0.6% y/y.

On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, which is bearish for the euro.  Last Friday, German Chancellor Merz and French President Macron called for secondary sanctions on Russia for its war in Ukraine and said they will push for measures targeting “companies from third countries that support Russia’s war.” Last Thursday, German Chancellor Merz stated that a meeting between Russian President Putin and Ukrainian President Zelensky is unlikely to take place. 

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.

USD/JPY (^USDJPY) is down -0.92%, mainly due to dollar weakness. The yen was undercut on Tuesday by news that the Secretary General of Japan’s Liberal Democratic Party, Hiroshi Moriyama, a key ally of Prime Minister Ishiba and a proponent of fiscal discipline, is stepping down, which is seen as paving the way toward a more expansionary fiscal policy.

December gold (GCZ25) is up +31.3 (+0.87%), and December silver (SIZ25) is up +0.073 (+0.18%.  Precious metal prices rallied on today’s sharp sell-off in the dollar index and on increased bets for Fed easing through year-end.  Silver underperformed gold on concern about industrial metals demand, with today’s US unemployment report suggesting a slowing economy.

Gold prices have continued support from uncertainty tied to US tariffs and geopolitical risks.  Also, political uncertainty in France is driving demand for gold as a safe-haven asset, following French Prime Minister Bayrou’s call for a confidence vote that could bring down his government as soon as next week. 

Precious metals prices have continued support from fund buying of precious metal ETFs.  Gold holdings in ETFs rose to a 2-year high on Tuesday, and silver holdings in ETFs rose to a 3-year high on Wednesday.