The dollar index (DXY00) on Thursday rose by +0.42%.  The dollar rallied after the stronger-than-expected US payroll report of +147,000 suggested continued strength in the US economy. The dollar also saw support from improved interest rate differentials, with the 10-year T-note moving higher by +7 bp. The dollar also had support as the market cut the chances of a Fed rate cut at the upcoming July 29-30 meeting to 5% from 23% on Wednesday.

By contrast, the dollar was undercut by reduced safe-haven demand with Thursday’s rally in stocks.  Also, the US trade deficit report was mildly bearish for the dollar.

The May US trade deficit of -$71.5 billion was slightly larger than expectations of -$71.0 billion, and was up from April’s revised -$60.3 billion deficit. May exports fell -4.0% m/m.  May imports fell -0.1% m/m, adding to April’s -16.3% plunge.

The House passed the Senate’s reconciliation bill on Thursday afternoon, sending it to President Trump for his signature.  The nonpartisan Congressional Budget Office estimates that the bill will add nearly $3.3 trillion to US budget deficits over the next decade.  The fiscal stimulus from the bill will be a net positive for the US economy, but the higher deficit also increases the risk of an eventual debt crisis in the United States.

The approved reconciliation bill included a $5 trillion debt ceiling hike, thus averting the Treasury default that would have occurred in late summer or early autumn without a debt ceiling hike.  The debt ceiling hike is designed to last into 2027, which means the markets will not have to worry about that issue over the next two years.

In a negative factor for the dollar, the Trump administration’s campaign against Fed Chair Powell to cut interest rates continued after Treasury Secretary Scott Bessent said Thursday morning in an interview on Fox Business that the Fed appears to be “a little off” on its interest rate setting process since the 2-year T-note yield of 3.76% at the time of his interview was below the Fed’s target range for the federal funds rate of 4.25%-4.50%. However, the 2-year T-note yield then rose to 3.88% after the stronger-than-expected US unemployment rate.

The Treasury yield curve remains inverted, with high short-term rates, as the Fed continues to battle the high post-COVID inflation environment and the new inflation pressures from President Trump’s tariffs.  Any artificial attempt to cut interest rates below ideal levels could lead to severe inflationary pressures and spark an eventual upward spike in short-term interest rates, potentially triggering a recession.

Mr. Bessent also said the administration hopes to fill two empty Fed seats next year, meaning that the administration is hoping Jerome Powell will leave the Fed altogether after stepping down as Fed Chair in May 2026, even though his separate term as a Fed Governor doesn’t end until January 2028.

Trade talks are in focus ahead of the July 9 deadline for implementing reciprocal tariffs.  The EU aims to reach an agreement in principle with the US by the July 9 deadline, according to comments made Thursday by EU Commission President Ursula von der Leyen.  She said there is no way a full trade agreement could be reached by July 9.  In other trade deal news, President Trump on Wednesday said that the US had reached a trade agreement with Vietnam. President Trump said on Tuesday that a trade deal with Japan is unlikely, so the country will most likely pay a tariff of 30%, 35%, or “whatever the number is that we determine.” 

Friday’s June non-farm payroll report of +147,000 was stronger than expectations of +106,000.  The payroll report came as a bit of a surprise, given that the markets had been braced for a weak report following Wednesday’s news of a -33,000 drop in the US June ADP employment report, which marked the first decline in 2-1/4 years. The stronger-than-expected payroll increase in June was driven by a rise in employment in state and local governments, including public education.  By contrast, private payrolls rose just +74,000, suggesting labor market weakness outside the state and local governments.  June manufacturing payrolls fell -7,000, matching May’s decline.  There was a net upward revision of +16,000 in April-May payrolls.

Also, the June US unemployment rate fell by -0.1 point to 4.1%, indicating a stronger labor market than expectations for a +0.1 point rise to 4.3%.  The June unemployment rate of 4.1% is up from the 8-decade low of 3.4% posted in April 2023.

In some positive news for the inflation outlook, June average hourly earnings rose +0.2% m/m and +3.7%, slightly weaker than expectations of +0.3% m/m and +3.8% and down from May’s +0.4% m/m and +3.9% y/y.

Initial unemployment claims fell by -4,000 to 233,000, showing a stronger labor market than expectations of 241,000.  Continuing claims were unchanged at 1.964 million, showing a slightly weaker labor market than expectations of 1.962 million.

The June ISM US Services Index rose by +0.9 to 50.8 from 49.9 in May, stronger than expectations for a +0.7 point rise to 50.6.  The June ISM services prices paid index fell by -1.2 points to 67.5 from 68.7 in May, weaker than expectations for a +0.2 point increase to 68.9.

The final-June S&P US services PMI was revised slightly lower by -0.2 points to 52.9 from the preliminary report of 53.1, weaker than expectations for an unrevised report of 53.1.  The final-June S&P US Composite PMI was revised slightly higher by +0.1 point to 52.9 from 52.8, stronger than expectations for an unrevised report of 52.8.

May US factory orders rose +8.2% m/m, in line with market expectations and represented a rebound after May’s revised decline of -3.9%.  May US factory orders ex-transportation rose by +0.2% m/m, in line with market expectations.

The markets are discounting a 5% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.

EUR/USD (^EURUSD) on Thursday fell by -0.43%, mainly due to dollar strength.  The euro was also undercut as ECB officials at their June meeting expressed concern about the euro’s strength, which was dovish for ECB policy.  The ECB also expressed concern about the Eurozone economy due to trade uncertainty.

In some positive news for the euro, the final-June HCOB Eurozone services PMI was revised higher by +0.5 points to 50.5 from the preliminary report of 50.0, stronger than the expectation of no revision.  The composite PMI was revised higher to 50.6 from 50.2.

Swaps are pricing in a 6% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.

USD/JPY (^USDJPY) rose sharply by +0.94%.  The yen remained under pressure due to trade concerns after President Trump stated on Tuesday that a trade deal with Japan is unlikely, indicating that the country will likely face a tariff of 30%, 35%, or “whatever the number is that we determine.”

August gold (GCQ25) on Thursday closed down -16.80 (-0.50%), and September silver (SIU25) closed up +0.357 (+0.97%).  The stronger dollar and the rise in T-note yields on the stronger-than-expected US payroll report undercut gold prices.  However, silver saw strength on optimism about industrial metals demand after Thursday’s US economic reports suggested continued strength in the US economy.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com