Weak U.S. Payrolls Shift Fed Odds and Rattle Global Markets

Overview

• U.S. payrolls unexpectedly fell by 23,000 jobs in July and prior months were revised down, while the unemployment rate edged lower to 4.1%, a report that undermined the case for a September rate increase.
• Markets quickly re‑priced policy bets after the report, with fed‑funds futures moving to a higher probability of the Fed holding in September and short‑term Treasury yields falling as investors adjusted expectations.
• Earlier in the week press reports that Fed chair Kevin Warsh might favor a September hike had pushed U.S. Treasury yields higher and helped transmit upward pressure to global and Brazilian long‑term rates.
• Brazil faced a mixed reaction: Copom on Aug. 5 cut the Selic by 25 basis points to 14.00% but removed forward guidance, domestic DIs rose and the Ibovespa slipped while the real outperformed peers and Petrobras reported a large Q2 profit with hefty dividends.
• Key things to watch are September U.S. inflation data and the Fed meeting, developments over the Strait of Hormuz that affect oil risk premia, and Brazil’s upcoming bond auctions and foreign flows that will determine whether local rates and stocks stabilize.