Synopsis:

Mitsubishi UFJ Financial Group (MUFG) discerns a potential peak in US yields and the strength of the US dollar (USD), based on recent labor market data that indicates a softening in employment growth. This aligns with the Federal Reserve's efforts to mitigate inflationary pressures.

Key Points:

1. Employment Growth Slowdown: October's non-farm payrolls showed a significant reduction in private employment growth, with a five-month average falling to 138,000, suggesting a broad slowdown.

2. Labor Market Cooling as a Fed Reassurance: The easing of employment growth could reassure the Federal Reserve that its tightening measures are effectively reducing inflationary pressures stemming from the labor market.

3. Unemployment Rate Increase: The unemployment rate has incrementally risen to 3.9%, moving further from the cycle's low point in January at 3.4%, which raises some concerns about potential recession risks.

4. Sahm Rule Recession Indicator: According to the Sahm rule, an increase in the three-month moving average of the unemployment rate by 0.5 point from its low in the previous 12 months may indicate the start of a recession. The current increase is at 0.3 point.

5. Deceleration in Wage Growth: There is a noted deceleration in average hourly earnings growth, which has been observed for three consecutive months as of October.

Conclusion:

MUFG suggests that the softening labor market may be a sign that US yields and the strength of the USD have peaked. The data serves as an indicator of the effectiveness of the Federal Reserve's policy measures in cooling off the labor market to reduce inflationary risks. The ongoing shifts in the employment sector, along with the deceleration in wage growth, could make the USD more susceptible to weakness in the near term.