June’s stellar jobs report showed a massive rebound in payrolls - so why aren’t markets pricing in a rise in the probability of the Federal Reserve increasing interest rates?
The employment sector had been struggling for a while in Q2.
First there was the lacklustre 123k rise in April, following in from so many straight 200 plusses, and then the terrible 38k result in May, which has now been revised down to an even more ignominious 11k.
The large gain in Non-Farm Payrolls (NFPs), in June, however, was well above expectations, coming out at 287k versus the forecast 175k.
Despite this, the rise did not appear to be enough to spark a major change in market-expectations of when the Federal Reserve (Fed) might increase interest rates.
One thing it did do, however, was wipe out the small probability which had been germinating ever since Brexit, of the Fed actually cutting interest rates:
“The stellar job creation seen in the month of June served on Friday to wipe out the small probability of the Federal Reserve (Fed) cutting interest rates at the July 26-27 meeting, though markets remained sceptical that the U.S. central bank would be able to continue with tightening monetary policy in 2016.” Reported Investing.com following the release of the report.
As far as actually increasing the likelihood of the Fed raising rates before the end of the year, the June jobs’ report had a surprisingly limited impact on market-based forecasts, with Feds Funds Futures showing a rise in probabilities of a quarter of a percent cut from 18.4% in December, before the publication of June Payrolls, then increasing to 23.9% afterwards.
Some analysts explained that the lack of rise in Fed rate expectations was due to the poor wage inflation, which only showed pay increasing by 0.1% in June versus the 0.2% consensus forecast.
A lack of wage inflation is seen as the reason why headline inflation is so subdued and has failed to reach the Fed’s 2.0% target in four years.
It is a major factor the Fed look at to determine the future course of inflation, and what their policy response should be.
“The creation of more than a quarter of a million new jobs in June makes for barnstorming headlines, but the Dollar’s rally has been muted in response.
“The currency markets have two serious concerns about US job growth – the negligible pace of wage growth and June’s increase in the unemployment rate to 4.9%.” Said Jack Izzard of FWXCO Corporate FX Payments.
Izzard went on to comment:
“The prospect of further US interest rate rises may sneak back onto the table by the end of the year, but not before.
“None of this augurs a rapid Dollar rally, but the greenback’s safe haven status will ensure that as Brexit uncertainty dogs Europe, funds continue to head west across the Atlantic – and the Dollar’s prospects remain robust.”
Markus Bullus of MB Capital echoed these comments, saying:
“US average earnings increased by an almost imperceptible 0.1%, and the unemployment rate rose to 4.9% in June.
“All of which suggests that the US economy is still heading firmly upwards, but the afterburners are no longer on.
“With the prospect of another interest rate rise stuck firmly in the long grass, its greatest threat remains Brexit uncertainty. But the threat is also an asset – as the US’s safe haven status will continue to attract capital inflows.”
NBF Bank’s, FX Analyst Krishen Rangasamy, highlighted the positives about the report, such as the fact that, “gains were broadly distributed as evidenced by the private sector diffusion index which jumped to a one-year high.” And the fact that, “In addition, the other US employment report, the household survey, showed full-time employment reaching an all-time high.”
However in assessing whether or not these gains were enough to radically change the Fed’s chance of increasing rates, Rangasamy was less certain:
“Month-on-month movements have been volatile lately and hence FOMC members will instead look at the longer-term trend to better gauge the state of the labour market. Doing so reveals a less rosy picture.”
The analyst then points out that aggregate Private Non-Farm Payrolls for the first half of the year have risen by less than 1 million, which is the, “worst half yearly tally since the second semester of 2010.”
Also, other ongoing “headwinds” to the economy, warrant attention, such as:
“Besides this ramp down in trend job creation, ongoing headwinds to the economy arguably warrant caution from the Fed. Domestic investment remains soft, trade continues to struggle under pressure from a strong dollar, and added uncertainties created by Brexit won’t help.”
Rangasamy also notes how the Fed has failed to get inflation above its 2.0% target, as measured by PCE (Personal Consumer Expenditure), for four consecutive years now, “and odds are it will continue to do so with dollar strength and still-mild wage inflation.”
And that therefore don’t expect a change in stance, “because of one employment report.”
Upside surprise of over 89k indicates that dollar will probably have a strong month
Research shows that when the real NFP result exceeds the forecast result by over 89k it is a sign that the dollar will probably end the month higher than the level it was a minute before the announcement, often substantially higher and rarely more than a small amount lower.
The strategy was correct in forecasting a rise in the dollar during the month of the NFP’s release in 10 out of 11 NFP releases between 2006-2013.
In this case it would seem to indicate that the EUR/USD pair will probably end June above 1.1015, which was the rate moments before the report was released.