Fed to take 'cautious' approach after payrolls miss

Yesterday’s nonfarm payrolls report was a clear disappointment for the dollar bulls. Net job creation slowed to just 57k in June, more than half the 110k consensus, while there was also a 43k downward revision to the previous months number - both of which are somewhat surprising given the boost to hiring expected from the FIFA World Cup.

Yet unemployment surprised to the downside, easing to 4.2%, suggesting that while employers are perhaps reluctant to hire, they are not laying off staff en masse either. Wage pressures also remain relatively contained, rising by just 0.3% on the month.

All things considered, a rather soft report that supports our call in favour of no rate hikes from the Federal Reserve this year. The US labour market remains robust, but loose enough that workers are not able to demand sizeable salary hikes, which should ease pressure on inflation. Energy prices have also fallen - Brent crude is now trading back around pre-war levels - while we see a limited risk of secondround inflation effects.

FOMC chair Kevin Warsh has made clear that the Fed’s focus is on inflation, so Thursday’s report may not carry as much weight as it would have done in the past.

That said, unless and until we see clearer signs that the energy spike has filtered its way through to underlying inflation, we think that the Fed will opt for a cautious approach to policy tightening.