NFP Quick Analysis: Rate cuts are coming and USD has more room to fall


  • The US Non-Farm Payrolls report has badly disappointed with meager job growth and a slow increase in wages.
  • The Federal Reserve has opened the door to rate cuts and this report will take it closer to walking  through the door.
  • The US dollar may fall on growing chances of Fed action, but trade wars may limit its falls.

The labor market has badly disappointed markets – joining a long list of underwhelming figures. When the US economy gained fewer than 100K jobs in February, some suspected that it was a one-off – and they were right. Cold weather and the partial government shutdown disrupted hiring and data collection, resulting in meager job growth. March and April's reports turned out robust – convincing investors that February's weak number was an anomaly – a one-off.

However, the disappointing data for May is already the second sign of weakness in a span of only four months – not a one-off anymore – but a worrying sign that the economic malaise is hurting job growth.

The US economy has gained only 75K jobs in May, compared with 185K expected. Wages have risen by 0.2% instead of 0.3% projected on a monthly basis and 3.1% against  3.2% year over year– resulting in a fall for the USD – follow all the updates in the live coverage.

Non-Farm Payrolls reports are often mixed with s significant gain in jobs being offset by low wages or the other way around. However, May's NFP has no nuances by exposing weakness in both numbers

The dreadful labor-market data joins low inflation and trade tensions. The Fed may seriously consider cutting rates this year. 

Will it come as early as June? Probably not, as the central bank prefers to pre-announce its rate moves. However, the Washington-based institution may certainly alter its dot-plot signaling two or three rate cuts this year. Powell may add fuel to the fire with his straight talk.

Under these circumstances, the greenback has room to fall. The current downfall may be only the beginning.

Background

Earlier this week, Powell has hinted that he may be opening to cut interest rates by saying that the bank will "act as appropriate" rather than sticking to his previous mantra – patience – which meant maintaining rates unchanged. 

He expressed concern about uncertainty stemming from trade tensions and also low inflation. His words came on top of calls from James Bullard, President of the Saint Louis Fed, to cut rates "soon." Markets have been increasing their bets on a rate cut also due to the weak ADP NFP which showed that the private sector gained only 27K jobs – the worst in nine years.

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