- The US Non-Farm Payrolls came out at 164K, within expectations.
- The upbeat data, especially on wages, means the Fed may pause in September.
- Trump's new tariffs can change the picture for the bank and the dollar.
It is rare to see the Non-Farm Payrolls meeting expectations – 164K against the same number expected. Wages have risen by 0.3%, above 0.2% projected, and 3.2% year on year – bang on expectations.
While downward revisions knocked down some 32K of job gains from previous reports, other figures are encuraging. The unemployment rate remained at a low level of 3.7% while the participation rate advanced from 62.9% to 63%. The broader picture is even more upbeat – the U-6 underemployment rate fell from 7.2% to 7%. The gauge counts part-time workers who want a full-time position and people too discouraged to search for a job.
All in all, the report met expectations – which were solid – and has more positives than negatives in the second-tier components.
The US dollar is rising despite the distractions from this week's other substantial events.
Earlier this week, the Federal Reserve cut interest rates as expected but signaled that this monetary stimulus is only an "insurance move" – not the beginning of a cycle of back-to-back rate reductions. Moreover, the Fed maintained its view that the "labor market remains strong"
The report vindicates this upbeat assessment. An increase of 164K positions is more than satisfactory and points to ongoing expansion.
In addition, two members voted to leave rates unchanged. Markets had expected more, and the disappointment sent the dollar higher.
So why did the Fed cut rates? Its original signal about reversing the latest rate hike from December 2018 came in response to lower inflation and trade tensions which mounted in May.
Earnings data in this report remains upbeat – insufficient to justify raising rates – but still reflecting real wage growth, which is likely to prevent inflation from falling. It is important to remember that annual wage growth of 3% or higher is above the averages of around 2.5% that characterized Average Hourly Earnings for years.
The dollar now depends on Donald Trump
So only trade remains an issue. President Donald Trump has shocked markets by announcing a 10% duty on around $300 billion of imported Chinese goods – the remainder of products that have been spared tariffs so far.
The move came after the US delegation returned from trade talks in Shanghai, and Trump concluded that China is moving too slowly and that it has broken its promise to buy US agricultural goods.
However, some traders suspect that the timing of Trump's tariff tweets – less than 24 hours after Powell said "trade" around 24 times – is meant to force the Fed to cut rates.
And markets have already adapted to the new reality. Equities have suffered a sell-off and money fled into the safety of Treasuries. The resulting fall in yields now reflects a high chance of a rate cut in the Fed's next meeting due on September 18th.
After these upbeat jobs figures, it is becoming clear that only Trump's trade wars can force the Fed to cut rates – only they can stop the dollar rally.
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