- The US economy has gained 224K positions in June, much better than expected.
- Despite a minor miss in wages, the Federal Reserve has reasons to be cheerful.
- The greenback may extend its gains as the odds of an easing cycle diminishes.
Fluctuations in job gains are common – and as Powell said – the average gains remain healthy and point to a robust economy. The increase of 224,000 positions has put speculation of a downturn in job hiring to an end.
Wages have risen by only 0.2% in June – below 0.3% that was expected – but on top of an upwards revision from 0.2% to 0.3% for May. The annual pay rise is 3.1% in June, the same as in May.
The US labor market is on fire and Federal Reserve officials can sit back and enjoy the fireworks. While the central bank is set to cut interest rates at the end of the month, the upbeat Non-Farm Payrolls diminish the chances of a deep cut of 50 basis points that investors have wished for.
Fed Chair Jerome Powell and his colleagues may even consider abandoning plans to cut interest rates – but will find it hard to retreat from their promises. The central bank does not like to shock markets.
Zooming out to the longer term, the chances of a full cycle of monetary easing are also in doubt. The world's most powerful central bank has two mandates: full employment and price stability. As long as average employment remains robust, it is hard to see the Fed embarking on a long series of rate cuts.
Inflation, the Fed's second mandate, will be tested next week. The Consumer Price Index (CPI) report for June will be closely eyed by traders.
Nevertheless, assuming CPI is OK, the Fed is unlikely to race to the bottom – something the ECB is keen on.
On this background, the US dollar has room to rise beyond the immediate reaction, especially against the vulnerable euro.
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