The title of this piece is a direct copy of last month’s post-payroll release. But perhaps it doesn’t go far enough. Today’s payroll report wasn’t just dismal- it was disastrous.
The headline number showed an increase of just 38,000 jobs. This was on expectations of 160,000 additions. So that’s a miss of over 120,000 which was close to three times worse than last month’s miss. The number was so bad that even with the Unemployment Rate dropping to 4.7% it now looks very unlikely that the Fed can justify a rate hike this month, or in July for that matter.
At least that’s what the market thinks. The dollar slumped on the news while precious metals soared. These moves are entirely consistent with taking the prospect of a summer rate hike off the table.
USDJPY – 5 min:
Gold – 5 min:
The last month has been somewhat bizarre. It became apparent that members of the US Federal Reserve had become very unhappy that the market refused to price in the prospect of a summer rate hike. Consequently, over the past few weeks we saw a confusion of Fed Heads come out to declare that their conditions for monetary tightening were being met. Some were claiming that two, three or even four rate hikes were possible in 2016 – a ludicrous proposition given the few windows available due to the US Presidential Election, let alone the uncertain outlook for the US and global economies. Nevertheless, this hawkish commentary culminated last week with Federal Reserve Chairman Janet Yellen declaring that:
“It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate."
This constant barrage of hawkishness pressed the markets to sharply cut the odds on a summer rate hike. This led to a rally in the dollar together with a nasty and protracted sell-off in precious metals. That’s all been reversed now thanks to today’s payroll release.
On Monday evening (17:30BST) Mrs Yellen is scheduled to speak about the economic outlook and monetary policy at the World Affairs Council in Philadelphia. It will be very interesting to hear what she has to say in the light of the jobs data. Now we can’t blame the Fed for weak data. But we can take them to task for their relentless effort to tell the market it was pricing assets incorrectly. The US Federal Reserve exerts too much influence over the markets these days and many investors will now believe that the Fed has taken them for a ride. Mrs Yellen is going to find it very difficult to winch back credibility for the central bank now.
David: "It became apparent that members of the US Federal Reserve had become very unhappy that the market refused to price in the prospect of a summer rate hike."
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