• PM Bulletin: Non-Farm Payroll post mortem

    I have to say that I’m rather surprised by the violent market reaction to today’s payroll numbers. Yesterday I wrote that after Janet Yellen’s speech this week we knew everything we needed to know about the outlook for US monetary policy over the next six months. By that I meant that Mrs Yellen made it clear that the Fed would not be hiking rates this month or even in June. This was despite the fact that the Unemployment Rate was at an eight year low (no longer quite true after today’s report) and that inflation was on the rise. In essence, Mrs Yellen was claiming ownership of a whopping “get out of jail free” card by saying that the global economic situation could upend all the best laid plans of the central bank at any moment. She also cited her concerns about the low oil price and even suggested that the Fed could, under certain circumstances, provide further stimulus in the form of quantitative easing. This was a very dovish speech.

    So I thought investors would take today’s employment data in their stride – especially a payroll number which was only above the consensus expectation by 9,000 jobs. On top of that, this improvement was cancelled out by the Unemployment Rate which ticked up to 5.0% from 4.9%. But it was the increase in Average Hourly Earnings which seems to have galvanised traders and their algo-driven black boxes. Earnings rose 0.3% month-on-month, more than the +0.2% rate expected. As far as traders are concerned this is inflationary (quite correct as higher wages should feed straight through to consumption). But I thought that an uptick here would be positive for risk assets as Janet Yellen made it clear that the Fed has no intention of tightening monetary policy over the next few months in response. In fact, the way I read her speech is that the Fed’s 2% inflation target isn’t really an issue anymore.

    Anyway, that’s not how the markets are reading this today. The dollar is firmer while oil, equities, gold and silver are taking a pounding. The Fed is getting the inflation it so badly wished for, but now investors expect the central bank to step in and raise rates to curb it. I just don’t see that happening.

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