A second consecutive stellar jobs report from the US has added another layer of confusion for both the Federal Reserve and those trying to anticipate when exactly the next rate hike is coming. For a long time the markets have taken a far more pessimistic approach than the Fed and therefore been much more dovish with expectations and had we seen a weak report today, this stance could once again have been justified.
A number of people have been downbeat on the US economy for some time despite job creation remaining very strong and unemployment very low. Yet, the recent data was potentially justifying such a stance, with two consecutive quarterly GDP readings offering a less than acceptable assessment of the economy and May’s report suggesting the labour market was now struggling as well. The rebound in hiring in June meant that the July reading would be key. A poor July showing and there may be something to be concerned about. Alas, July was up there with June as job creation fell slightly short but earnings at 0.3% exceeded expectations and was triple that in June.
With market pricing for the next rate hike going beyond next summer prior to the release, it will be interesting to see exactly what impact this report has had on expectations. The surge in the dollar and US 10-year yields following the release would suggest investors are once again bringing forward their expectations having gone too far the other way despite the Fed repeatedly telling them otherwise. While I don’t expect them to come in line with the Fed any time soon, the probability of a rate hike this year has likely just improved significantly and it’s now down to the central bank to ensure market expectations come more in line with their own, or face the prospect of markets driving policy than vice versa.
Source – OANDA fxTrade