NFP report helps to further ease US economic slowdown concerns – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has strengthened modestly against the other major currencies following the release of the much stronger than expected US employment report for June.

Key Quotes

“However, the US dollar has weakened modestly against high beta emerging market currencies which have benefitted from the further improvement in global investor risk sentiment boosting investors’ search for yield in the near-term. The non-farm payrolls report was strong enough to help further ease US economic slowdown concerns but not strong enough to prompt the market to expect the Fed to resume rate hikes this year.

The probability of the Fed raising rates by 0.25 percentage point by the end of this year is still only judged at around a “1 in 5” probability. It highlights that the market is still not confident that more solid growth will be sustained in the second half of this year. Uncertainty related to the potential fall-out from the Brexit vote and upcoming US Presidential election is contributing to the current very dovish outlook for Fed policy which is dampening support for the US dollar.          

The NFP report revealed that employment growth rebounded more impressively than expected by 287k in June following a downwardly revised increase of just 11k in May. Employment growth has been very volatile over the last couple of months highlighting clearly why one should not place too much emphasis on the findings from individual reports.

Despite the sharp rebound in employment growth in June, the underlying trend is still one of slowing employment growth so far this year although more modestly than initially feared. Monthly employment growth has averaged 147k jobs in Q2 and 172k jobs in the first half of the year compared to an average of 229k jobs in 2015.

The Fed will be reassured that employment growth is still healthy reducing the risk of sharper economic slowdown ahead, and supports their plan for a gradual tightening of monetary policy as labour market conditions are expected to continue tightening placing upward pressure on wages. Earnings growth was a little softer than expected in June dampened by a calendar based effect.  The underlying trend still remains one of accelerating wage growth.”