Another big NFP beat sets stage

August 8, 2016

The US non-farm payrolls (NFP) data released on Friday morning showed another big beat for July following June’s stellar outcome. 255,000 jobs were added in July against prior consensus expectations of 180,000. Average hourly earnings were also better than expected, rising by 0.3% versus the previous 0.2% forecast. The unemployment rate remained steady from last month at 4.9%, falling slightly short of the 4.8% forecast. Further, June’s already-buoyant 287,000 figure was revised even higher to 292,000, and May’s painfully disappointing 11,000 was re-revised up to 24,000.

Overall, Friday’s employment data showed substantial continued strength in the US employment picture, lending support to the notion that May’s dismal data may simply have been an anomaly in an otherwise healthy US jobs environment. The immediate market reaction to the data was immediate and pronounced, as might have been expected from such a positive deviation from prior expectations. The US dollar was sharply boosted while gold plunged rapidly. US equity markets took the optimistic data as a reason to surge on the market open, with the S&P 500 quickly reaching yet a new all-time intraday high.

With regard to the Federal Reserve, Friday’s continuation of exceptionally positive NFP data from last month has set the stage for more debate and speculation over the likelihood of a Fed rate hike this year. Poor quarterly GDP data released last week (annualized +1.2% vs +2.6% expected) helped to lower expectations of a near-term rate hike. Additionally, low inflation and the fact that other major central banks have continued to ease policy, most recently the Bank of England, have also contributed to enduring skittishness on the part of the Fed.

It has now become rather clear, however, that employment remains a very substantial bright spot in the US economy and a strong support factor for a potential rate hike this year. If Friday’s NFP outcome had been in-line with expectations or even just moderately higher, the ever-cautious Fed may have found it quite easy to continue its business-as-usual stance of repeatedly postponing its policy-tightening objectives. However, it will be difficult to ignore two consecutive months of employment numbers that beat expectations by such a large margin. Indeed, the futures markets are currently pricing-in a September rate hike at an implied probability of 18%, a significant rise from the 12% that was implied prior to Friday’s NFP data. Similarly, the implied probability of any rate hike occurring by the end of the year rose from around 35% to over 46% as a result of the positive employment numbers.

In terms of the US employment situation, focus now shifts to the August data that will be released in early September, ahead of the next FOMC meeting. Any continuation of the positive trend for the past two months will undoubtedly place much increased pressure on the Fed to act, or at least to become significantly more hawkish, even in the midst of the strong dovishness and easing biases of the Fed’s global central bank counterparts.

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