Solid-but-unspectacular jobs report leaves the Fed in limbo

August 4, 2017 09:05 AM
NFP Instant Reaction

It's become par for the course for analysts to declare every month's U.S. Non-Farm Payroll report as "THE most important jobs report ever!" but even those with a flair for hyperbole had trouble pumping up today's release. After all, the Fed is almost certainly on hold until at least its December meeting, which is four NFP releases from now (not to mention countless inflation reports, GDP readings, and ISM surveys).

Meanwhile, the start of "quantitative tightening" or the wind-down of the Fed's colossal balance sheet seems highly likely next month, regardless of the jobs reading.

So if we're being honest, today's release is probably less significant than most U.S. jobs releases, at least from a policy perspective. That's unfortunate, because the NFP report was very solid on the whole. On a headline basis, the U.S. economy created 209,000 new jobs in the month of July, above the 182,000 reading expected by economists.

Meanwhile, the June reading was revised slightly higher to 231,000 (from 222,000). This month's reading was strong enough to drive the unemployment rate down another tick to 4.3%, even with the Labor Force Participation Rate rising 10bps to 62.9%

Beyond the solid gain in the quantity of jobs, the quality of jobs created was also solid, if unspectacular. The widely-watched average hourly earnings figure rose 0.3% m/m, a decent figure that keeps the year-over-year rate steady at 2.5%. With the unemployment rate so low, many economists are puzzled by the lack of wage pressures, and this has been the biggest factor keeping the Federal Reserve from tightening policy more aggressively. The average hours worked measure held steady at 34.5 per week.

Put simply: today's report extends the multi-year, decent-but-not-spectacular trend in the labor market, but will do little to change policy and should have a relatively limited long-term market impact.

Market reaction

In the immediate aftermath of today's release, fed funds futures traders are slightly more optimistic that the U.S. central bank will raise interest rates by the end of the year, with the market-implied odds of a such a move coming in at exactly 50% as of writing.

The U.S. dollar has caught a small bid, rising by 20-50 pips against most of its major rivals. U.S. stock futures are holding onto their gains ahead of the open, and the benchmark 10-year Treasury Yield has bumped up 2 basis points since the release.

As implied above, the dollar is certainly ripe for a short-covering rally, but today's report alone is unlikely to lead to a major long-term low in the world's reserve currency.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.