The US jobs report for July has been strong across all components. The question to weigh up is how it impacts the Fed’s prospects of tapering asset purchases. For that, we believe it is another strong step down the road, without being a blowout report.
Here are the highlights:
- Headline Nonfarm Payrolls +943,000 jobs (versus 870,000 expected) with June’s number revised higher to 938,000 (up from 850,000).
- Unemployment drops sharper than expected to 5.4% (5.7% exp, 5.9% last)
- Average Hourly Earnings +4.0% (+3.8% exp, +3.7% last).
- Other highlights include an increase in working week hours and an increase in the participation rate to 61.7%.
The strength of the jobs number is that with the upward revision to last month of 88,000 and 63,000 more than forecast this month, the labor market is around 150,000 better than expected. This is a fairly sizable number.
Wages growing higher than expected is something that is also a factor as this is inflationary. However, with a strong improvement in the labor market (more jobs, more workers participating), this is still positive. According to the Bureau of Labor Statistics, the economy is now just 5.7m jobs below pre-pandemic peak levels. Progress is being made. Here is an extract from the BLS survey data:
This adds pressure on the Fed
All-round this is a strong report that will up the pressure on the Fed. This is the last jobs report before the Jackson Hole Economic Symposium which could be where FOMC members and specifically Fed Chair Powell could begin to seriously hint at the action to come on tapering.
There will be one more jobs report in front of the September FOMC meeting, but another strong payrolls report next month will keep the Fed on course for what we see as tapering asset purchases in December. However, we do not believe this is strong enough to bring this forward at this stage.
Initial Market Reaction
This report is positive for the US economy and pushes the Fed towards the taper. However, it was not a blowout report that necessarily changes any timelines.
Therefore we see it as being a combination of risk positive and USD supportive. The big loser seems to be gold.
- EUR/USD -25 pips
- US 10 year yield +3/+4 basis points.
- Gold -$25 and sharply breaking below $1790 support
- US equity futures (S&P 500 futures) minimal reaction