US jobs data throws a curveball at the Fed.......

Monday 5th October 2015

 

US jobs data throws a curveball at the Fed.......

 

Ref : All media outlets

Employment data is key to the Fed's decision-making process and as such each monthly report is awaited with baited breath by officials and markets alike. Nevertheless, after last month's decision to postpone the first rate hike, Friday's numbers for September were thought likely to be marginally less impactful than has been usual of late. Not so, as it turned out .....

They were disappointing, to put it mildly. A rise in non-farm payrolls of 142,000 was well below the consensus estimate of 203,000, and the figures for July and August were revised downwards by 59,000. Average hourly earnings were stagnant when expected to show a rise of 0.2%.The headline unemployment rate was unchanged at 5.1%.

Let's get the caveats out of the way : "One should never over-react to one set of numbers" .... true. "This data is subject to revisions"..... as we have seen, also true. But make no mistake, this data is SOFT and will not be welcomed by the Fed. It has stayed its hand so far on account of global considerations but any slackening in labour market pressures, and in particular in wage rises that might fuel some much-desired uptick in inflation, will weaken the case for action sooner rather than later. Only last week Fed Chairwoman Janet Yellen, keen as ever to start the journey back to a more "normal" rate structure, reiterated her view that a first hike in 2015 was "likely". Well, it looks a fair bit less likely now.

At least the markets think so. Some had been holding out for a rate-rise in October .... never particularly likely but now seen as just an 8% possibility implied by futures prices. December rates as a 34% chance , March 2016 the favourite at 55%. 

The immediate market effects of data suggesting a later start to lift-off in the US have been predictable enough, even if the numbers themselves weren't : higher stocks, higher bond prices / lower yields , weaker dollar. But taking a wider view, it does little to dispel the impression that the Fed may not be in total control of its own destiny. And with the ECB and Bank of Japan thought likely to extend their already huge QE programmes that have so far produced mixed results at best, the question being asked is "how much control do central banks really have in the modern economy?". If things take a turn for the worse, driven by a crisis in emerging markets for example, we'll find out.