Market Review and Outlook Jobs Miss Likely Precludes September Fed Rate Hike

The US employment situation, along with the probability of a Fed rate hike in September, took a downturn on Friday when non-farm payrolls (NFP) data released by the US Labor Department showed that a relatively disappointing 151,000 jobs were added in August against previous consensus expectations of around 180,000. This substantial miss in employment data follows two stellar months of much better-than-expected readings, and significantly trails the average monthly gain of 204,000 jobs over the prior 12 months. Friday’s data continues a trend of the past five years in which August jobs data has disappointed expectations each and every year.

Also disappointing were two other primary data points released concurrently – average hourly earnings and the unemployment rate for August. Perhaps of greatest concern from the Fed’s perspective was the fact that the increase in average hourly earnings was down to only +0.1% against prior expectations of +0.2%, representing a substantial slowdown from last month’s +0.3%. And while the unemployment rate remained steady from the past two months at 4.9%, it was still higher than the 4.8% forecast.

Additionally, although the NFP number for the previous month of July was revised up from 255,000 to 275,000, June’s data was revised down from 292,000 to 271,000, creating a net downward revision of 1,000 jobs for the past two months.

Overall, while the US employment situation still remains relatively robust, the fact that Friday’s data fell significantly short of expectations across the board does not bode well for a decision by the Federal Reserve to raise interest rates at its next FOMC meeting less than three weeks from now (September 20-21). Although there will be several more major economic data points released before the meeting, Friday’s August NFP was the most prominent employment-related release directly preceding it.

In the current monetary policy environment, exceptionally strong readings in the labor market are a virtual prerequisite for any action by the ever-cautious Fed. June and July were exceptionally strong – August was most certainly not. Indeed, the market-measured probability of a September rate hike fell sharply immediately after the jobs release, with the Fed Fund futures market showing a dip in the implied probability well below 20% before recovering partially.

Also falling sharply immediately after the release was the US dollar, as might have been expected, although it quickly pared those losses and reversed course back to the upside shortly after. Both gold and US stocks surged in the immediate aftermath as bets on a September rate hike dropped and the dollar weakened. But gold soon pared its gains in a swift counter-move as the dollar recovered.

Short-term speculation aside, Friday’s jobs miss has considerably decreased the chances that the Fed will act in September, and increased the probability that there will be more “wait-and-see” rhetoric in the next FOMC statement. After Friday’s event-driven volatility tapers off, this could begin to weigh on the dollar and boost gold prices next week and in the run-up to the next Fed meeting, while continuing to help support soaring equity markets.